tag:blogger.com,1999:blog-291304232024-03-07T00:52:53.384-06:00A Texas Bankruptcy Lawyer's BlogCase updates and commentary for insolvency professionals in Texas and beyond.Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.comBlogger544125tag:blogger.com,1999:blog-29130423.post-65789570037347387952024-01-01T20:15:00.003-06:002024-01-02T12:50:10.655-06:00Meet Judge Robinson<p style="text-align: justify;">Shad Robinson took the bench as the twelfth bankruptcy judge to serve in the Western District of Texas on February 21, 2023. Judge Robinson, by his own telling, took an unlikely path to law school and practicing bankruptcy law. He is fairly unique among his bankruptcy colleagues in that he practiced in a small firm in a small city and practiced both consumer and business bankruptcy. However, he does possess one credential common among the current judiciary in that he clerked for one the Western District Bankruptcy Judges. Practitioners were introduced to Judge Robinson at a brown bag lunch followed several days later at his Investiture Ceremony. This article is taken from those two sessions and questions that Judge Robinson was kind enough to answer.</p><span><a name='more'></a></span><p style="text-align: justify;"><b style="font-family: "Times New Roman", serif; font-size: 12pt;">Judge Robinson’s Road to the Bench</b></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%;">Shad Robinson grew up in Iowa. He played baseball in
high school, junior college and college. He gave a lot of credit to his
baseball coaches for teaching him dedication and hard work. He did not go to
college expecting to attend law school. His father was a fireman and he hoped
to be a police officer or an FBI agent. At the end of college, he had a double
major in Criminal Justice and Political Science and a double minor in Religion and Philosophy but no
job prospects. One of his professors suggested he attend law school. <o:p></o:p></span></p><p class="MsoNormal" style="text-align: justify;"></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgz7pgAAVb90lhp7nBTR-AGReuQHB1S5BSXjygpKNs-PY5wahasaFVYNp5DbwwnCMtMMX0JCxMDcTGtvXtHB3BoiCpQfQzND0L_43zdjIQ-H_rfubI-IbODVCf0_v6D6m-2i7Lmgfpy-LICuccxJt07Gj63ZgRA0zEBIMY3iWjuJnokMhi2jT-i-w/s320/thumbnail_output_image1704221078676.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="320" data-original-width="240" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgz7pgAAVb90lhp7nBTR-AGReuQHB1S5BSXjygpKNs-PY5wahasaFVYNp5DbwwnCMtMMX0JCxMDcTGtvXtHB3BoiCpQfQzND0L_43zdjIQ-H_rfubI-IbODVCf0_v6D6m-2i7Lmgfpy-LICuccxJt07Gj63ZgRA0zEBIMY3iWjuJnokMhi2jT-i-w/s1600/thumbnail_output_image1704221078676.jpg" width="240" /></a></div><br /><span style="font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%;"><br /></span><p></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%;">He went to Baylor Law School in part because the climate
in Texas was more pleasant than in Iowa. He still had hopes of becoming an FBI
agent. After his first two quarters at Baylor, he returned home for the summer.
He didn’t have a job so he asked a friend’s dad, who happened to be a bankruptcy
judge, if he could volunteer in the court. During the summer of 1997, he spent
4-5 weeks as an intern for Bankruptcy Judge William Edwards of the Northern
District of Iowa. He thought bankruptcy was pretty cool. He didn’t want to do
something that was boring and bankruptcy was something different every day.<o:p></o:p></span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%;">After graduating from law school, he applied to be a law
clerk for Judge Leif Clark. Judge Clark called him back and said that he was
having trouble deciding between Robinson and another candidate. On a Friday
afternoon, he gave Robinson an assignment to write a bench memo on a legal
issue and have it back to him by 5:00 p.m. the following Monday. He said that
he re-wrote it 25 times before sending it off by fax. <o:p></o:p></span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%;">He began his year with Judge Clark in August 1999. During
that year, they wrote 10-12 published opinions as well as 40 unpublished ones. On one
occasion, he wrote a 30 page bench memo to Judge Clark. Judge Clark said that
the memo was all well and fine, but asked about subject matter jurisdiction. Mr.
Robinson replied that the parties had not raised subject matter jurisdiction. Judge Clark explained that you always start
with subject matter jurisdiction regardless of whether the parties raise it.<o:p></o:p></span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%;">When Judge Robinson reached the end of his clerkship,
he was looking for a place to practice. Judge Larry Kelly told him that if you
are good at what you do, you can succeed wherever you go, so you should go
where you will be happy. He took a job at Haley & Olson, a small firm in
Waco. He said that from day one, his mentor Blake Rasner would hand him files and
tell him to go to court. Because he worked for a small firm, he got to do a lot
of other practices such as mergers and acquisitions and civil litigation. <o:p></o:p></span></p><p style="text-align: justify;">
</p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%;">While at Haley & Olson, he taught Creditor’s Rights
and Debtor’s Remedies at Baylor. One time, he learned that his students had
been discussing him on social media. He found the group chat, printed it out
and attached it to his final exam, asking his students to discuss the ethical
issues raised by the discussion. <o:p></o:p></span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%;">Prior to taking the bench, he was General Counsel for Alliance Bank Central Texas<b>.</b></span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%;"><b>Q & A With the Judge</b></span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%;">Before Judge Robinson took the bench I sent him some questions to answer. I recently heard back from him. Here is what he had to say:</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">Mr. Sather, thank you for the questions you submitted to me for purposes of writing a short profile in your blog. I wanted to wait before responding so I could reflect on your questions and my experiences since taking the bench. I hope the responses are interesting to you and your readers.</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">Q: I see that you graduated with a degree in Criminal Justice/Political Science and Religion/Philosophy. That is quite a varied set of studies. How did that schooling prepare you to be a bankruptcy lawyer?</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">It was indeed a very diverse set of studies, but I don’t think that undergrad actually prepared me to be a bankruptcy lawyer. That being said, my diverse undergrad studies provided me the opportunity to improve my writing skills, explore my intellectual curiosity in different academic areas, and develop practical skills such as effective communication, critical thinking, and creative problem-solving. The practical skills I first acquired in undergrad were improved in law school, used on a daily basis during my practice, and are certainly utilized as a bankruptcy judge.</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">Q: How did you make the decision to attend law school? Was this something you had always planned?</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">I had no intent to attend law school until the fall semester of my senior year of college. I wanted to be an FBI agent and I was encouraged to attend law school to get an advanced degree to assist in achieving that goal. It was also suggested that I consider learning to fly an aircraft or speak a second language and since I am afraid of heights and learning a second language seemed too difficult at the time, I chose law school! In hindsight, I think it was the right decision.</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">Q: Did you take a bankruptcy class in law school?</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">Yes, I took bankruptcy at Baylor Law School with Professor Larry Bates. I also did an independent study with Professor Bates regarding executory contracts.</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">Q: Did you know that you wanted to practice bankruptcy law when you were in law school?</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">The short is answer is no, I wanted to be an FBI agent. However, during law school I spent three weeks as a volunteer intern for Bankruptcy Judge William Edmonds in the Western District of Iowa. During the three weeks I spent with Judge Edmonds, I enjoyed the diverse factual and legal issues that arose in bankruptcy and wanted to learn more. I returned to Baylor Law School with a strong interest in bankruptcy and then took courses in bankruptcy, secured transactions, creditor’s rights, securities law, tax, management of complex litigation, etc.</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">Q: What did you learn clerking from Judge Clark?</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">Where do I start?! I learned so many things clerking for Judge Clark that I think I could write a book. As we all know, Judge Clark liked to write so I certainly improved my writing skills. Judge Clark also interacted a lot with his law clerks on pending matters and asked tough questions, so I quickly learned the importance of being prepared and understanding the various pieces of the bankruptcy puzzle and how they fit together in a variety of different cases.</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">Q: Where have you practiced since concluding your clerkship? How would you describe your practice?</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">After clerking for Judge Clark, I went to work for Haley & Olson, P.C. in Waco, Texas. My bankruptcy practice consisted of representation of secured and unsecured creditors under chapters 7, 11, 12, and 13. I worked on both consumer and business bankruptcy cases and on all bankruptcy related litigation. I was also fortunate to work on a wide variety of other legal matters such as debt collection and related litigation, workouts, banking compliance, real estate, mergers and acquisitions, and general commercial litigation.</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">Q: Did you have a law firm mentor you would like to mention?</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">I worked with many excellent lawyers at Haley & Olson. I also worked with many outstanding bankruptcy lawyers in Texas and many other jurisdictions. I was fortunate that during my first few years of practice, the senior lawyers at Haley & Olson trusted me to interact directly with clients, gave me the independence to make substantive and strategic decisions, and allowed me to handle complex matters as the lead attorney.</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">Q: Did working in house for a bank change your perspective on the law as opposed to when you worked for a firm?</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">Working in-house for a bank for a short time period, gave me the opportunity to participate at the management level of a financial institution and be involved in a variety of matters including litigation management, contract review, legal compliance, bank regulatory compliance, loan underwriting, general corporate legal matters, and strategic planning. I don’t think that it changed my perspective on the law, but it allowed me to diversify my legal knowledge and also experience being the client when dealing with outside counsel.</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">Q: What are some of the most important cases that you have worked on and why?</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">I know it’s a cliché, but I believe every case is important to the parties in that particular case, so I treated every case I worked on the same whether it was five thousand, fifty thousand, or fifty million dollars.</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">If I had to pick a few cases, as a third-year lawyer, I defended a preference case filed by Enron that involved complex financial transactions and contentious issues related to </span><span style="font-family: "Times New Roman", serif;">reasonably equivalent value, intercompany debt, cash management systems, and application of the Texas construction trust fund statute. In the Schlotzsky’s bankruptcy, I represented the purchaser of the debtor’s assets as lead counsel and later represented the former Schlotzsky’s board of directors in litigation regarding alleged breach of fiduciary duty claims. I was also lead counsel for ERCOT on some general bankruptcy matters in Lehman Brothers and several other bankruptcy cases in various jurisdictions. I was also lead counsel for a large supplier and critical vendor in the Takata bankruptcy. </span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Times New Roman", serif;">Q: If the answer is different, what are some of the most personally significant cases you have worked on and why? </span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Times New Roman", serif;">Generally, the same answer. I sincerely believe every case is significant to the parties in that particular case, so I treated every case with the same effort and focus while being aware of, and sensitive to, the economic realities of each case. In fact, in small cases I often elected to substantially reduce my time or cut all of my time to make my services economically feasible for the client. </span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Times New Roman", serif;">Q: How do you feel about sitting on the same bench where Larry E. Kelly once sat? </span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Times New Roman", serif;">I appeared in front of Judge Kelly frequently and had such great respect for him and I am honored to now sit on the same bench he once occupied. During my years of practice, the Western District has been blessed with competent, hard-working, and well-respected judges and I will certainly strive to maintain the high standards established by my predecessors. </span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Times New Roman", serif;">Q: What are some of the things you did to prepare for taking the bench since your appointment? </span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Times New Roman", serif;">I observed hearings before all of the Western District Judges (both in-person and via Webex). I had general discussions with Judge King, Judge Gargotta, Judge Mott, and Judge Parker regarding their courtroom practices and asked them many questions about how and why they did certain things. I also read many of the opinions of my colleagues that are posted on the Western District website and studied written materials provided to new Federal Judges by the Federal Judicial Center. Since taking the bench, I have attended Phase I and Phase II of new judge school, I have attended several functions with the Austin bankruptcy bar, and met with the members of the Austin Bankruptcy Bar-Court Liaison Committee. </span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Times New Roman", serif;">Q: Are there any practice areas that you are likely to encounter as a judge that were not part of your law firm experience and how do you intend to prepare for those areas? </span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Times New Roman", serif;">Bankruptcy cases involve so many different areas of law: state law, intellectual property, tax, employment, family, probate, insurance, environmental, etc. When I encounter an area of law or issue that I am not familiar with, I will review and consider the pleadings/briefing provided by the parties and then my law clerks and I will discuss the issues, conduct our own research, and collaborate so that we understand the issues and I can apply the law to the facts and make the correct decision.</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">Q: What advice would you give to a lawyer appearing before you on a contentious case?</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">Be prepared. Comply with the local rules. Be on time for all hearings. Cite statutes, rules, and cases in pleadings. Accurately represent the facts and the law. I will probably ask questions so you should know your case well enough to accurately answer my questions. Pay attention to details. Make sure the relief requested in the Motion/Complaint matches the form of order/judgment. Promptly respond to emails from my law clerks (and copy opposing counsel). Provide reasonable and accurate time estimates. Confer and work through discovery and evidentiary disputes, if possible. Confer prior to the hearing and stipulate to exhibits, if possible. Be prepared, did I mention that?!</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">Q: What is a personal challenge that you have had to overcome in your life?</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">A challenge I frequently encountered and had to overcome was being perceived by opposing counsel as a small-town lawyer that was not competent or didn’t know what I was doing in complex litigation or a large Chapter 11 bankruptcy case.</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">Q: What do you enjoy doing when you are not working?</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">When I am not working, I enjoy spending time with my family, traveling, playing board games, and enjoying new experiences. My wife and I also enjoy good restaurants (Austin has so many great restaurants). She is also trying to get me to watch television shows and movies, but I am not really entertained by watching TV unless it is college sports or the news. I am from Iowa originally and a huge Iowa Hawkeye fan so if an Iowa game is on TV I am likely watching.</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">Q: What do you think your approach will be to when you hold hearings live in the courtroom and when you hold them virtually?”</span></p><p class="MsoNormal"><span style="font-family: "Times New Roman",serif; line-height: 107%;"></span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">Although we have all adapted to virtual hearings over the last few years, I personally prefer having hearings live in the courtroom. I expect that I will continue to set more hearings live in the courtroom, especially if they are evidentiary hearings or involve complex issues and/or extensive legal argument. Virtual hearings are generally acceptable for announcements, status conferences, reaffirmation agreements, motions for continuance, and other similar type of non-evidentiary hearings. I am currently holding the Chapter 13 dockets in Austin and Midland via Webex, but per guidance from the Judicial Conference regarding limits on remote access I am reviewing our Chapter 13 hearing procedure and discussing the same with Judge Bradley.</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: Times New Roman, serif;">Thanks to Erin Shank for the photo.</span></p><p class="MsoNormal"><span style="font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%;"><br /></span></p><p style="text-align: justify;"><br /></p><p style="text-align: left;"><br /></p><p><br /></p>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com0tag:blogger.com,1999:blog-29130423.post-45724232018900282752023-11-26T18:08:00.000-06:002023-11-26T18:08:36.599-06:00Supreme Court Strikes Blow for Deciding Cases and Explains What Is Jurisdictional and What Is Not<p style="text-align: justify;">Author's Note: I started writing this post in April. My life has been a bit busy this year so I haven't blogged as much as in prior years. If you are already familiar with the holding of <i>Moac Mall Holdings</i>, you may want to skip to the end to the What It Means section.</p><p style="text-align: justify;">In Justice Ketanji Brown Jackson's first major opinion, the Supreme Court ruled that 11 U.S.C. Sec. 363(m) is not a jurisdictional bar and batted away an appellate mootness argument. The ruling means that Mall of the Americas may continue to challenge the assignment of a lease to a subsidiary of a purchaser in the Sears bankruptcy case. However, in a larger sense, the opinion is a challenge to the rulings that have shielded many bankruptcy court rulings from appellate review. The case is No. 21-1270, <i>MOAC Mall Holdings, LLC v. Transform Holdco, LLC</i>, 508 U.S. ___ (U.S. 4/19/23). You can find the opinion <a href="https://www.supremecourt.gov/opinions/22pdf/21-1270_3204.pdf">here</a>. </p><p><b>What Happened</b></p><p style="text-align: justify;">When Sears filed bankruptcy, it sold most of its assets to Transform Holdco, LLC. One of the assets it purchased was the right to designate who leases would be assumed and assigned to. It formed a subsidiary to assume a lease at Mall of the Americas. Mall of the Americas objected that Transform Holdco could not prove that its newly formed entity could not provide adequate assurance of future performance under 11 U.S.C. Sec. 365(f)(2)(B). The Bankruptcy Court overruled the objection. MOAC requested a stay pending appeal. The Bankruptcy Court denied the stay on the basis that Sec. 363(m) did not apply. Transform insisted that it would not rely on Sec. 363(m).</p><p style="text-align: justify;">MOAC appealed to the District Court which reversed the order approving the assignment. Transform then moved for reconsideration on the basis that Sec. 363(m) deprived the Court of jurisdiction to hear the appeal (the very position it had told the Bankruptcy Court it would not assert). The District Court was not happy and said some choice things about Transform. Nevertheless, it held that it lacked jurisdiction and dismissed the appeal. MOAC appealed to the Second Circuit which affirmed in an unpublished order.</p><p><b>The Issue at the Supreme Court</b> </p><p><span style="text-align: justify;">Section 363(m) states that:</span></p><blockquote><p style="text-align: justify;">The reversal or modification on appeal of an authorization under [§363(b) or §363(c)] of a sale or lease of
property does not affect the validity of a sale or lease
under such authorization to an entity that purchased
or leased such property in good faith, whether or not
such entity knew of the pendency of the appeal, unless
such authorization and such sale or lease were stayed
pending appeal.</p></blockquote><p></p><p>The Second Circuit had previously held that Sec. 363(m) was jurisdictional, meaning that an appellate court had no power to review an order falling within its power while the Third and Eleventh Circuits said that it was not. Justice Jackson framed the issue this way:</p><p></p><blockquote><p style="text-align: justify;">In this case, we are called upon to decide whether
§363(m)’s strictures are jurisdictional. If so, a party may
invoke that provision at any time—without fear of waiver,
forfeiture, or similar doctrines interposing. If not, courts
can apply such doctrines when evaluating §363(m) issues,
where appropriate. </p><p></p></blockquote><p style="text-align: justify;">Opinion, p. 2. </p><p style="text-align: justify;"><b>It's Not Jurisdictional</b> <br /></p><p style="text-align: justify;">Justice Jackson and the unanimous Court concluded that Sec. 363(m) was not jurisdictional. </p><p></p><div style="text-align: justify;"><blockquote><p>Congressional statutes are replete with directions to litigants that serve as “preconditions to relief.” Filing deadlines are classic examples. So are preconditions to suit, like exhaustion requirements. So, too, are “statutory limitation[s] on coverage,” or“on a statute’s scope,” such as the “element[s] of a plaintiff ’s claim for relief.” Congress can, if it chooses, make compliance with such rules “important and mandatory.” But knowing that much does not, in itself, make such rules jurisdictional.<br /><br />The “jurisdictional” label is significant because it carries with it unique and sometimes severe consequences. An unmet jurisdictional precondition deprives courts of power to hear the case, thus requiring immediate dismissal. And jurisdictional rules are impervious to excuses like waiver or forfeiture. Courts must also raise and enforce them sua sponte.<br /></p><p>This case exemplifies why the distinction between nonjurisdictional and jurisdictional preconditions matters. In light of Transform’s belated invocation of §363(m), the District Court stated that, “if ever there were an appropriate situation for the application of judicial estoppel, this would <span class="markedContent" id="p22R_mc2"><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*156.24px); top: calc(var(--scale-factor)*158.06px); transform: scaleX(1.12065);">be it.”</span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*186.23px); top: calc(var(--scale-factor)*158.06px);"> </span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*327.92px); top: calc(var(--scale-factor)*158.06px);"> </span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*334.58px); top: calc(var(--scale-factor)*158.06px); transform: scaleX(1.1701);">But not even such egre</span></span><span class="markedContent" id="p22R_mc4"><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*156.24px); top: calc(var(--scale-factor)*171.32px); transform: scaleX(1.1792);">gious conduct by a litigant could permit the application of </span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*156.24px); top: calc(var(--scale-factor)*184.52px); transform: scaleX(1.1725);">judicial estoppel as against a jurisdictional rule. </span></span></p><p><span class="markedContent" id="p22R_mc5"><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*167.22px); top: calc(var(--scale-factor)*197.72px); transform: scaleX(1.18885);">In view of these consequences and our past sometimes-</span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*156.24px); top: calc(var(--scale-factor)*210.98px); transform: scaleX(1.12156);">loose use of the word “jurisdiction,” we have endeavored “to </span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*156.24px); top: calc(var(--scale-factor)*224.18px); transform: scaleX(1.17979);">bring some discipline” to this area.</span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*336.39px); top: calc(var(--scale-factor)*224.18px);"> </span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*191.75px); top: calc(var(--scale-factor)*237.44px);"> </span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*199.21px); top: calc(var(--scale-factor)*237.44px); transform: scaleX(1.20001);">We have clarified that jurisdictional rules pertain </span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*156.24px); top: calc(var(--scale-factor)*250.64px); transform: scaleX(1.14942);">to “ ‘ “the power of the court rather than to the rights or ob</span></span><span class="markedContent" id="p22R_mc7"><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*156.24px); top: calc(var(--scale-factor)*263.84px); transform: scaleX(1.10067);">ligations of the parties.” ’ ”</span> <span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*156.24px); top: calc(var(--scale-factor)*277.10px); transform: scaleX(1.17073);">And we only treat a provision as jurisdictional if Congress </span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*156.24px); top: calc(var(--scale-factor)*290.30px); transform: scaleX(1.10107);">“ ‘clearly states’ ” as much.</span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*289.50px); top: calc(var(--scale-factor)*290.30px);"> </span></span></p><p><span class="markedContent" id="p22R_mc8"><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*167.23px); top: calc(var(--scale-factor)*316.76px); transform: scaleX(1.19149);">This clear-statement rule implements “Congress’ likely </span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*156.25px); top: calc(var(--scale-factor)*330.03px); transform: scaleX(1.18963);">intent” regarding whether</span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*290.13px); top: calc(var(--scale-factor)*330.03px);"> </span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*293.59px); top: calc(var(--scale-factor)*330.03px); transform: scaleX(1.15277);">non</span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*312.55px); top: calc(var(--scale-factor)*330.03px); transform: scaleX(1.14971);">compliance with a precondi</span></span><span class="markedContent" id="p22R_mc10"><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*156.25px); top: calc(var(--scale-factor)*343.22px); transform: scaleX(1.1563);">tion “governs a court’s adjudicatory capacity.”</span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*391.06px); top: calc(var(--scale-factor)*343.22px);"> </span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*156.25px); top: calc(var(--scale-factor)*356.49px); transform: scaleX(1.15909);"> We have reasoned that Congress or</span></span><span class="markedContent" id="p22R_mc12"><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*156.25px); top: calc(var(--scale-factor)*369.68px); transform: scaleX(1.21582);">dinarily enacts preconditions to facilitate the fair and or</span></span><span class="markedContent" id="p22R_mc14"><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*156.25px); top: calc(var(--scale-factor)*382.88px); transform: scaleX(1.13923);">derly disposition of litigation and would not heedlessly give </span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*156.25px); top: calc(var(--scale-factor)*396.15px); transform: scaleX(1.25951);">those same rules an unusual character that threatens to </span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*10.98px); left: calc(var(--scale-factor)*156.25px); top: calc(var(--scale-factor)*409.34px); transform: scaleX(1.1811);">upend that orderly progress.</span></span></p></blockquote></div><p style="text-align: justify;">Opinion, pp. 7-8 (cleaned up). To sum up, jurisdictional limitations are limitations on the power of the court, not the parties and Congress must clearly state when it is imposing a jurisdictional limit. First, there must be an express jurisdictional grant, such as diversity jurisdiction or bankruptcy jurisdiction under 28 U.S.C. Sec. 1334 or appellate jurisdiction under 28 U.S.C. Sec. 1291. If there is not an affirmative grant of jurisdiction, the court has no power to proceed. However, even if there is an affirmative grant of jurisdiction, there may be cases in which Congress has taken that jurisdiction away. Transform was arguing that Sec. 363(m) fell into this second category, that it took the power to adjudicate certain disputes regarding sales or leases away from the appellate courts if a stay pending appeal was not granted. </p><p style="text-align: justify;"><b>Supremes Say No to Equitable Mootness</b><br /></p><p style="text-align: justify;">In keeping with the focus on deciding cases on the merits, the Court also rejected an equitable mootness argument. This was not a hard call. None of the lower courts applied equitable mootness. As a result, there was not a factual record for the court to rule on. To apply equitable mootness at the Supreme Court level, the Court would have to find that application of the doctrine was required under the undisputed facts of the case. Justice Brown dispatched this argument as easily as she rejected the jurisdictional argument. (Note: The Court's opinion addressed mootness first. Because it was a secondary issue to me, I addressed it in order of importance). </p><p>Justice Brown explained equitable mootness using these words:</p><p></p><blockquote style="text-align: justify;">A “case becomes moot only when it is impossible for a court to grant
any effectual relief whatever to the prevailing party.” The case remains live “‘[a]s long as
the parties have a concrete interest, however small, in the
outcome of the litigation.’” </blockquote><p></p><p>Opinion, p. 5. Justice Brown noted that mootness is disfavored, which must have come as a surprise to all of the hundreds of courts that have used it as a means to clear their dockets. In the end, she found that that the Supreme Court was not going to not going to act as a court of first review where it was not clear that no relief could be granted. She wrote:</p><p></p><blockquote style="text-align: justify;">Here, as elsewhere, we decline to act as a court of “‘first view,’” plumbing the Code’s complex depths in “‘the first instance’” to assure ourselves that Transform is correct about its
contention that no relief remains legally available.</blockquote><p>Opinion, p. 6. Under this formulation, mootness is a doctrine of last resort. For example, if a criminal defendant passes away while a case is on appeal, the correctness of the sentence becomes moot since the defendant has already been granted release. </p><p><b>The Post-Script</b> </p><p>On November 6, 2023, the Second Circuit vacated the decision of the District Court and remanded the case for further proceedings. <i>MOAC Mall Holdings, LLC v. Transform Holdco (In re Sears), </i>2023 U.S. App. LEXIS 29477 (2nd Cir. 2023). It found that because Sec. 363(m) was not jurisdictional, the District Court should not have dismissed the appeal. </p><p> </p><p></p><p><br /></p><p><br /></p><p> </p>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com0tag:blogger.com,1999:blog-29130423.post-49544068950570113302023-10-18T14:17:00.003-05:002023-10-18T15:55:52.211-05:00NCBJ 2023: The Valuation Paradox<p style="text-align: justify;">In the program Who Killed the Company? Tips and Trends in Claims and Defenses, Judge Marvin Isgur and his fellow panelists confronted issues such as in pari delicto, insurance coverage and waiver of fiduciary duties. However, one discussion led by Judge Isgur focused on whether solvency should be determined based on what was known at the time of the valuation or what was known at a later date. The discussion highlighted that valuation can be a moving target based on what is known at a given point in time. </p><span><a name='more'></a></span><p style="text-align: justify;">Judge Isgur gave an example from his life before he became a lawyer. In 1984, the price of oil took a precipitous drop causing Houston to lose 300,000 residents. The day before oil collapsed, an apartment complex might be valued at $10 million based on comparable sales. However, there were no comparable sales for the next two years. When property started moving again, the same apartment complex would sell for $1.5 million. So what was the complex worth during the intervening years? If viewed based on the latest comparable sales, it would be worth $10 million. However, there were no willing buyers and willing sellers at this or any other price. A cynic might say that the apartment complex was worth $0 since there were no buyers at any price. However, this was clearly wrong because the real estate and the improvements clearly had some value. When real estate started moving again, it had a value of $1.5 million. Did it drop 85% in one day or was there a curve of declining value which only became apparent in retrospect?</p><p style="text-align: justify;">Judge Isgur gave a second example of an unknown liability. A company sold tainted grape juice which ultimately killed many people. If a solvency analysis were prepared on the day the first toxic juice hit stores, the company might appear solvent because the nature of the liability was unknown. Once the claims were liquidated years later, the extent of the liability and its impact on solvency would become known. However, how would a solvency analysis value the company while the crisis was still ongoing?Perhaps an epidemiologist could extrapolate the total number of expected deaths and injuries from the number of gallons sold and then a litigation expert could estimate the value of each type of injury. However, the true nature of the liability would only be known in retrospect. </p><p style="text-align: justify;">I think that the point Judge Isgur was making (and this is my interpretation) is that sometimes valuation can only be seen in hindsight and will change as more information is received. In the absence of an efficient market, valuation at different points in time may be little more than an educated guess until sufficient information is received. </p><p style="text-align: justify;">He gave another example of a case where he performed a valuation at one point and then after the case was reversed, he made another finding of valuation on remand. Both valuations were based on the same point in time. However, because he had more information at the time of the second valuation, the amounts differed. The first valuation wasn't wrong; it was simply based on incomplete information. As more information was developed, the valuation would become more refined. Thus, the valuation of a specific asset at a specific point in time might vary dramatically based on the information available. While there may only be one "true" valuation, that number might only become apparent some time after the fact.</p><p style="text-align: justify;">The same theme was picked up in the panel on The Next Generation of Bankruptcy Cases. While there is a general presumption that cases should proceed swiftly, in a case filed during a period of economic uncertainty, delay may be the best course. The Covid pandemic turned the world on its head. Hertz filed its bankruptcy case on May 22, 2020 during the early days of the pandemic. Had the case gone to a prompt resolution, there probably would not have been enough funds to pay all creditors. Because the case was allowed to move more slowly, the case paid all creditors in full and returned money to equity. What this illustrates is that at the time Hertz filed its bankruptcy, its true value was unknown due to the unprecedented event of a once in a century pandemic. Its value was always there but it couldn't be seen at the time. Because Hertz was not required to be valued at a time when the true value was unknown, it avoided a negative result. On the other hand, if the company had not had the resources to weather the Covid storm, it could have crashed and burned before its true value was realized.</p><p style="text-align: justify;">It seems like valuation is a bit like Shrodinger's Cat.</p><p><br /></p>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com0tag:blogger.com,1999:blog-29130423.post-43500600173038854342023-10-15T14:24:00.002-05:002023-10-15T14:26:11.014-05:00NCBJ 2023: The View from Austin<p> The National Conference of Bankruptcy Judges came to Austin for its 2023 conference with the slogan Blues, Barbecue and Bankruptcy. Here are some images from the conference.</p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTGOJkKbqmokWUbX7rCEXd3Hc48kUlVWufsD2rKebTr6W53f2GLwOFsgrw2u3UP-jmq3Df9lF-uWBOizPUMROCfu0Kbu6PX__S33PnA27tNT3ysDVOyuhEJOJHh50Kf_dIQCxCFxVZn7TuN50E76LHqfdh_2QtOYwVneLlglbUXYWO4bNjgSb2oQ/s1920/Conference%20Logo.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1920" data-original-width="1920" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTGOJkKbqmokWUbX7rCEXd3Hc48kUlVWufsD2rKebTr6W53f2GLwOFsgrw2u3UP-jmq3Df9lF-uWBOizPUMROCfu0Kbu6PX__S33PnA27tNT3ysDVOyuhEJOJHh50Kf_dIQCxCFxVZn7TuN50E76LHqfdh_2QtOYwVneLlglbUXYWO4bNjgSb2oQ/s320/Conference%20Logo.jpg" width="320" /></a></div><br /> <p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQKnuEDIBiJD2wSg7B48vJ0NuWhMqAxRJGwg3Kv6S0a9Os-H2D-zAL708_L5GEDQw4SNkquYDrCc_gBGdDxCuolqILZKoyAFBzfBEqZm2V2XjO6xs0hDaryShbOwpB7xuK8jbcVhrFIVHIbmush7H-FYr4uiMrrzxDt7mod_7CGqXPHvGcDg-YVA/s1920/Sheriff%20King.jpg" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="1920" data-original-width="1920" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQKnuEDIBiJD2wSg7B48vJ0NuWhMqAxRJGwg3Kv6S0a9Os-H2D-zAL708_L5GEDQw4SNkquYDrCc_gBGdDxCuolqILZKoyAFBzfBEqZm2V2XjO6xs0hDaryShbOwpB7xuK8jbcVhrFIVHIbmush7H-FYr4uiMrrzxDt7mod_7CGqXPHvGcDg-YVA/s320/Sheriff%20King.jpg" width="320" /></a></div><p> </p><p> </p><p> </p><p>Sheriff Ronnie King was the Master of Ceremonies for the Conference.<br /></p><p><br /></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgX-9t9PVD1izc1-hiWodbwt-n2xD7zup7Ne3-mwNNDiIS9WV-yWMBU1JCzTio9dglqXSjWeZ0XBLccMf2HAJt_GkvzXhWlMcXimHPuO21hE6adeTt53A-OJXSvr0pjPueWAF3nSg4bl_pVolKR-lKsGNmmNSg3muh3K9m5HXBJK2MmQj5E89DKQA/s1920/thumbnail_IMG_20231012_083237.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1920" data-original-width="1920" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgX-9t9PVD1izc1-hiWodbwt-n2xD7zup7Ne3-mwNNDiIS9WV-yWMBU1JCzTio9dglqXSjWeZ0XBLccMf2HAJt_GkvzXhWlMcXimHPuO21hE6adeTt53A-OJXSvr0pjPueWAF3nSg4bl_pVolKR-lKsGNmmNSg3muh3K9m5HXBJK2MmQj5E89DKQA/s320/thumbnail_IMG_20231012_083237.jpg" width="320" /></a></div><p></p><p> </p><p> </p><p> </p><p>Chief Judge Craig Gargotta welcomed conference goers to Austin.<br /></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiLIVlA4VpkTWbk07unNU0ZwWU5MCajV5iMQmS7NtNWfvsfi2sx2ZIhRlKSx83evnhmGKJRigL9z5LL8IkIWiGXmP19qMDeWkfWYVwfOR4hNWD44SB8WhEZO1s5OpsHje4TKoWy-aSicPIgxiw_2_c395hlOglc7KtqzehPSzM1jAB07_te_YqKlg/s1920/thumbnail_IMG_20231012_083304.jpg" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="1920" data-original-width="1920" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiLIVlA4VpkTWbk07unNU0ZwWU5MCajV5iMQmS7NtNWfvsfi2sx2ZIhRlKSx83evnhmGKJRigL9z5LL8IkIWiGXmP19qMDeWkfWYVwfOR4hNWD44SB8WhEZO1s5OpsHje4TKoWy-aSicPIgxiw_2_c395hlOglc7KtqzehPSzM1jAB07_te_YqKlg/s320/thumbnail_IMG_20231012_083304.jpg" width="320" /></a></div><p></p><p> </p><p> </p><p> </p><p>The Western District delegation <br /></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSmNzj_0_qygoEqJziCH2HCMBVUpOjfIbwwaaQQAriW4Ta5iGa_8ykXDoLh_IaHy4cCpsTEyAH3B7m_OBhMZuo9PComsZbcSzPXTC6KN6i7jJcHJTE71biXGNM1-olDm5Tbd5_lTJ_cH3ba7o_HxAYheSz6TsGSUjMsAHIRoytZiVB-s7mbGxCLQ/s1920/thumbnail_IMG_20231012_083319.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1920" data-original-width="1920" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSmNzj_0_qygoEqJziCH2HCMBVUpOjfIbwwaaQQAriW4Ta5iGa_8ykXDoLh_IaHy4cCpsTEyAH3B7m_OBhMZuo9PComsZbcSzPXTC6KN6i7jJcHJTE71biXGNM1-olDm5Tbd5_lTJ_cH3ba7o_HxAYheSz6TsGSUjMsAHIRoytZiVB-s7mbGxCLQ/s320/thumbnail_IMG_20231012_083319.jpg" width="320" /></a></div><p> </p><p> </p><p> </p><p>Judge Shad Robinson<br /></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXxjPABWmQT14_-8lvapjYVrPmiJSnwCBJAU85oG2thwLcyXAtYhxld-svwse546KxgcKwm0NmmWsFCZ2D9KC23uADWlcnJnU1zX6RUMfgp7-mVfSij-rKHaGEx_VMTzhChIwS394lVn3lJ8z0NYR4MSsTNhYtJGoU8xda83Ju1eheFEza99hTIA/s1920/thumbnail_IMG_20231012_083948.jpg" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="1920" data-original-width="1920" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXxjPABWmQT14_-8lvapjYVrPmiJSnwCBJAU85oG2thwLcyXAtYhxld-svwse546KxgcKwm0NmmWsFCZ2D9KC23uADWlcnJnU1zX6RUMfgp7-mVfSij-rKHaGEx_VMTzhChIwS394lVn3lJ8z0NYR4MSsTNhYtJGoU8xda83Ju1eheFEza99hTIA/s320/thumbnail_IMG_20231012_083948.jpg" width="320" /></a></div><p> </p><p> </p><p>Judge Ronnie King<br /></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiflAs9ZkHlmvDoO8UPgduVFdkFikGuWCldBtEu6KOhusxrhBL38sSP4rZgH1RoVm-lyVYsfuoTk2qVTTzf2R6c2kLT7GzeGYDVg5KrLvkCh_JwzyLdn60cv7rcb9gP22UU2DheZBj8E-83OT173K-fLPD9BjmBDGoYfTnc8GPN32cQiRQedO_xSw/s1920/thumbnail_IMG_20231012_100543.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1920" data-original-width="1920" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiflAs9ZkHlmvDoO8UPgduVFdkFikGuWCldBtEu6KOhusxrhBL38sSP4rZgH1RoVm-lyVYsfuoTk2qVTTzf2R6c2kLT7GzeGYDVg5KrLvkCh_JwzyLdn60cv7rcb9gP22UU2DheZBj8E-83OT173K-fLPD9BjmBDGoYfTnc8GPN32cQiRQedO_xSw/s320/thumbnail_IMG_20231012_100543.jpg" width="320" /></a></div>Law Clerk Bach Norwood<br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgP8nwVBTbH0u5V7vpMv3JKDjzh1V6mM8qhkoNcqqxh8VpEKvhzgwDXZlU-y7MNhKXOo41c0WBkb6J6TpSLoSYoh06LcwGKpElHbUqNmtmbu7PFXwRVzcfuTRWLNNl9iRinoG1GSZqGfhLBxkvQ-k91_qOI4eR1N47PCO7gLVa0kmTAg3qxgBLwOQ/s1920/thumbnail_IMG_20231012_171014.jpg" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="1920" data-original-width="1920" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgP8nwVBTbH0u5V7vpMv3JKDjzh1V6mM8qhkoNcqqxh8VpEKvhzgwDXZlU-y7MNhKXOo41c0WBkb6J6TpSLoSYoh06LcwGKpElHbUqNmtmbu7PFXwRVzcfuTRWLNNl9iRinoG1GSZqGfhLBxkvQ-k91_qOI4eR1N47PCO7gLVa0kmTAg3qxgBLwOQ/s320/thumbnail_IMG_20231012_171014.jpg" width="320" /></a></div><p> </p><p> </p><p> The Rockestra<br /></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMWLWEK6mYdmI9rYU3lgms-E1bt5tw6WoshfyPLBywaDy68wRD8mvDHhzVBQFFD-g0I8QxFjH0ndacSEPsVRY9NQB8s6yviY-WTZybSa1AslHTAoZY-Rvx09LbcrIC1cMwlzunNJu3DAkCRl96GSGKeUuD49jndP7CoLD3aqq_YFRhbpoWdVdDVw/s1920/thumbnail_IMG_20231013_085501.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1920" data-original-width="1920" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMWLWEK6mYdmI9rYU3lgms-E1bt5tw6WoshfyPLBywaDy68wRD8mvDHhzVBQFFD-g0I8QxFjH0ndacSEPsVRY9NQB8s6yviY-WTZybSa1AslHTAoZY-Rvx09LbcrIC1cMwlzunNJu3DAkCRl96GSGKeUuD49jndP7CoLD3aqq_YFRhbpoWdVdDVw/s320/thumbnail_IMG_20231013_085501.jpg" width="320" /></a></div><br /><br /><br /><br /><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhFnqmuUvbcMbstbT8qRqYmUG3cvS1eGvxs54_zFfzLFiIMXcNK4gdNYQKJcEIH8ddka6Pq1WFr1DCC9ENe44eJNBVuMIDO7RaBJOgCO48LX2yFJWZTHWjMoujGOz3tI9hnWlljlpJUGNS8QLeTmlLOzQUitKhUze68f02WfozDNc7gn4NElgAybg/s1920/thumbnail_IMG_20231013_205715.jpg" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="1920" data-original-width="1920" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhFnqmuUvbcMbstbT8qRqYmUG3cvS1eGvxs54_zFfzLFiIMXcNK4gdNYQKJcEIH8ddka6Pq1WFr1DCC9ENe44eJNBVuMIDO7RaBJOgCO48LX2yFJWZTHWjMoujGOz3tI9hnWlljlpJUGNS8QLeTmlLOzQUitKhUze68f02WfozDNc7gn4NElgAybg/s320/thumbnail_IMG_20231013_205715.jpg" width="320" /></a></div><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIaICJay8BfAlzSTRFjI3Q5RmdyTswE3JO9O1Kxp-fzlZEK0KmitABKd9ilvAiRcrXS78x0eyYxMbs-kOd_OX6Jh2TyX5iXU-1JdNA043lqlodFBB5V9tAl7DGG9z2ow4P5xvQKHM9E14SFikkIC_Kcl2Gq7DCwwRr-tgbnvtQd7VFj8W0hLn18g/s1920/thumbnail_IMG_20231013_210056.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1920" data-original-width="1920" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIaICJay8BfAlzSTRFjI3Q5RmdyTswE3JO9O1Kxp-fzlZEK0KmitABKd9ilvAiRcrXS78x0eyYxMbs-kOd_OX6Jh2TyX5iXU-1JdNA043lqlodFBB5V9tAl7DGG9z2ow4P5xvQKHM9E14SFikkIC_Kcl2Gq7DCwwRr-tgbnvtQd7VFj8W0hLn18g/s320/thumbnail_IMG_20231013_210056.jpg" width="320" /></a></div><p> </p><p> </p><p> </p><p> That's a lot of bull<br /><br /></p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgujGRt-PYHdTpgQtDzpj1I0ZuzJagHjP8qOgAJNdiTZKqs1tgT6MHllVEFV0w7_A4gk8_8uZkOGJxB41HCmNkCgHM55KxvlxB1qRnQRt90HrIzn9FHb-cEHhnfcEtI0qf6Vjr2flc9Cv1mE8ubKo1usT8B1Sf8o6alB1Idnf9h4lJvqCX054EK0w/s1280/Bull1.jpg" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="960" data-original-width="1280" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgujGRt-PYHdTpgQtDzpj1I0ZuzJagHjP8qOgAJNdiTZKqs1tgT6MHllVEFV0w7_A4gk8_8uZkOGJxB41HCmNkCgHM55KxvlxB1qRnQRt90HrIzn9FHb-cEHhnfcEtI0qf6Vjr2flc9Cv1mE8ubKo1usT8B1Sf8o6alB1Idnf9h4lJvqCX054EK0w/s320/Bull1.jpg" width="320" /></a></div><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8Oy_VS8sHyBeEQCfQnxJ5PVsB1lsPBSBwgS-slyCi8Bre6HvKAqGR1w__R-Fm3Wq2OnUXMILMCKgeTeZ1PXyA6Klubf90_tZ4E4A_eQUdtuI5fdLWBxi16HuUibTThSbAi_VimuYafPXqUatTlDKyEDtAZj8-jz2aWcDRgtQ5IXKL6TLpYTDzbA/s1280/Bull2.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="960" data-original-width="1280" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8Oy_VS8sHyBeEQCfQnxJ5PVsB1lsPBSBwgS-slyCi8Bre6HvKAqGR1w__R-Fm3Wq2OnUXMILMCKgeTeZ1PXyA6Klubf90_tZ4E4A_eQUdtuI5fdLWBxi16HuUibTThSbAi_VimuYafPXqUatTlDKyEDtAZj8-jz2aWcDRgtQ5IXKL6TLpYTDzbA/s320/Bull2.jpg" width="320" /></a></div><br /><p><br /></p><p><br /></p><p> Ouch<br /></p><p><br /></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRu02ybpENuZGkU26K9x0rJP8OWQPStNhIad7gXw6OZ4OG_384dxt3vfVpR4d-y0U_9lTh3zupfnN4PeaAu8Ha2Zh8bhJUpbi7XulvUIrUFM-wL7rvI4n3S4WAmCOqRAbZUlSfxZgLp3T2PjQ3XKXea3jF1hgkI6s8khaFJoRg7NYuRqZdbjfyKw/s1920/thumbnail_IMG_20231013_214844.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1920" data-original-width="1920" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRu02ybpENuZGkU26K9x0rJP8OWQPStNhIad7gXw6OZ4OG_384dxt3vfVpR4d-y0U_9lTh3zupfnN4PeaAu8Ha2Zh8bhJUpbi7XulvUIrUFM-wL7rvI4n3S4WAmCOqRAbZUlSfxZgLp3T2PjQ3XKXea3jF1hgkI6s8khaFJoRg7NYuRqZdbjfyKw/s320/thumbnail_IMG_20231013_214844.jpg" width="320" /></a></div><br /><br /><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIEm5z5DfKEiqjyBUGAUoRbWgmZozmE1HttEJtnpnVYm1zWiJrec3fPwUtpQkVRIrz6v08YfgXFI0DuDC0OsTHJVnJErmIL4rqRF1YS4_F_1XeSn22cNIQDalVNZh19OR0SD8o-si92IpCTjIn3z5WjUYlC7a0kZfv9buVqxtGsxK5P_U768fc3A/s1920/thumbnail_IMG_20231013_214914.jpg" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="1920" data-original-width="1920" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIEm5z5DfKEiqjyBUGAUoRbWgmZozmE1HttEJtnpnVYm1zWiJrec3fPwUtpQkVRIrz6v08YfgXFI0DuDC0OsTHJVnJErmIL4rqRF1YS4_F_1XeSn22cNIQDalVNZh19OR0SD8o-si92IpCTjIn3z5WjUYlC7a0kZfv9buVqxtGsxK5P_U768fc3A/s320/thumbnail_IMG_20231013_214914.jpg" width="320" /></a></div><p></p><p><br /></p>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com0tag:blogger.com,1999:blog-29130423.post-28957409242663783712023-02-28T14:56:00.003-06:002023-05-12T17:55:51.941-05:00The Bankruptcy Judges of the Western District of Texas<p style="text-align: justify;">The Western District of Texas crosses two time zones, has a population of 7.6 million and contains 93,000 square miles. It is larger than the State of Oklahoma but smaller than the State of New Mexico. It contains the 7th, 11th and 24th largest cities in the United States (San Antonio, Austin and El Paso respectively). Since the Bankruptcy Code was adopted, the Western District has been served by 12 judges. The judges of the Western District have come from San Antonio, Houston, Waco and El Paso. I have appeared in front of ten of them.</p><span><a name='more'></a></span><p style="text-align: justify;"><b style="text-align: left;">Bert W. Thompson</b></p><p style="text-align: justify;">Bert W. Thompson was born in 1917. He served as a Bankruptcy Referee from 1971-1979 and a Bankruptcy Judge from 1979-1985. He commanded a PT Boat during World War II. After the war, he returned to San Antonio where he was an Assistant Criminal District Attorney, secretary to the mayor, Manager of LaVillita, City Judge for Terrell Hills, Special Assistant U.S. Attorney and Enforcement Director of the Office of Price Administration. He passed away in 2001.</p><p><b>Joseph C. Elliott</b></p><p style="text-align: justify;">Joe Elliott served as a Bankruptcy Referee from 1975-1979 and a Bankruptcy Judge from 1979-1986. He clerked for U.S. District Judge John Wood and worked for the San Antonio firm of Plunkett & Gibson, Incorporated. He became a Bankruptcy Referee in 1975 at age 33. The Elliott Cup is named in his honor. After stepping down from the bench, he was a staff attorney for Chapter 13 Trustee Marion "Al" Olson.</p><p style="text-align: justify;"><b>R. Glen Ayers</b></p><p style="text-align: justify;">R. Glen Ayers was born in 1947. He served as a Bankruptcy Judge from 1985-1988. He was commissioned as an armor officer in the United States Army. He received his law degree from the University of South Carolina in 1975. He taught law at the University of Mississippi and St. Mary's University School of Law. You can find a tribute to Judge Ayers written by Bankruptcy Judge Craig Gargotta and Dick Davis <a href="https://commons.stmarytx.edu/cgi/viewcontent.cgi?article=1000&context=thestmaryslawjournal">here</a>. My post about him can be found <a href="https://stevesathersbankruptcynews.blogspot.com/2017/10/remembering-r-glen-ayers-1947-2017.html">here</a>. He passed away in 2017. </p><p><b>Larry E. Kelly</b></p><p style="text-align: justify;">Larry E. Kelly was born in 1946. He served as Bankruptcy Judge from 1986-2007. He served as a communications specialist in the Navy for three and a half years. He graduated from Baylor Law School in 1974 and practiced with Pakis, Cherry, Beard & Giotes until he was appointed to the bench in 1986. Two of his favorite expressions were "let me tell you where I'm at" and "in the twelve years I was practicing." He shepherded the implementation of CM/ECF in the Western District as one of the beta testing districts in the county. The Larry E. Kelly Inn of Court is named in his honor. I wrote remembrances of Judge Kelly which can be found <a href="https://stevesathersbankruptcynews.blogspot.com/2014/03/longtime-texas-bankruptcy-judge-larry.html">here</a> and <a href="https://stevesathersbankruptcynews.blogspot.com/2014/05/remembering-judge-larry-kelly.html">here</a>. He passed away in 2014 (but only after he finished grading his final exams for the semester).</p><p><b>Leif M. Clark</b></p><p style="text-align: justify;">Leif M. Clark served as a Bankruptcy Judge from 1987-2012. He earned a M. Div. (with Honors) from Evangelical Lutheran Theological Seminary in 1972 and earned a law degree from the University of Houston Bates College of Law in 1980. He worked at Cox & Smith, Inc. in San Antonio before taking the bench. I wrote two posts discussing some of his 300 opinions <a href="https://stevesathersbankruptcynews.blogspot.com/2013/01/the-leif-and-times-of-judge-clark-pt-one.html">here</a>, and <a href="https://stevesathersbankruptcynews.blogspot.com/2013/01/the-leif-and-times-of-judge-clark-pt.html">here</a> While a sitting judge, he was a trainer and program designer for the USAID Judicial Training Program in Romania, Latvia, Poland and Ukraine. He also taught U.S. Constitutional Law to students in Austria. Since retiring, he has served as a mediator, arbitrator and consultant. </p><p><b>Ronald B. King</b></p><p style="text-align: justify;">Ronald B. King was an active Bankruptcy Judge from 1988 to 2021. He graduated from UT Law School in 1977, then clerked for Justice James G. Denton of the Texas Supreme Court. Before taking the bench, he worked for Foster, Lewis, Langley, Gardner & Banack, Inc. He took the bench at age 35 which made it possible to serve for 33 years. Since taking senior status, he has continued to hear cases and serve as a judicial mediator. He was featured in the Bankruptcy Law Section Newsletter of the State Bar of Texas which can be found <a href="https://statebaroftexasbankruptcy.com/resources/Documents/Newsletters/BLS%20Fall%202021%20NL.pdf">here</a>. Two of his former law clerks, Craig Gargotta and Michael Parker, are now judges in the Western District. </p><p><b>Frank R. Monroe</b></p><p style="text-align: justify;">Frank R. Monroe served as a Bankruptcy Judge from 1989 to 2009. He graduated from the University of Texas School of Law in 1969. Prior to being appointed as a judge he was a partner with Sheinfeld, Maley & Kay in Houston, where he served as managing partner. During his tenure on the bench, he was the presiding judge over a
multitude of cases including real estate related cases and golf courses
to name a few. He was ordained as a Deacon in the Diocese of Austin in 1998 and served as a Deacon for nineteen years, marrying and baptizing many of his children, grandchildren and friends. After retiring, he practiced with Graves, Dougherty, Hearon & Moody in Austin. He was the recipient of a lung transplant in 2020. He passed away on May 8, 2023. His obituary can be found <a href="https://www.dettlingfuneral.com/obituaries/Frank-Monroe/#!/Obituary">here</a>. </p><p><b>Craig R. Gargotta</b></p><p style="text-align: justify;">Craig R. Gargotta has served as a Bankruptcy Judge since 2007. He graduated from St. Mary's School of Law in 1989. Prior to taking the bench, he was a law clerk to Bankruptcy Judge Ronald B. King and was an Asst. U.S. Attorney from 1990-2007. He is currently the Chief Judge for the Western District of Texas and holds court in San Antonio. He taught at St. Mary's School of Law from 2002-2006.</p><p><b>H. Christopher Mott</b></p><p style="text-align: justify;">H. Christopher Mott has served as a Bankruptcy Judge since 2010. He graduated from Texas Tech Law School in 1983. He practiced law with the firm now known as Gordon, Davis, Johnson and Shane in El Paso, Texas for 27 years. I wrote a profile of him <a href="http://stevesathersbankruptcynews.blogspot.com/2011/08/meet-judge-mott.html">here</a>. Judge Mott presides over cases in the Austin and El Paso divisions of the Western District of Texas. His chambers in El Paso include a holding cell left over from when the U.S. District Court occupied the premises. He refers to this as the "Pancho Villa Conference Room." </p><p><b>Tony M. Davis</b></p><p style="text-align: justify;">Tony M. Davis served as a Bankruptcy Judge from 2013-2023. He received his J.D. from the University of Virginia School of Law in 1983. He spent much of his legal career as a partner at Baker Botts, LLP in Houston, Texas. I wrote a profile of him <a href="http://stevesathersbankruptcynews.blogspot.com/2013/07/meet-judge-davis-expanded-version.html">here</a> which discusses his career prior to taking the bench. Judge Davis's opinion in <i>In re D'Avila</i>, 498 B.R. 150 (Bankr. W.D. Tex. 2013) was later followed by the Fifth Circuit in <i>Hawk v. Engelhart (In re Hawk)</i>, 871 F.3d 287 (5th Cir. 2017) and <i>Lowe v. DeBerry (In re DeBerry)</i>, 884 F.3d 526 (5th Cir. 2018).</p><p><b>Michael Parker</b></p><p style="text-align: justify;">Michael Parker has served as a Bankruptcy Judge since 2021. Judge Parker holds four degrees: B.S. in engineering from the University
of Colorado; M.S. in engineering, M.B.A., and J.D. from U.T. Austin. He
graduated from the University of Texas School of Law in 1993. He
clerked for Judge King from 1993-1995 and worked for Norton Rose
Fulbright for the entire time from when he left his clerkship until he
took the bench. I wrote a profile of Judge Parker <a href="https://stevesathersbankruptcynews.blogspot.com/2021/12/meet-judge-parker.html">here</a>. Judge Parker holds Court in San Antonio and Waco.</p><p><b>Shad Robinson</b></p><p style="text-align: justify;">Shad Robinson is the newest judge in the Western District of Texas, having taken the bench on February 21, 2023. He received his law degree from Baylor University Law School in 1999. <span style="font-family: serif; font-size: calc(var(--scale-factor)*12px); text-align: left;">From 1999 to 2000, he was a law clerk for the Honorable Leif M. Clark, </span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*12px); left: calc(var(--scale-factor)*72px); text-align: left; top: calc(var(--scale-factor)*310.32px); transform: scaleX(1.02638);">retired United States Bankruptcy Judge for the Western District of Texas-San Antonio.</span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*12px); left: calc(var(--scale-factor)*498.42px); text-align: left; top: calc(var(--scale-factor)*310.32px);"> </span><span dir="ltr" role="presentation" style="font-family: serif; font-size: calc(var(--scale-factor)*12px); left: calc(var(--scale-factor)*506.1px); text-align: left; top: calc(var(--scale-factor)*310.32px); transform: scaleX(1.02509);">He has </span><span style="font-family: serif; font-size: calc(var(--scale-factor)*12px); text-align: left;">also served as an Adjunct Professor at Baylor Law School for over 18 years. He practiced with Haley & Olson in Waco, Texas and was General Counsel for Alliance Bank Central Texas. Judge Robinson holds court in the Austin and Midland divisions. I hope to have a profile for him soon. </span></p><p style="text-align: justify;"> </p><p><b><br /></b></p><p><b><br /></b></p><p><b><br /></b></p><p><b><br /></b></p>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com0tag:blogger.com,1999:blog-29130423.post-91588694890388584862023-02-23T15:53:00.001-06:002023-02-23T15:53:53.247-06:00Grammar Dooms Innocent Spouse in Non-Dischargeability Case<p style="text-align: justify;">While we often recite that bankruptcy is for the honest but unfortunate debtor, a new case from the Supreme Court shows that getting into bed or business with the wrong person can lead to a non-dischargeable debt for an innocent spouse. The case is No. 21-908, <i>Bartenwerfer v. Buckley</i>, which you can find <a href="https://www.supremecourt.gov/opinions/22pdf/21-908_n6io.pdf">here</a>.</p><p style="text-align: justify;"><b><span></span></b></p><a name='more'></a><b>What Happened</b><p></p><p style="text-align: justify;">The case involved David Bartenwerfer and his then-girlfriend, later wife, Kate. They jointly bought a house to remodel in San Francisco. Their first mistake was that they apparently formed a general partnership to buy the property. Kate's second mistake was leaving the construction and sale of the property to David. David failed to disclose defects in the construction which led to both of them getting sued and being hit with a judgment for over $200,000. When they filed bankruptcy, the judgment creditor brought a non-dischargeability case against them. The Bankruptcy Court found that David had committed fraud and that Kate was liable for David's fraud due to their partnership. The Bankruptcy Appellate Panel found that Kate could not be held liable based on imputed intent. On remand, the Bankruptcy Court found that Kate did not have fraudulent intent. Unfortunately the Ninth Circuit reversed and reinstated liability against Kate.</p><p style="text-align: justify;"><b>The Court's Ruling</b></p><p style="text-align: justify;">A unanimous court ruled that non-dischargeability under 11 U.S.C. Sec. 523(a)(2)(A) is based on the type of debt, not the actions of the debtor. Here, the exception to being dischargeable turned on whether there was a debt for money "obtained by . . . fraud." Supreme Grammarian Justice Amy Coney Barrett decreed that because the exception was written in the passive voice rather than the active voice that the debt was non-dischargeable. She stated:</p><p></p><blockquote style="text-align: justify;">The provision obviously applies to a debtor who was the fraudster. But sometimes a debtor is liable for fraud that she did not personally commit—for example, deceit practiced by a partner or an agent. We must decide whether the bar extends to this situation too. It does. Written in the passive voice, §523(a)(2)(A) turns on how the money was obtained, not who committed fraud to obtain it.</blockquote><p style="text-align: justify;">Opinion, p. 1. While the opinion goes on for twelve pages, everything a practitioner needs to know is on page 1. If someone obtained money through fraud and that person is liable for the debt, then the liability will not be dischargeable in bankruptcy. </p><p style="text-align: justify;"><b>What Does It Mean?</b></p><p style="text-align: justify;">I have two thoughts about this case. The first is that it is so typical of the types of bankruptcy cases that the Supreme Court hears. This was a narrow, technical issue. We just don't see the Supreme Court taking up the big issues of bankruptcy practice, such as equitable mootness or third party releases Instead, they take up these smallish cases that can be decided by looking at a small amount of statutory text. </p><p style="text-align: justify;">The other way this decision is similar to other Supreme Court decisions on bankruptcy is that we don't know whether this will have a big impact or a teeny tiny one. Justices Sotomayor and Jackson wrote a concurrence stating that they joined the opinion because "(t)he court here does not confront a situation involving fraud by a person bearing no agency or partnership relation to the debtor." If the decision is limited to those parameters it will have a small impact because most people are savvy enough not to enter into a general partnership when an LLC can be formed for a few hundred dollars. </p><p style="text-align: justify;">However, the concurrence may be trying to impose a limitation not present in the majority opinion. Justice "passive voice" Barrett did not place any limits on how a person might be liable on a debt for fraud. Yes, partnership and agency ensure that the person being held liable has a legal relationship to the person committing the bad acts, but is not the only way someone can be held liable for the debts of another. What is the most common way that someone can be held liable for someone else's debt? By signing a guaranty. Assume a company has a CEO actively involved in the business and a financial partner. The firm takes out a bank loan guaranteed by the financial partner. Under <i>Bartenwerfer</i>, if the CEO lied to get the loan and the bank justifiably relied on those misrepresentations, a debt for money obtained by fraud is created. The innocent guarantor could be held liable just as the innocent girlfriend was in this case. If that is how the cases develop, then <i>Bartenwerfer</i> will have dramatically expanded the universe of debts that can be excluded from discharge. </p><p></p>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com0tag:blogger.com,1999:blog-29130423.post-24535858812670713462022-12-22T16:22:00.002-06:002022-12-22T16:22:57.912-06:00Notes on a Diversity Workshop<p style="text-align: justify;"> 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.</p><p style="text-align: justify;"><b><span></span></b></p><a name='more'></a><b>First Exercise</b><p></p><p style="text-align: justify;">In the first exercise, participants were shown three photographs and asked to write two adjectives about each. I failed the exercise because I could only think of nouns. </p><p style="text-align: justify;">Photo #1 was a protest against police brutality.</p><p style="text-align: justify;">Photo #2 was a collage of two men appearing romantically and then a photo of one of them as a football player.</p><p style="text-align: justify;">Photo #3 was a protest for abortion right. </p><p style="text-align: justify;">The crowd of about thirty participants generated about 150 responses. One of the responses to the police brutality protest was Black Lives Matter (which shows that someone else had trouble knowing what an adjective was). However, there was nothing in the photo that expressly mentioned BLM. While the facilitators did not draw an express message from the exercise what I came away with was that a group of people looking at the same photos can come away with a wide variety of impressions.</p><p style="text-align: justify;"><b>Culture and Related Terms</b></p><p style="text-align: justify;">Next we looked at the term culture and three culture related terms. We discussed what culture meant but the materials did not contain a defined term. From discussion, I think the closest definition of culture that I was able to find online was "the customs, arts, social institutions, and achievements of a particular nation, people, or other social group." From that definition, the presenters gave the following definitions:</p><p style="text-align: justify;">Cultural Awareness
- Acknowledgment of cultural differences </p><p style="text-align: justify;">Cultural Competence
- Refers to one’s ability to understand, appreciate, and interact with people from
different cultural backgrounds </p><p style="text-align: justify;">Cultural Intelligence
- Ability to interact effectively with people of different cultures </p><p style="text-align: justify;">The presenters also discussed four skills for navigating cultural differences.</p><p style="text-align: justify;">Cultural Due Diligence (assessing and preparing for the possible impact of culture and cultural difference)</p><p style="text-align: justify;">Cultural Dialogue (exploring cultural differences and negotiating mutual adaptations)</p><p style="text-align: justify;">Style-Shifting (using a different behavioral approach to accomplish one's goals)</p><p style="text-align: justify;">Cultural Mentoring (helping others with cultural adaptation and integration)</p><p style="text-align: justify;"><b>Exercise #2</b></p><p style="text-align: justify;">Case study / scenario </p><p style="text-align: justify;"> • Luisa Perez is a new counsel who works in the New York office.</p><p style="text-align: justify;"> • Luisa is 36-year-old native Puerto Rican but was raised in New York
most of her life. Luisa has been added to a complicated bankruptcy
matter led by a partner and a few junior associates in the Pacific
Northwest (PNW) office. </p><p style="text-align: justify;"> • The PNW partner and associates have found Luisa to be quite assertive
with her positions on the matter and expresses them often. </p><p style="text-align: justify;"> • Luisa is frustrated with the slow pace, pushed deadlines, and multiple
rounds of discussions about the same topics to try and get consensus. </p><p style="text-align: justify;"> • Discuss the team dynamics and how both Luisa and the PNW team
members could be more culturally intelligent.</p><p style="text-align: justify;">Case study / scenario </p><p style="text-align: justify;"> • What are some of the cultural challenges both Luisa and the PNW folks
need to address? </p><p style="text-align: justify;">• What other dynamics are in play between the PNW team members and
Luisa? </p><p style="text-align: justify;">• Putting yourself in the Luisa’s or the PNW folks’ places, what would you
do to try and be more culturally intelligent? </p><p style="text-align: justify;"> • What are the risks if nothing is done, or if the difficulties are
mismanaged by either party? </p><p style="text-align: justify;">• What are the benefits if the parties work to resolve the issues? </p><p style="text-align: justify;">• What are the implications to either the individuals, group, and/or the
organization?</p><p style="text-align: justify;">The room was broken into groups to discuss the scenario. We were only given about ten minutes which was just enough to sample the problem. In order to fully recreate the workshop atmosphere, I should let the readers discuss the problem amongst yourself. However, that is hard to do in the blog format. </p><p style="text-align: justify;">Some of the comments that came up were that Luisa and the Pacific Northwest team had different styles for approaching a problem. Neither style was "right" but they would have to be synthesized if the parties were to work together. For my part, I identified with Luisa. I like for discussions to flow in a linear fashion toward a conclusion. It drives me absolutely bonkers when a discussion seems to go round and round in no particular order. I also value arriving at a conclusion and moving forward even if it's not possible to reach consensus. </p><p style="text-align: justify;">The clash of styles had consequences for both sides of the group. If they could not reconcile their approaches, they would waste valuable resources bickering. For Luisa, getting a good recommendation from the Pacific Northwest partner would affect her ability to advance in the firm. For the firm, if Luisa got frustrated and left, they would lose their investment in her and the potential benefits she could have brought to the firm. </p><p style="text-align: justify;"><b>My Thoughts</b></p><p style="text-align: justify;">I wasn't sure what to expect when I went to this program. In some circles, diversity and inclusion are considered to be code words for social engineering. This workshop was anything but radical. It focused on empathy, communication and understanding. These are all good skills for any attorney to have. </p><p style="text-align: justify;">You can find the materials <a href="https://www.abi.org/education-events/sessions/diversity-panel">here</a>.</p><p style="text-align: justify;"><br /></p><p style="text-align: justify;"><br /></p>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com0tag:blogger.com,1999:blog-29130423.post-89710155123901347992022-12-16T17:00:00.004-06:002022-12-22T16:23:16.697-06:00NCBJ 2022: Gradually, Then Suddenly. The Bankruptcy of Detroit<p></p><div style="text-align: justify;">This program looked at the bankruptcy of the City of Detroit through the lens of a documentary filmmaker. I thought it was a clever way to look at one of the most consequential bankruptcies of our time through the eyes of someone who was not a bankruptcy lawyer or judge. While filmmaker Sam Katz is not part of the bankruptcy profession, he did have substantial experience in municipal finance, having served as Chair of the Fiscal Oversight Board in Philadelphia in the 1990s. It took him six years to make the film compared to the fourteen months that Detroit was in bankruptcy. I have included a link to a website about the film at the end.</div><span><a name='more'></a></span><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi25tetWleITMYogPxU_2baOOpvV-imh-2vHz6YBf5DAYTiEG03KN7suV4NiihHC2ctw_u6ANdSww675R9m2P0u8rQN0t_tQgcY55TiWUQZBFZIUOnuTRyB5FTdYZYyKIxWXHUQHGl_zWStHcSxOmaviyfk6h5bJbN9arxQJpRdt8rbLf9uhFY/s3024/IMG_20221022_083159.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="3024" data-original-width="3024" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi25tetWleITMYogPxU_2baOOpvV-imh-2vHz6YBf5DAYTiEG03KN7suV4NiihHC2ctw_u6ANdSww675R9m2P0u8rQN0t_tQgcY55TiWUQZBFZIUOnuTRyB5FTdYZYyKIxWXHUQHGl_zWStHcSxOmaviyfk6h5bJbN9arxQJpRdt8rbLf9uhFY/s320/IMG_20221022_083159.jpg" width="320" /></a></div></div><div><p style="text-align: justify;">Much of the story of the City of Detroit focuses on the conflict between the Republican Gov. Snyder and the Democratic officials in Detroit. In 2010, the Michigan legislature passed an emergency management law allowing the State to basically take over city. In the view of the White Michigan, Detroit was a management problem and they could fix it. If the elected officials were unable to protect life, liberty and the pursuit of happiness, someone has to do it. When a house is burning, you don't say you didn't give me enough time. You have to react. </p><p style="text-align: justify;"><span style="vertical-align: inherit;"><span style="vertical-align: inherit;">When the state decided to use the emergency management law, the big issue was picking the right person. Kevyn Orr was a partner at Jones Day and was African-American. He asked why he would accept such a difficult job. His wife told him it was time to put up or shut up. He held the emergency manager job for 18 months. </span></span></p><p style="text-align: justify;"><span style="vertical-align: inherit;"><span style="vertical-align: inherit;">The statute assigned the emergency manager extraordinary powers. He could sell assets. throw the elected council and mayor out and reject contracts. It was a controversial position and he was widely hated. However, the City's problems could not be solved by the elected leaders. When you have to make hard choices, you are not going to make them because you want to get reelected. How are you going to do that and have a political career? The emergency manager didn't have that problem.</span></span></p><p style="text-align: justify;"><span style="vertical-align: inherit;"><span style="vertical-align: inherit;"><b>Enter Bankruptcy</b></span></span></p><p style="text-align: justify;"><span style="vertical-align: inherit;"><span style="vertical-align: inherit;">When Kevyn Orr used his powers to put Detroit into bankruptcy, Judge Steven Rhodes held a hearing on eligibility. On the one hand, there was a sea of suits with their binders stacked up and media from the New York Times, Wall Street Journal, wire services and local media. Into the maelstrom, Judge Rhodes allowed ordinary citizens to come in and express themselves. </span></span></p><p style="text-align: justify;"></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjS2MlOiNcGteSLuHNBdS8jjlQ6NCA2qt_aLRoW5gxx85HyJ13d9M_Oig1uzanKNTj50K39EniQxY2GkiNc5bDLOLanefdejAO_I5H6Opuual_hTC0JydPzFOe-x8Wyk5KUrVo5L6wv9DPGsYhXYpkLCj5zrDeUe4XNptk6nZs_Ld5I7YLsr24/s3024/IMG_20221022_090308.jpg" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="3024" data-original-width="3024" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjS2MlOiNcGteSLuHNBdS8jjlQ6NCA2qt_aLRoW5gxx85HyJ13d9M_Oig1uzanKNTj50K39EniQxY2GkiNc5bDLOLanefdejAO_I5H6Opuual_hTC0JydPzFOe-x8Wyk5KUrVo5L6wv9DPGsYhXYpkLCj5zrDeUe4XNptk6nZs_Ld5I7YLsr24/s320/IMG_20221022_090308.jpg" width="320" /></a></div>It was hard for some people to accept just how bad the City's situation was. Every constituency screamed for 100% recovery. Protesters were chanting and protesting in the streets that paying even a dime to the banks was too much. Ordinary citizens gave their stories about how bad things were. One citizen testified that a body lay in street for five hours because of cutbacks in the coroner's office. Things were so bad in fire stations that they didn't have alarms. They would put a pop can on the fax machine to let them know when a call came in. Judge Rhodes concluded that the City of Detroit was eligible to be a debtor under chapter 9. <p></p><p style="text-align: justify;">The filmmaker said that he was not sure anyone had a sense what it was like to be in chapter 9. FDR had suggested a system of municipal bankruptcy during the Great Depression. He turned to the Mayor of Detroit, Frank Murphy, to help him design the system. The Supreme Court found FDR's municipal bankruptcy law to be unconstitutional but it was later enacted as part of the Bankruptcy Code. However, Chapter 9 was not used that often. There had only been 230 or 240 chapter 9s, most of which were special purpose districts. When Judge Rhodes allowed ordinary people to testify, Detroiters started to take notice. </p><p style="text-align: justify;"><b>The Great Conflict</b></p><p style="text-align: justify;">As I mentioned above, Detroit's problems posed a conflict between the White, Republican state government and the people of Detroit. The idea that the Republicans would take over the city was unacceptable to citizens of Detroit. Gov. Snyder's support in Detroit went down from 8% to 4%. The filmmaker expressed his opinion that Gov. Snyder didn't have a political motive to hurt the Democrats in Detroit. Instead, he was afraid that the city would collapse and the state would be called upon to pay its debts. Michigan could not kick Detroit out of the State. If the city collapsed, Detroit's problems would become Michigan's problems. The State constitution said that pensions could not be impaired. As a result, Detroit's unfunded pension obligations of $3.5 billion could potentially become an obligation of the state. </p><p style="text-align: justify;"><b>The Unfunded Pension Liabilities</b></p><p style="text-align: justify;"><span style="vertical-align: inherit;"><span style="vertical-align: inherit;">Could the pensions be touched? In bankruptcy, there are two types of creditors, secured and unsecured. The pensions were unsecured debts which made them a long way from sacrosanct. While the State Constitution promised that they could not be diminished or impaired, they were still just contract debts. There was a very strong emotional reaction to telling retirees that their pension rights might be impaired in the bankruptcy process. It was a classic case of kicking the can down the road. The union leadership had not been honest with its members. They learned that when you go into bankruptcy, your pension rights might not be protected. </span></span></p><p style="text-align: justify;">The actuaries had said that the unfunded liability was $1.5 billion. However, they had used a discount rate of 9%. When a more realistic discount rate of 6% was used, the unfunded balance went to $3.5 billion. The key variable was the discount rate. </p><p style="text-align: justify;"><b>Art to the Rescue</b></p><p style="text-align: justify;">The thing that saved Detroit was that it owned an art museum. When formulating a plan, the options are to raise new revenue, borrow new money or find an asset to sell. Many years before, the wealthy citizens of Detroit decided that they needed a jewel of an art museum. Collections were donated to the City and other major works were bought with city funds. </p><p style="text-align: justify;">However, the museum asset raised the issue of how to evaluate 60,000 works of art in a matter of months. There was a concern that the appraisers and investment bankers were coming in like Visigoths to take over museum. In the end, the City decided that if Christie's wanted to appraise the collection, they could pay their 8 bucks and walk around with their note pads. </p><p style="text-align: justify;">There were two valuations: Christie's and the investment bankers that represented the insurance companies. Christie's said it was worth $500-800 million, while the investment bankers said it was worth $8 billion. </p><p style="text-align: justify;">The emergency manager figured out how much was needed to make the reorganization work and got an appraisal to support that number. The plan was based on raising funds to keep the art museum intact. Judge Rhodes later said he would never have approved sale of art. The value of the art would have been discounted by quantity of art being dumped on the market so that keeping it intact made sense.</p></div><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><div><p style="text-align: justify;"></p><div class="separator" style="clear: both; text-align: left;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh7PpKqHAm_q1QsIukzbGbzYpbUpYY2GqZ8iXOb2VP94NnrbJU7Xx1yY5UmzR-fsWzJA588pA91vvK0UnfCw0X1Z3cj_A9st6My9zsiwT4mtjVkOfvCle6i9ZhPr1J6ipb7c3_6cpmjA2bZ_8wBfqm7uGQMQKDpJSiVvH1M0NM9TgKK5IgMtfg/s3024/IMG_20221022_091536.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="3024" data-original-width="3024" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh7PpKqHAm_q1QsIukzbGbzYpbUpYY2GqZ8iXOb2VP94NnrbJU7Xx1yY5UmzR-fsWzJA588pA91vvK0UnfCw0X1Z3cj_A9st6My9zsiwT4mtjVkOfvCle6i9ZhPr1J6ipb7c3_6cpmjA2bZ_8wBfqm7uGQMQKDpJSiVvH1M0NM9TgKK5IgMtfg/s320/IMG_20221022_091536.jpg" width="320" /></a></div><p></p></div></blockquote><div><p style="text-align: justify;">There wasn't enough cash in the systems to plug the hole. The plan was to put the art in a trust and give the money to the pensioners. The City would need for the foundation community to kickstart the process. In the end, the foundations came through and the State ended up matching the foundation grant. This was a great deal for the state. If the City had failed and the State had been forced to cover the unfunded pension liability under the State Constitution, it could have been liable for $3.5 billion. They ended up paying $169 million.</p><p style="text-align: justify;">There is a lot that I didn't cover in this summary. One facet I wanted to end with was that early on in the case, Judge Rhodes was presented with a compromise that would have gotten the City out of bankruptcy without solving its problems. He rejected it on the basis that there had been too many instances where the City had made deals which simply kicked the can down the road. In the view of the filmmaker, Judge Rhodes protected the interest of the unsecured creditors but also protected the citizens of the City.</p><p style="text-align: justify;"><b>Take-Aways</b></p><p style="text-align: justify;">My takeaway from this film was being impressed with just how versatile the bankruptcy system can be. It took many decades of neglect for the City to be forced to file bankruptcy. Once it did file, it didn't fit the mold for a normal bankruptcy. In a typical bankruptcy, there are assets and cash flow which can be used to satisfy creditors and if that is not sufficient, the debtor can liquidate under chapter 7. However, a city cannot liquidate. There are people who live there who need city services in order to survive. The fact that the State could have been liable for the unfunded pension debt made the case a ticking time bomb for the White, Republican leadership. As judge, Steven Rhodes had to balance the interests of the bondholders, the pensioners and the city residents. By all accounts, many things went right. The Governor obtained the legislation to appoint an emergency manager who could take the drastic actions that city leaders could not. The emergency manager, Keyvn Orr turned out to be the right man for the job. The judge turned out to be a hero. "Old" Detroit represented by the foundations stepped in to save the art museum and fund the plan. It really is an amazing story of disaster averted through the hard work of the bankruptcy system.</p><p style="text-align: justify;">To see more about the film, click <a href="https://www.thebetterangelssociety.org/films/gradually-then-suddenly-the-bankruptcy-of-detroit/">here</a>.</p><p style="text-align: justify;"><br /></p><p style="text-align: justify;"><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p></div>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com0tag:blogger.com,1999:blog-29130423.post-33585851311977635372022-12-10T16:19:00.002-06:002022-12-22T16:44:45.281-06:00NCBJ 2022: The Role of the Bankruptcy Judge<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhO2r51kHPVVxIKr_RtfhSJ0k1jeIVgK7CVQt5YZCMtvV_iwvkg4xYcAAmi7hLNXmSW9CKQJouTvFG6POigfkUKpRv-Abm9Z11YKHmu-11ELCLW6M3HbfOXoOYlAmajJHWIIzSmCn9t_S6JX0NQa6fyn4aHu0ssHAWaVlX037pQDqSmEu-W2vw/s3024/IMG_20221022_101455.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="3024" data-original-width="3024" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhO2r51kHPVVxIKr_RtfhSJ0k1jeIVgK7CVQt5YZCMtvV_iwvkg4xYcAAmi7hLNXmSW9CKQJouTvFG6POigfkUKpRv-Abm9Z11YKHmu-11ELCLW6M3HbfOXoOYlAmajJHWIIzSmCn9t_S6JX0NQa6fyn4aHu0ssHAWaVlX037pQDqSmEu-W2vw/s320/IMG_20221022_101455.jpg" width="320" /></a></div><br /><div style="text-align: justify;"> This panel asked the question, what is the role of the bankruptcy judge? To answer that question, they featured two retired judges, Judge Robert Drain from the Southern District of New York and Judge Harlan "Cooter" Hale from the Northern District of Texas along with sitting judges Erithe Smith from the Central District of California and Grace Robson from the Middle District of Florida. Rather than trying to recreate their panel, I will try to distill their presentation into a series of rules.</div><span><a name='more'></a></span><div style="text-align: justify;"><br /></div><div style="text-align: justify;">1. Bankruptcy is a collective proceeding. It involves many more people than traditional litigation and bankruptcy judges have to spend more time managing the proceeding.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">2.<span> Bankruptcy is a problem solving court. In any case, there are a finite number of assets that can be distributed among the group of creditors. The bankruptcy court needs to be able to find a way to get the assets to the creditors before the case is consumed by administrative expenses. In unique cases like the City of Detroit, the bankruptcy court may be the only court equipped to solve a problem involving many different groups.</span></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">3.<span> Bankruptcy courts exist to build consensus when they can and make decisions when they can't. There is an element of truth telling to being a bankruptcy judge. According to Judge Smith, "We can make lemonade, but it may not be a very big pitcher."</span></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">4.<span> Bankruptcy courts deal with the human element. Bankruptcy judges deal with issues critical to ordinary people, such as whether someone gets to keep their house or car. That is not something that big firm practitioners experience on a regular basis but bankruptcy judges do.</span></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">5.<span> Bankruptcy judges need to look out for the parties who may not be present at the beginning of a case. Especially when dealing with interim first day orders, the judge needs to realize that no everyone has had a chance to read the filings. Judges can control how much gets done how fast by adopting local rules and setting expectations.</span></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">6.<span> Bankruptcy is the Emergency Room of the legal system. The first priority is to keep the patient alive until you can do more long term fixes. When the debtor comes in on the first deal, the goal is to allow the company to survive for another week or month so that more permanent solutions can be explored. </span></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">7.<span> Sometimes you can't go with the consensus. When someone is objecting, the judge needs to ask whether that person is really being hurt and does that outweigh the benefits of the consensus. Sometimes the Code gives definitive answers and sometimes it is more ambiguous. In the City of Detroit case, Judge Steven Rhodes was offered an early compromise where the people of Detroit were not in the room. It takes a lot of courage to go against the consensus.</span></div><div style="text-align: justify;"><span><br /></span></div><div style="text-align: justify;"><span>8.<span> Consent makes life easier. Issues can be waived. In Judge Hale's National Rifle Association case, there was a major problem with venue (and I said so in this blog). However, no one raised venue and the case stayed in Judge Hale's court by the tacit agreement of everyone involved.</span></span></div><div style="text-align: justify;"><span><span><br /></span></span></div><div style="text-align: justify;"><span><span>9.<span> Bankruptcy judges are given a vast amount of discretion. According to Judge Smith, the Bankruptcy Code is a beautiful document, but it can't address every issue. This means that much is left to the judge's interpretation.</span></span></span></div><div style="text-align: justify;"><span><span><span><br /></span></span></span></div><div style="text-align: justify;"><span><span><span>10.<span> Bankruptcy courts are courts of equity--sort of. While bankruptcy courts are referred to as courts of equity, they are still governed by the Bankruptcy Code. However, some provision so of the Code are flexible enough to allow lawyers to present creative solutions to comply with the letter and the spirit of the law. </span></span></span></span></div><div style="text-align: justify;"><span><span><span><span><br /></span></span></span></span></div><div style="text-align: justify;"><span><span><span><span>11.<span> Judges have different styles when it comes to showing their views. Judge Drain said that as part of managing an entire case, he would let the parties know where he thought the case was going. He said that during the mortgage crisis he would ask lenders if they really wanted to foreclose when they had so many vacant properties. However, he acknowledged that what might not seem rational to him could make perfect economic sense to a lender. </span></span></span></span></span></div><div><p style="text-align: justify;">Judge Hale joked that sometimes confusion could be confused with a poker face. He said that while he was not an activist judge. even people with poker faces can signal to parties that there is something on your mind. When he wanted to send a message to the parties, he would have his law clerk send them an email encouraging them to address certain issues.</p><p style="text-align: justify;">Judge Smith said that you can have poker face but be screaming on the inside until someone makes a completely, utterly ridiculous argument. She said her law clerks could hear argument in chambers and instantly recognize that a case was not going well for a party. She said that you can let them hang themselves. She added that it's learned behavior to just sit there and not show anything.</p><p style="text-align: justify;">12.<span> Exercising discretion is a skill judges develop over time. Judge Robson said that she felt very constrained at first. Judge Smith added that in her first years on the bench, she saw things pretty stringently but five years later, ten years later, they looked differently. </span></p><p style="text-align: justify;">The judges agreed that competing sales offers were an area where the judge could exercise discretion. Judge Robson said that if the offers were close, she would consider the option that saved jobs, but that she had to consider the interest of creditors first. Judge Smith added that the highest offer might not be the one that is most likely to close. </p><p style="text-align: justify;">13.<span> Sometimes the judge needs to insert himself into the process. Judge Hale gave the example of the NRA case where the parties were aggressively sparring. He said that sometimes the judge needs to say something to set the right tone. </span>Judge Robson that in dealing with a pro party, she may ask questions if the debtor doesn't know what's relevant so she can try to get to the right result. Judge Smith said that she would ask questions if she wanted to clarify the testimony but she would never step in if one side forgot to ask an important question. Judge Drain said that if he thought a witness was lying, he might ask him questions because the witness might just be nervous.</p><p style="text-align: justify;">14.<span> Sometimes justice means an orderly process. Judge Drain said that justice is a loaded word. He quoted Judge Bonapfel as saying that our job is to stop people from killing each other. He said that people don't appreciate the role that an orderly process plays in ensuring justice, but that there are times in history when that has broken down and people start shooting each other because they want revenge.</span></p><p style="text-align: justify;">15.<span> The judge should not step in when the lawyers are mismatched. Judge Drain said that he won't weigh in unless one of the lawyers is being a real bully. He said I will not become the less effective lawyer's senior partner. Judge Smith said that one lawyer is not making arguments that are obvious, it's hard not to say something but you don't want to put your thumb on the scale for the person that's dying in court. Judge Smith said that you don't want to ask questions that are outcome determinative. She said that you spend your whole career as an advocate and then you go on the bench and you have to assume a different role.</span></p><p style="text-align: justify;">16.<span> Judges notice how lawyers behave. Judge Hale said that we hate lawyers who are bullies. If you are the better lawyer, don't be so proud of it that you are obnoxious. Judge Drain said that people want to get better and will do so if you have high expectations. He said that it is great to see a young lawyer catch on. Judge Smith said that it is a pet peeve of hers when someone says a case is on all fours with a situation and then they can't tell her about the facts.</span></p><p style="text-align: justify;">17. The judge has a duty to look out for the party that is not there, to balance the need for speed with due process. Judge Drain said that you have to ask always who's hurt by this particularly when its fast. He said that he had done one day prepackaged plans when they just addressed one element of capital structure. Judge Hale said that he felt comfortable taking out pieces from a debtor in possession financing order presented on the first day of the case. He said that would consider putting them back in at the final hearing when all the parties have had a chance to consider them.</p><p style="text-align: justify;">18.<span> Even good judges have regrets--sometimes. Judge Drain said that he had learned to forget about a decision that he wrote almost immediately and not to get out of shape if he got reversed later on. However, the other judges gave examples of rulings they regretted.</span></p><p style="text-align: justify;">Judge Smith she regretted appointing a fee examiner in a case. She thought that it would simplify the process. However, there was so much animosity between the firms that there ended up being scorched earth attacks on the fee examiner and it ended up costing more to litigate the fee examiner's recommendations than the ultimate fee reductions made.</p><p style="text-align: justify;">Judge Hale said that a ruling he made denying a discharge has weighed on him for weighed on him for nineteen years. He said that the case was a learning experience and always regretted barring the discharge.</p><p style="text-align: justify;">19.<span> Judges have experiences they remember fondly. Judge Drain remembered a case involving a 1920s amusement park where he was able to get the parties to mediate. </span></p><p style="text-align: justify;">Judge Smith had a case where she granted relief from the automatic stay which resulted in the debtor losing her home. About two days after the hearing, she got a letter from debtor who said that she realized that she had no equity in the home but wanted to see how process worked. She said that she was so mesmerized that she stayed for all the hearings. Judge Smith said that it reminded her of how important our job is. </p><p style="text-align: justify;">Judge Hale remembered the case of a hospital district in Quanah, Texas which had filed chapter 9. The government officials rented a bus and brought in 50 people so they could participate in the hearing. </p><p style="text-align: justify;"><br /></p><p> </p></div>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com0tag:blogger.com,1999:blog-29130423.post-55001938285332106822022-12-02T13:29:00.001-06:002022-12-02T13:29:59.820-06:00Counsel's Retention of "Wet Signatures" Overcomes Debtor's "Faulty" Memory<p style="text-align: justify;">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. <i>In re Wilson</i>, 2022 Bankr. LEXIS 3378 (Bankr. D. N.J. 11/30/22). </p><p style="text-align: justify;"><b><span></span></b></p><a name='more'></a><b>What Happened</b><p></p><p style="text-align: justify;">On December 3, 2019, attorney Fred Braverman filed a chapter 13 petition for Charlie Wilson. The case was later dismissed on February 27, 2020 after the debtor failed to prosecute the case. Several years later, the Debtor was attempting to refinance his mortgage and found out that the bankruptcy filing on his credit report impacted his credit score. After asking his attorney to remove the bankruptcy from the public record, on August 26, 2022, the Debtor wrote a letter to the Court. In the letter, the Debtor alleged that he had told his attorney not to file the bankruptcy case and "was not aware that Atty. Braverman proceeding to file the Chap. 13 case anyway . . . and without our knowledge."</p><p style="text-align: justify;">The Court was rightfully concerned that a petition might have been filed without the client's authority and issued an Order to Show Cause. Both Attorney Braverman and the Chapter 13 trustee filed responses to the Order to Show Cause. </p><p style="text-align: justify;"><b>The Court's Findings</b></p><p style="text-align: justify;">The Court found that the Clerk had sent at least five notices to the Debtor and that none of them had been returned as undeliverable. The Chapter 13 trustee stated that she had mailed a "welcome letter" advising the debtor of the materials needed for the 341 meeting. The Court found that Attorney Braverman's response "is more damning." Attorney Braverman protected himself by producing:</p><p style="text-align: justify;"></p><blockquote><p style="text-align: justify;">copies of the wet ink signature pages of the bankruptcy petition</p><p style="text-align: justify;">a screen shot of a text message urging him to file the bankruptcy petition to avoid a wage garnishment</p><p style="text-align: justify;">a screen shot of a text message thanking him for filing the bankruptcy petition</p><p style="text-align: justify;">a hand-written note from the debtor providing information to contact his payroll office</p><p style="text-align: justify;">a screen shot of a text message on December 27, 2019 indicating that he was having second thoughts about proceeding with the bankruptcy case.</p></blockquote><p style="text-align: justify;"></p><p style="text-align: justify;">Attorney Braverman also testified as to his phone conversations with the Debtor.</p><p style="text-align: justify;"><b>The Court's Ruling</b></p><p style="text-align: justify;">The Court noted that there was a split of opinion as to whether a bankruptcy petition, once filed, can be removed from the record, even if it was filed without permission. The Court noted that this would be an extraordinary remedy. The Court went on to state that "Mr. Wilson's regret, three years after the fact, of the filing the bankruptcy case is not the kind of circumstance that merits an extraordinary remedy." It also stated:</p><p class="MsoNormal" style="line-height: 15.0pt; margin-top: 10.0pt; mso-pagination: none; text-align: justify;"><span style="font-family: Times, serif;"></span></p><blockquote><p class="MsoNormal" style="line-height: 15.0pt; margin-top: 10.0pt; mso-pagination: none; text-align: justify;"><span style="font-family: Times, serif;">It is clear that Mr. Wilson authorized this bankruptcy
filing. He sent messages to Mr. Braverman urging him to file the case as soon
as possible to stop garnishment of his wages. Mr. Braverman produced a copy of
the wet-ink signature page of the petition. If
authorization exists courts usually do not expunge the petition.
Messages from Mr. Wilson regarding changing his mind about
bankruptcy were not sent until the 27th of December, 24 days after the
bankruptcy commenced and after numerous notices regarding the bankruptcy had
been served on Mr. Wilson.</span><o:p></o:p></p><p style="text-align: justify;">
<a name="Bookmark_para_40"></a><span style="font-family: Times, serif; font-size: 12pt;">Nothing in the Bankruptcy Code allows the court
to relieve a filer's remorse.</span></p></blockquote><p style="text-align: justify;"><span style="font-family: Times, serif; font-size: 12pt;"></span>
</p><div style="text-align: justify;">Opinion, pp. 17-18 (cleaned up). </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><b>Why It's Important</b></div><div style="text-align: justify;"><b><br /></b></div><div style="text-align: justify;">Too often, opinions feature attorneys behaving badly. This could have been one of those cases if Attorney Braverman had failed to respond to the Order to Show Cause or if he had failed to preserve the wet signatures. One case cited by the Court stated that <span style="font-family: Times, serif; font-size: 12pt;">"failure to produce the wet signature on a
petition leads to the conclusive presumption that the signature does not
exist." <i>In re T.H.</i>, 529 B.R. 112, 120 (Bankr. E.D. Va. 2015). Attorney Braverman also protected himself by preserving his text messages with the debtor. In this case, the record reflects that Attorney Fred Braverman not only complied with his responsibilities under the Bankruptcy Code but practiced good defensive law as well. Other attorneys would do well to follow his example. </span></div><div style="text-align: justify;"><span style="font-family: Times, serif; font-size: 12pt;"><br /></span></div><div style="text-align: justify;"><span style="font-family: Times, serif; font-size: 12pt;">I am a little disappointed that the Court let the debtor get off so easily. The debtor's representations to the court were not just erroneous but appear to be fraudulent as well. Even if the Court did not find that sanctions were appropriate it should have cautioned the debtor about the seriousness of lying to a federal bankruptcy judge. However, even without such an admonishment, if Mr. Wilson files bankruptcy in the future, there is a record of his attempt to mislead the court. </span></div>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com0tag:blogger.com,1999:blog-29130423.post-69545412934982387402022-11-28T08:58:00.001-06:002022-11-28T08:58:16.566-06:00Judge Gargotta Nixes Non-Dischargeability Claim Against Corporate SubV Debtor<p style="text-align: justify;"> 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, <i>Avion Funding, LLC v. GFS Industries, LLC</i> (Bankr. W.D. Tex. 11/10/2022). The decision can be found <a href="https://www2.txwb.uscourts.gov/opinions/opdf/22-05052-cag_Avion_Funding,%20LLC%20v.%20GFS%20Industries,%20LLC_2022-11-10_230516.pdf">here</a>. The decision was especially sweet for me personally because the case it distinguished, <i>New Venture Partnership v. JRB Consolidated, Inc. (In
re JRB Consolidated, Inc.)</i>, 188 B.R. 373, 374 (Bankr. W.D. Tex. 1995), was one that I lost and always thought was wrongly decided. </p><span><b><a name='more'></a></b></span><p style="text-align: justify;"><b>Introduction to Non-Dischargeability of Corporate Debts</b></p><p style="text-align: justify;">Under 11 U.S.C. Sec. 523(a), there are certain debts which cannot be discharged in a bankruptcy case. Some debts are automatically non-dischargeable, such as domestic support obligations and certain taxes, while other debts must be proven to be non-dischargeable, such as fraud, defalcation in a fiduciary capacity and willful and malicious injury. Usually, it is easy to tell when non-dischargeability applies. Only a human being can receive a discharge in a chapter 7 case, 11 U.S.C. Sec. 727(a)(1) and only individuals can file chapter 13, 11 U.S.C. Sec. 109(e). Since chapters 7 and 13 account for 99% of all bankruptcies, the possible application of non-dischargeability to a corporation or partnership does not come up very often. Nevertheless, it happens enough to parse the statutes and wonder just what Congress was thinking. </p><p style="text-align: justify;">What makes this issue interesting is how different sections of the Code interact. Let's start with 11 U.S.C. Sec. 523(a). It states that "(a) discharge under (specified specific code sections) does not discharge an individual debtor from any debt" listed in the nineteen subsections which follow. That should make it really clear that only an individual can have a non-dischargeable debt, right? </p><p style="text-align: justify;">However, when you look at chapter 12, it says that a discharge under chapter 12 does not discharge a debtor from a debt "of a kind specified in specified in section 523(a) of this title." So, does the reference to "of a kind specified in section 523(a)" refer to the nineteen subsections only or does it include the limitation that section 523(a) only applies to individual debtors? In the <i>JRB Consolidated</i> case, Judge Larry Kelly, for whom my Inn of Court is named, concluded that "of a kind" meant the specific types of debts regardless of what debtor they applied to. </p><p style="text-align: justify;">Now what does Subchapter V say? In 11 U.S.C. Sec. 1192, Congress stated that upon conclusion of a plan, the court shall grant<span face="Verdana, "Helvetica Neue", Helvetica, Arial, sans-serif" style="background-color: white; color: #333333; font-size: 16px; text-align: left;"> </span>the debtor a discharge of all debts provided in section 1141(d)(1)(A) of this title" except for debts "of the kind specified in section 523(a) of this title." Section 1141(d)(1)(A) doesn't offer any clarity since it simply refers to pre-petition debts and a few other debts determined as if they were pre-petition debts. However, 11 U.S.C. Sec. 1141(d)(1)(B) specifically says that in a legacy chapter 11 case that non-dischargeability only applies in an individual case. </p><p style="text-align: justify;">The Fourth Circuit has recently held that non-dischargeability can apply to a non-human Subchapter V debtor. <i>In re Cleary Packaging, LLC</i>, 36 F.4th 509 (4th Cir. 6/7/2022).</p><p>So, how did Judge Gargotta approach the problem?</p><p><b>Judge Gargotta's Interpretation</b></p><p>Judge Gargotta relied substantially on the preamble to section 523(a) to find that non-dischargeability in Subchapter V cases only applied to individuals. He gave three reasons for this conclusion.</p><p style="text-align: justify;"></p><blockquote><p style="text-align: justify;">First, § 1192(2)’s reference to § 523(a) only incorporates the list of nondischargeable debts,
without expanding it. In other words, the language of § 1192(2) does not intend to except from
discharge any debts that § 523(a) does not already except. Because § 523(a) unequivocally applies
only to individuals, the language of § 1192(2) does not empower § 523(a) to cast a wider net than
the text of § 523(a) permits. Had Congress included a phrase in § 1192(2) explicitly stating that
the list found in § 523(a) applies to all debtors proceeding in Subchapter V, then the interpretation
would be straightforward. Congress’s choice not to insert this language is instructive. </p><p style="text-align: justify;">Moreover, if Congress intended the list of debts to be applicable to corporate debtors, it
knew how, because it did so in § 1141(d). Section 1141(d)(6) states: “the confirmation of a plan
does not discharge <i>a debtor that is a corporation</i> from any debt (A) of the kind specified in paragraph 2(A) or 2(B) of section 523(a) that is owed to a governmental unit…”(emphasis added). Similarly, § 1141(d)(2) states: “A discharge under this chapter does not discharge a debtor who is
an individual from any debt excepted from discharge under section 523 of this title.” (emphasis
added). This language is evidence that Congress knew, when it drafted § 1192(2), how to
distinguish dischargeability based on the type of debtor. Congress did not make this distinction in
§ 1192(2). Thus, in order to determine to which debtors § 1192(2) refers, one must look to the
language of § 523(a), which unequivocally applies only to individuals. </p><p style="text-align: justify;">Second, the inclusion of § 1192 in § 523(a) would be rendered meaningless under any other
interpretation. When Subchapter V was passed, Congress also amended § 523(a) to add the newly
enacted § 1192 to the list of discharge provisions incorporated in the scope of § 523(a)’s discharge
exceptions. § 523(a) now reads, “[a] discharge under section…<i>1192</i>…does not discharge an
individual debtor…” (emphasis added). Section 1192’s addition is vital to the analysis because it
evinces Congress’s intent. Section 1192(2) as written makes § 523 discharge exceptions applicable
to “debtors” without regard to whether the debtor is an individual or a corporation. Critically
though, had Congress intended § 523(a) exceptions to apply to entities as well, it would be
unnecessary to add § 1192 to a statute that plainly applies to individual debtors only. The fact that
Congress added § 1192 into § 523 demonstrates that Congress intended § 1192(2) to limit the § 523
exceptions in Subchapter V to individuals only. </p><p style="text-align: justify;">This conclusion is mandated by the canon of statutory construction against surplusage.
When interpreting statutes, courts should “lean in favor of a construction which will render every
word operative, rather than one which may make some idle and nugatory.” Antonin Scalia & Bryan A. Garner, <u>Reading Law: The Interpretation of Legal Texts</u> 69, 174 (2012) (citing Thomas M.
Cooley, A Treatise on the Constitutional Limitations Which Rest upon the Legislative Power of
the States of the American Union 58 (1868)). Here, interpreting § 523 as excepting from discharge
debts of corporate debtors in Subchapter V would be to ignore the import of § 1192 into § 523(a).
The Court believes the correct interpretation is one which gives meaning to the amendment to
§ 523. This position compels the Court to conclude that discharge exceptions found in § 523 apply
to an § 1192 discharge, but only as to individual debtors. </p><p style="text-align: justify;">Third, corporate debtors proceeding under Chapter 11 historically have been immune to
dischargeability actions under § 523(a). It is well-settled law in this circuit that the § 523
exceptions to discharge apply only to individuals, not to corporations. See <i>Garrie v. James L.
Gray, Inc.</i>, 912 F.2d 808, 812 (5th Cir. 1990) (“the ‘willful and malicious injury’ exception to
discharge, like all of the exceptions to discharge found in section 523(a), applies only to individual,
not corporate debtors”) (citing <i>Yamaha Motor Corp., U.S.A. v. Shadco, Inc.</i>, 762 F.2d 668, 670
(8th Cir. 1985)). As this Court itself has explained, it is clear from the language of the Chapter 11
discharge statutes “that corporate debtors in Chapter 11 are not subject to a complaint to determine
dischargeability of debt under § 523(a).” <i>New Venture Partnership v. JRB Consolidated, Inc. (In
re JRB Consolidated, Inc.)</i>, 188 B.R. 373, 374 (Bankr. W.D. Tex. 1995). For Congress to
suddenly depart from this well-established principle when it enacted Subchapter V defies reason. It is much more likely, and confirmed by the language used in Subchapter V, that Congress intended to expand, not discontinue, the principle that Chapter 11 corporate debtors are not subject
to § 523(a) complaints to determine dischargeability. Because Subchapter V is merely a subchapter
to the broader Chapter 11, this is the required result.
More compelling, the provisions governing Chapter 11 discharge imply that § 523(a)
should not apply to corporate debtors. Section 1141(d)(2) states, “[a] discharge under this chapter
does not discharge a debtor who is an individual from any debt excepted from discharge under
section 523 of this title.” (emphasis added). Had Congress intended that corporate debtors also be
held to the provisions of § 523(a), then clarifying that only individuals under Chapter 11 are liable
for § 523 exceptions to dischargeability makes little sense. </p><p style="text-align: justify;">In sum, the statutory language along with the broader Chapter 11 statutory scheme mandate
this Court’s holding that corporate debtors proceeding under Subchapter V cannot be made
defendants in § 523 dischargeability actions. Avion’s claims under § 523, therefore, must be
dismissed for a lack of legal foundation.
</p></blockquote><p style="text-align: justify;"></p><p>Opinion, pp. 8-11.</p><p style="text-align: justify;">Judge Gargotta was able to distinguish the prior JRB Consolidated decision primarily on the basis that it recognized a difference in the chapter 11 discharge. Judge Gargotta wrote:</p><p style="text-align: justify;"></p><blockquote>The Court recognizes the similarities between the language of §§ 1228(a)(2) and 1192(2).
Despite the similar language, the Court does not find its decision in this case as inconsistent with
the ruling in <i>In re JRB Consolidated</i>. Critical to Judge Kelly’s decision was the difference between
the operation of Chapter 11 corporate discharges and Chapter 12 corporate discharges. Judge Kelly
pointed out that the provisions of Chapter 11 are narrower, only excepting from discharge 1) a
liquidating corporate debtor that would otherwise be denied a discharge under § 727(a)
(§ 1141(d)(3)); and 2) individual Chapter 11 debtors who have debts of the kind enumerated in
§ 523(a) (§ 1141(d)(2)). Given the limited exceptions to discharge in Chapter 11, Judge Kelly
observed that “it seems clear from that language that corporate debtors in Chapter 11 are not
subject to a complaint to determine dischargeability of debt under § 523(a).” <i>Id</i>. at 374. Because
Subchapter V is not its own chapter of bankruptcy, but rather is a subchapter of Chapter 11, Judge
Kelly’s analysis regarding Chapter 11 discharges remains applicable to the case here.
</blockquote><blockquote>Furthermore, Judge Kelly recognized the uniqueness of Chapter 12, stating that the broad
language of § 1228(a), “would appear to be consistent with the intent of Congress to provide
special treatment for certain kinds of debtors otherwise eligible to file for Chapter 12.” <i>Id</i>. In short,
because Chapter 12 is only available to a small and specific subset of debtors, Chapter 12 cases
have unique considerations that are not present in a Chapter 11 case. Therefore, the Court is not
mandated to extend the holding that Chapter 12 corporate debtors are subject to § 523
dischargeability actions into Subchapter V notwithstanding the similar language between
§§ 1228(a) and 1192(2). </blockquote><p></p><p style="text-align: justify;">Opinion, p. 13.</p><p style="text-align: justify;">I have set out the key areas of Judge Gargotta's reasoning because I think he (and his law clerk) do a masterful job of using the canons of statutory interpretation to determine what Congress intended on a subject that Congress probably never thought about. He gets bonus points for citing the Scalia text on statutory interpretation. Congress created this problem by blindly cross-referencing statutes that apply differently in different contexts. The Court can either take the plain meaning approach in a vacuum (as I believe Judge Kelly did in <i>JRB Consolidated</i>) or think about how the statutes work together (as Judge Gargotta did). While other courts may disagree with Judge Gargotta's analysis, they will find it hard to dismiss it as a principled approach to a problem foisted onto the courts by Congress.</p><p style="text-align: justify;"><b>What Should the Answer Be?</b></p><p style="text-align: justify;">Setting aside statutory interpretation and Congressional intent, what should the answer be? I think that dischargeability is a concept uniquely applicable to individual debtors. I start with the proposition that bankruptcy is intended to benefit the "honest but unfortunate" debtor. <i>Local Loan Co. v. Hunt</i>, 292 U.S. 234, 244 (1934). This introduces a concept of morality that can only apply to human beings and not to artificial entities. </p><p style="text-align: justify;">The nineteen categories of non-dischargeable debts fall into four broad categories: those which contain an element of moral judgment, those which protect the public fisc, technical exceptions and a grab bag of special interest provisions tacked on over the years. </p><p style="text-align: justify;">The morality based exceptions include fraud (sec. 523(a)(2)), fraud or defalcation in a fiduciary capacity (sec. 523(a)(4)), willful and malicious injury (sec. 523(a)(6)), death or personal injury caused by drunken driving or boating (sec. 523(a)(9)), federal restitution obligations (sec. 523(a)(13)) and debts for violations of the securities laws (sec. 523(a)(19)).</p><p style="text-align: justify;">The exceptions aimed at protecting the public fisc include taxes (sec. 523(a)(1)), domestic support obligations (sec. 523(a)(5)), student loans (sec. 523(a)(8)), fraud or defalcation while acting in a fiduciary capacity of a federally insured institution (sec. 523(a)(a)(11)), failure to maintain a commitment to contribute capital to a federally insured institution (sec. 523(a)(11)), and certain fees imposed on prisoners (sec. 523(a)(17)). </p><p style="text-align: justify;">The exceptions I would describe as technical include debts that are not listed or scheduled (sec. 523(a)(3)) and debts excluded from discharge in a prior case (sec. 523(a)(10)).</p><p style="text-align: justify;">Of the nineteen categories of non-dischargeable debts there are many which can only apply to an individual, such as domestic support obligations, student loans, restitution, prisoner fines and drunken driving debts. While artificial entities can owe tax debts, they must pay priority claims in full in order to receive a discharge. </p><p style="text-align: justify;">When you eliminate the debts that could not be incurred by an artificial entity or must be paid by an artificial entity in order to reorganize, the main debts left are a subset of the morality-based exceptions to discharge, such as the fraud claim raised in the <i>Avion Funding</i> case. Morality is a concept not easily applied to an artificial entity. <i>Purdue Pharma</i> is an example of an entity whose owners operated it in an egregiously immoral manner. However, it was able to reorganize because reorganization promoted the greater good. If non-dischargeability had applied to that case, there would have been no reorganization since most debts would have escaped discharge. A corporate restructuring is more of a collective maximization of value than it is a vehicle for making moral judgments. Moral judgments, on the other hand, are particularly apropos in the case of an individual receiving a chapter 7 discharge. </p><p style="text-align: justify;">Beyond the question of whether morality should apply to artificial entities, a kind of morality is baked into the Code in other areas applicable to artificial entities. The good faith requirement of 11 U.S.C. Sec. 1129(a)(3) is designed to ensure that the bankruptcy process is not used for improper purposes. The priority given to taxes, employee wages and customer deposits all include an element of moral judgment. </p><p style="text-align: justify;">While the existing laws are rather murky, if Congress were writing on a clean slate, it should state that dischargeability only applies to human debtors.</p><p style="text-align: justify;">Disclaimer: Given that there are two viable alternatives for deciding whether non-dischargeability applies to a corporate debtor, I reserve the right to argue whichever position benefits my client. </p>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com1tag:blogger.com,1999:blog-29130423.post-43592691197658338622022-11-13T06:51:00.001-06:002022-11-22T06:41:34.036-06:00NCBJ 2022: The Devastating Impact of the Opioid Crisis featuring Pulitzer Prize Winning Journalist Eric Eyre<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjJRn_xQkO6KTNM1GLy_2Ehetz-Ods70iyWaa0jWb3QwMZyV7t_XorT7UWmME02PDjLs5RiNiBLuSJT3x8QS4hRK4WLv-rg1gj1ylZbF3NGZQ7vAe23ED8CF82Z9FYHTGL8r3C03yqbyxgcnbQNUzgAsFb8Ld-Oi-WQ56Te6t7Cbu701Qsdb4/s3024/IMG_20221020_113515.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="3024" data-original-width="3024" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjJRn_xQkO6KTNM1GLy_2Ehetz-Ods70iyWaa0jWb3QwMZyV7t_XorT7UWmME02PDjLs5RiNiBLuSJT3x8QS4hRK4WLv-rg1gj1ylZbF3NGZQ7vAe23ED8CF82Z9FYHTGL8r3C03yqbyxgcnbQNUzgAsFb8Ld-Oi-WQ56Te6t7Cbu701Qsdb4/s320/IMG_20221020_113515.jpg" width="320" /></a></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"> "The o<span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">pioid crisis
is nothing short of sinister."</span></div><p></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">Eric Eyre and </span></span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">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. </span></p><p class="MsoNormal" style="text-align: justify;"><span></span></p><a name='more'></a><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;"><br /></span><p></p>
<p class="MsoNormal"></p><div class="separator" style="clear: both; text-align: right;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwlXf95yH4UjHsIiMeg4XpOZVakpbbG00fcDsuN_BIfQCXrg5mVsAcP3sEaaL74tLevCQkR7N6yZ9jbGJGpcrLlNHhxQ1Qsu3NdbikY9QgZloGrva7GwIMUA9wlSqPyyyCkqJh0rNaW211BpxoYrun5wJ6UksJthWGrXPZeZJZmpxXTqGAN7c/s3024/IMG_20221020_114407.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em; text-align: justify;"><img border="0" data-original-height="3024" data-original-width="3024" height="270" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwlXf95yH4UjHsIiMeg4XpOZVakpbbG00fcDsuN_BIfQCXrg5mVsAcP3sEaaL74tLevCQkR7N6yZ9jbGJGpcrLlNHhxQ1Qsu3NdbikY9QgZloGrva7GwIMUA9wlSqPyyyCkqJh0rNaW211BpxoYrun5wJ6UksJthWGrXPZeZJZmpxXTqGAN7c/w270-h270/IMG_20221020_114407.jpg" width="270" /></a></div><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;"><div style="text-align: justify;"><span style="font-size: 12pt;">The story began in 2005 when </span><span style="font-size: 12pt;">William Bull
Preece died in a ladder fall in a mine. His addiction to opioids contributed to his death. His sister Debbie compiled "the list of the dead," a listing of everyone within a ten mile radius who had died from opioids. </span></div></span><p></p>
<p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">Eric Eyre was a journalist for the Charleston Gazette-Mail who covered the West Virginia statehouse among other duties. A new West Virginia Attorney General had just taken office. The AG moved to West Virginia to run for office. Before being elected, he had been a lobbyist for opioid manufacturers and his wife was still lobbying on behalf of the big big three manufacturers. He took over supervising cases brought by his predecessor but insisted that he would recuse himself from any participation in the cases. From, </span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">2013-2016, he attended hearings in circuit court to monitor the case. He received a tip about the inaugural party. The paper filed a FOIA request and intervened in the state court action. When they did, they found out that everything in the case, including the complaint was sealed. He found it bizarre that a case brought on behalf of the people of West Virginia was kept secret from the people of West Virginia. The judge twice ruled that the complaints should be unsealed but the distributors argued that the complaint contained confidential business information.</span></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">Then there was a FOIA battle to show that the Attorney General had not recused himself. The paper obtained documents showing that the Attorney General had given specific instructions for dealing with the cases and had personally met with executives of Cardinal Health. The paper received an email from the Attorney General's Office stating that it would face sanctions if it published the story. The paper published the story anyway. While they did not face sanctions, the Attorney General's Office opened an antitrust investigation against the small paper. </span></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">As the battle over unsealing the complaint proceeded, the AG said that he wanted to </span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">redact just words 18 words from the complaint. The Judge denied the request and it came out that the 18 words listed the number of opioids being sold in West Virginia from 20016-2012. The</span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;"> complaint got the number from information in a DEA database. The p</span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">ublic had no idea that hundreds of millions of pills were being sold in their state. Eventually it turned out that </span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">780 million pills had been brought into West Virginia. </span></p><p class="MsoNormal"></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh3YITe0-96OjAmJ166tWuFq6GkB1aHfW36QA9-UQip4I96Dr8KXSRPiuuQQeJ-rq1IrZbkoy5IbQpA3IWBtOD4Zy6HbMRYl_DftFdC_kDHCrBIPOhzHEBFJsThpTExQ8g3WiGA5eS94kBBCdQgvlSfP84ntXUTtbKxA_nEz-kd_SaF3fBlczo/s3024/IMG_20221020_121312.jpg" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em; text-align: justify;"><img border="0" data-original-height="3024" data-original-width="3024" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh3YITe0-96OjAmJ166tWuFq6GkB1aHfW36QA9-UQip4I96Dr8KXSRPiuuQQeJ-rq1IrZbkoy5IbQpA3IWBtOD4Zy6HbMRYl_DftFdC_kDHCrBIPOhzHEBFJsThpTExQ8g3WiGA5eS94kBBCdQgvlSfP84ntXUTtbKxA_nEz-kd_SaF3fBlczo/s320/IMG_20221020_121312.jpg" width="320" /></a></div><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;"><div style="text-align: justify;"><span style="font-size: 12pt;">The opioid epidemic was facilitated by sham clinics. </span><span style="font-size: 12pt;">50% of the entire prescriptions
in the state of West Virginia came from a single clinic. Persons wanting prescriptions c</span><span style="font-size: 12pt;">ould get
anything they wanted for $150 cash. There was not even a </span><span style="font-size: 12pt;">doctor at the clinic. Employees used machines to print out prescriptions. </span></div></span><p></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">The epidemic was also facilitated by local pharmacies. Save Rite Pharmacy was described as an open air drug market. Although it was located in a town of just 400, it was the sixth largest seller of opioids in the United States. It filled thousands of prescriptions a day.</span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">The question was how did they
get the opioids? Debbie Preece followed a delivery truck around the county and took a picture of its license plate. The plate was traced back to Cardinal Health, one of the largest pharmaceutical companies in the country. </span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">While trying to track down the source of the opioid crisis, Debbie Preece
lost another brother to opiods. Her brother, the fire chief, responded to the call, but didn't have any Narcan to save his life. </span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">Meanwhile Eric Eyre's newspaper
filed for Chapter 11 bankruptcy. Despite having won the Pulitzer Price for his reporting, he had to reapply for his job.</span></span></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">Plaintiff's lawyers smelled money and sued everyone in the supply chain. Eventually there were 3,000 cases which became part of a Multi-District Litigation. </span></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">Everyone knew there was a problem with opioids because of the number of deaths. The big question was where were the pills coming from. Were they coming from Mexican cartels? The DEA database showed that the pills were coming from American manufacturers but the DEA fought its release. Eventually the Plaintiff's lawyers were able to get the database by sending FOIA requests to small counties which had information. </span></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">When the data came out, it was revealed that nationally there were 110 billion pills sold that killed half a million people. </span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">"Everyone knew
what was going on."<o:p></o:p></span></span></p><p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">Post-Script: In 2018, Attorney General Morrissey, whose inaugural ball helped launch the investigation, ran for U.S. Senate. He lost to Joe Manchin.</span></span></p><p class="MsoNormal" style="text-align: justify;"><span style="color: #404040; font-family: Times New Roman, serif;"><span style="background-color: white;">My take-away from this program is that there was a cynical effort by government regulators in league with industry lobbyists, to conceal the nature of the opioid epidemic in this country. The DEA had the data but didn't want it released. A curious and determined reporter, aided by the sister of a victim, uncovered part of the story. Plaintiff's lawyers unearthed more of the story. Eventually it played out in bankruptcy courts. My summary doesn't really do the story justice. You can find the book, Death in Mud Lick, <a href="https://www.amazon.com/Death-Mud-Lick-Companies-Delivered/dp/1982105313">here</a>. </span></span></p><p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;"><br /></span></span></p><p></p><p class="MsoNormal"><br /></p>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com2tag:blogger.com,1999:blog-29130423.post-17525185380224676972022-11-07T06:42:00.002-06:002022-11-22T06:41:55.558-06:00NCBJ 2022: Mass Torts in Bankruptcy: Two Steps Forward or Two Steps Back<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh5XqCFzkwWS2GaNp7UETrff08-WxLOGcgw9L2SAsz38lKNzn15LWBzW85ILs8mSLXpczosxw2NuBU24PLhCJq35xLouH7do4qSLcxV7vi3KyNVP0DHK-KsY8AnKiIPZCHxvcxbkLYgVa8dfUFA0HSRspfw77o34_QjizaPhTKHKie-vQgLQ5c/s3024/IMG_20221020_153014.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="3024" data-original-width="3024" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh5XqCFzkwWS2GaNp7UETrff08-WxLOGcgw9L2SAsz38lKNzn15LWBzW85ILs8mSLXpczosxw2NuBU24PLhCJq35xLouH7do4qSLcxV7vi3KyNVP0DHK-KsY8AnKiIPZCHxvcxbkLYgVa8dfUFA0HSRspfw77o34_QjizaPhTKHKie-vQgLQ5c/s320/IMG_20221020_153014.jpg" width="320" /></a></div><br /> <p></p><p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">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 </span></span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">Hon. Craig Goldblatt (Bankr. D. Del.), </span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">Karen Cordry from the National Association of Attorneys' General, </span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">Prof. Douglas
Baird and </span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">Sander
Esserman. </span></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">Third party releases have been in the news a lot lately. In<i> Purdue Pharma</i> and <i>Mahwah Bergen Retail Group</i>, District Courts struck down overly broad provisions, while they were allowed in the <i>Mallinckrodt PLC</i> case. </span></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;"><span></span></span></p><a name='more'></a><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">The panelists discussed the history of third party releases. Karen Cordry made the observation that the first time an innovation in the law is allowed it's based on unique circumstances, then it's allowed based on prior precedent and then it's settled law. </span><p></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;"><b>Releases for Guarantors Disfavored</b></span></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif;">T</span>hird party releases were originally rejected by the Ninth and Tenth <i>Circuits.Resorts Int’l v. Lowenschuss (In re Lowenschuss)</i>, 67 F.3d 1394 (9th Cir. 1995); <i>In re Western Real Estate Fund, Inc., et al.</i>, 922 F.2d 592 (10th Cir. 1991). . These cases involved guarantor liability. and relied on section 524(e) to say that the discharge in bankruptcy doesn't benefit anyone other than the debtor. </p><p class="MsoNormal" style="text-align: justify;">The Fifth Circuit continued with a hard line, rejecting not only third party releases but exculpation clauses. <i>Bank of New York Trust Co., NA v. Official Unsecured Creditors' Comm. (In re Pacific Lumber Co.)</i>, 584 F.3d 229 (5th Cir. 2009). However, the Fifth Circuit's ruling was not based on guarantor claims like the earlier 9th and 10th circuit decisions.</p>
<p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;"><b>Mass Tort Cases Provide a Different Justification</b></span></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">Sander Esserman provided what he described as the other side of the story. In the Johns-Manville case, Judge Burton Lifland was faced with a mass tort case that, like the Railroad equity receiverships threatened to go on forever. There was a profitable company faced with tort suits. At first its one, two or three at a time. The company is winning most of the cases. The plaintiff's lawyers threaten to just keep filing more suits until they got a big victory.</span></p><p class="MsoNormal" style="text-align: justify;"><span style="color: #404040; font-family: Times New Roman, serif;"><span style="background-color: white;">For Judge Lifland, the question was w</span></span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">ow do we get
out of this mess? </span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">How do you
give protection to people who want to contribute to a plan? </span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">How do you
protect the right of future claimants? His solution was to create what was later codified as 11 U.S.C. Sec. 524(g). It provided for both payment of future claims and third party releases. When the insurance companies wrote a check, they would be done. The insurance companies needed a release because they could not be assured that tendering policy limits would be enough. They could be faced with bad faith claims, direct claims and policies without limits. </span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">What made the plan work as a practical matter was that the v</span></span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">ast majority of claims voted in favor, it protected constitutional jury trial rights for those who wanted to exercise them and without the third party release, there would be no plan. This was later codified into law by Congress. However, at the time, Judge Lifland was crafting a remedy without clear statutory authority. </span></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">The mass tort claims provide a clear counterpoint to the guarantor cases. In the mass tort cases, the releases were necessary to provide a greater economic benefit to the creditor body as a whole as opposed to merely protecting someone who did not want to file bankruptcy.</span></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">Ultimately the Third and Fourth Circuits endorsed third party releases in the mass tort context. </span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;"><b>The Baird Hypothetical</b></span></span></p><p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">Prof. Baird testified before Congress on July 28, 2021. In his testimony he presented the following hypothetical:</span></span></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">ABC
Corporation is a d</span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">efendant in
mass tort litigation</span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">There are claims about failure
to warn the public about danger of its product.<o:p></o:p></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">Some members
of the family are named defendants. <o:p></o:p></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">The family members had received substantial dividends.<o:p></o:p></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">After negotiations, the parties reach a global
settlement. The former owners agree to make payment into a trust, but only if they receive third party
releases.<o:p></o:p></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">It is estimated
creditors will get 85% of their claims paid.<o:p></o:p></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">92% of the creditors vote in favor of the plan.<o:p></o:p></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">Can the Court bind the 8% who voted no?<o:p></o:p></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">If the hypothetical sounds familiar, its very similar to the settlement with the Sackler family in the Purdue Pharma bankruptcy.</span></span></p><p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">Prof. Baird argued that it’s not a discharge, i</span></span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">t’s a
settlement.</span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">He pointed to the example that a trustee can
settle fraudulent transfer claims under 11 U.S.C. Sec. 544 even those those claims could have been pursued by creditors outside of bankruptcy.<o:p></o:p></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">He argued that the trustee is representing groups of claims that the debtor has with some third party. The Trustee is pursuing that claim on their account and settling that claim on their account.<o:p></o:p></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">The settling party is going to say, "Why should I
have one truce if the war isn’t over?"<o:p></o:p></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">He said, "This isn’t
outrageous."<o:p></o:p></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">He then said, I have two buts
coming. We should be d</span></span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">ramatically
limiting third party releases. The parties getting released should be paying the full value of their liability and the settlement should receive overwhelming consent.</span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;"><b>The Discussion Becomes Lively</b></span></span></p><p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">On of the panelists (Karen Cordry I think) bemoaned the fact that every case was becoming special. She compared it to Lake Woebegone where all the children are above average. <o:p></o:p></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">She said that to say you can
have it in bankruptcy law doesn’t mean you have it in our bankruptcy law.</span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">She asked do we have Section 544(c)? (Section 544 as written ends with Section 544(b)).<o:p></o:p></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">One of her fellows pointed out that we read lots
of things into the code. </span></span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">Even if we
don’t have an actual Section 544(c), we have a virtual Section 544(c). </span></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">However, someone their water on that idea by saying that you won’t get you anywhere with
the Supreme Court. This power was e</span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">xplicitly rejected by the </span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif;">Supreme Court in </span><span style="color: #404040; font-family: Times New Roman, serif;"><i>Caplin v. Marine Midland Grace Trust Co.</i>, 406 U.S. 416 (1972).</span></p>
<p class="MsoNormal"><span style="color: #404040; font-family: Times New Roman, serif;"><span style="background-color: white;"><b>The Texas Two Step</b></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">From there, the panel ventured into a discussion of the Texas Two Step. This was discussed extensively in other presentations so I am going to truncate my discussion here. Under the Texas Two Step, a company splits itself into an operating company and a liability company. It assigns all of the liabilities to the bad company. To avoid being a fraudulent conveyance, the good company has to assign sufficient assets to the bad company to cover the liabilities. This is a type of third party release because it is intended to shield the operating company from lawsuits. the whole premise of the Texas Two Step relies on the good company promising to pay all or most of the debts of the bad company in return for a release. </span></span></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">Prof. Baird said he saw two
issues. On the one hand, there is a slam dunk fraudulent conveyance claim without writing the big check. However, the problem is that the good company won't write the check unless they get the third party release. To do this, you have to be able to accurately value the liabilities. What if the tort claims are actually weak?</span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">Ms. Cordry said that it affects negotiating positions. If the States know that there is no possibility of a third party release, they can take one position. However, if the debtor can just go into court and get a release, there is more of an incentive to make the deal.<o:p></o:p></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="color: #404040; font-family: Times New Roman, serif;"><span style="background-color: white;"><b>Opt In and Opt Out Releases.</b></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">The panel then switched the discussion to opt in releases. Creditors will
only be bound if they check a box saying they will be bound by release and the settling parties will only fund if 90% say yes. If creditors have the ability to take or leave the settlement, it is not controversial. <o:p></o:p></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">However, what if the release requires a creditor to opt out? That depends on how conspicuous the release language. One of the panelists referred to disclosures that contain so many words that it actually discloses very little. Instead of
creditor opting in, they have to opt out.</span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">What if most
people don’t read and respond? What if only </span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">half of creditors return a ballot but 90% of those opt in and 10% opt out. Under an opt in release, that would mean that only 45% of creditors would have opted in. However, if it were an opt out release, only the 10% of the 50% who returned ballots opting out (5% in total) would be exempt from the release. </span></p>
<p class="MsoNormal"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;"><b>Using a 363 Sale to Obtain a Third Party Release</b></span></span></p><p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">The panel also discussed a concept I had not thought of before. What is ABC Company owns an insurance policy. When it files bankruptcy, it proposes to sell all its rights under the policy back to the insurance company free and clear of liens. The sale would feature standard buyer protections, including that there would be n</span></span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">o successor liability and there would be an injunction against
pursuing claims against the buyer. Assuming that it meets the section 363 standard is anything else required?</span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">How is that
different than tendering policy limits?<o:p></o:p></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">How are third
party releases different than sales free and clear of liens?<o:p></o:p></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">Under another scenario, ABC Corp. has
assets sufficient to cover greatest estimate of liability but ABC Corp. thinks the tort system is random with winners and losers. It doesn’t want to put ABC Corp.
into bankruptcy because it will harm enterprise value. <o:p></o:p></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">What about doing a 363 type sale before hand? Sell the good company and leave a pot of cash in the bad company. The obvious problem here is that the good company has to file bankruptcy in order to do a sale free and clear of liens. If the parties attempt to do a 363 type sale outside of bankruptcy, it won't have the statutory protections and could be attacked by creditors. </span></span></p><p class="MsoNormal"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;"><b>Is this a Problem Bankruptcy Can Solve?</b></span></span></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">Rather than resolving these mass injury problems through the tort system or bankruptcy, government can set up a specific program to handle these claims. For coal miners, Congress created a program to compensate victims of Black Lung Disease. Workman's compensation laws protect employers at the state level. </span></span></p><p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">Perhaps the solution to asbestos and opioids and other societal problems is for Congress to set up a collective scheme to be funded from tax dollars outside of bankruptcy. The biggest obstacle would be getting Congress to act in an era of divided governance and suspicion of big government programs. Notwithstanding the obstacles, Ms. Cordry said that such a collective program is the only way to accomplish the goal constitutionally. </span></span></p><p class="MsoNormal"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;"><b>Take-Aways</b></span></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">The idea that the split in circuits over whether to allow third party releases is really a split between circuits dealing with guarantor claims and those dealing with mass tort claims was new to me. </span></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">The potential use of Section 363 sales to accomplish third party releases was also something I had not heard before. </span></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">I was also struck with the idea that bankruptcy courts dealing with new and thorny problems are like the engineered dinosaurs in Jurassic Park, that nature will find a way. Judge Lifland created Section 524(g) before Congress enacted it into law. It may be that the Code will follow the necessities of solving big, messy problems. Either that or the Supreme Court will squash the effort like the giant foot in the opening credits of Monty Python's Flying Circus. </span></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">I am also struck by the similarities between bankruptcy and class actions. Bankruptcy is essentially a class action between the debtor and its creditors. If bankruptcy can be expanded to be a class action between the debtor, its creditors and persons liable to the debtor, it may be possible to solve these problems through the vehicle of a class settlement rather than trying to incorporate third party releases into bankruptcy law. </span></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">I have a draft of an article on third party releases that is going through the editing process. One realization that hits me when I attend programs like this is just how much updating I will have to do from my original draft in February 2022.</span></p><p class="MsoNormal"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">The materials for this panel can be found </span><a href="https://ncbjmeeting.org/2022/materials/CLLA%20Mass%20Torts%20in%20Bankruptcy-Two%20Steps%20Forward%20or%20Two%20Steps%20Back.pdf" style="font-family: "Times New Roman", serif; font-size: 12pt;">here</a><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">.</span></p>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com0tag:blogger.com,1999:blog-29130423.post-21290444500162666082022-10-31T08:17:00.000-05:002022-10-31T08:17:19.385-05:00NCBJ 2022: Bankruptcy Boom or Bust - How Far Is Too Far and Is the Day of Reckoning Here?<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgz2bCAkvpgz-QhGaOcya32QbRah8pM4xhCSb9xmJD1_eY55urzQyAxcp7ZIzPbbQuRwL7FAAl2qen-3VzQmFHbO5Nh4tHBsg-i5JzfCiE6DJDmYQnwa5avp54NiAxv15kJBIKie9MLr0q1p7jZXH8tRc-lyQ-KwDSSGUYYYG4oEOGvqltcNgc/s3024/IMG_20221020_084735.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="3024" data-original-width="3024" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgz2bCAkvpgz-QhGaOcya32QbRah8pM4xhCSb9xmJD1_eY55urzQyAxcp7ZIzPbbQuRwL7FAAl2qen-3VzQmFHbO5Nh4tHBsg-i5JzfCiE6DJDmYQnwa5avp54NiAxv15kJBIKie9MLr0q1p7jZXH8tRc-lyQ-KwDSSGUYYYG4oEOGvqltcNgc/s320/IMG_20221020_084735.jpg" width="320" /></a></div><br /><p></p><div style="text-align: justify;">The first plenary session of NCBJ was a panel consisting of Professor Melissa Jacoby, Jennifer Hagle from Sidley and Austin and Judge Lisa Beckerman (Bankr. S.D.N.Y.). My overall impression of the panel was that it consisted of Prof. Jacoby asking why parties in big bankruptcy cases should be allowed to bend the rules, Ms. Hagle saying that its necessary to meet the demands of her creditor clients and Judge Beckerman trying to make sense of what parties are telling her. The Moderator, Judge Elaine Hammond, brought in the views of some of her judicial colleagues in the audience.</div><div><span><a name='more'></a></span><div style="text-align: justify;"><b>Do Traffic Laws Apply in Large Chapter 11s?</b></div>
<p class="MsoNormal" style="text-align: justify;">In a typical exchange, Professor Jacoby asked "Can you get an exemption from traffic laws?" Somewhat later in the program, she said <span style="mso-spacerun: yes;"> "</span>Imagine going into a chapter 7 case and saying we don’t need a trustee, we don’t need a financial management course. We’ve got a better idea." </p><p class="MsoNormal" style="text-align: justify;">Ms. Hagle replied that "certainty is very strong currency." She added that venue and jurisdiction and what judge and what precedent will apply gives creditors the ability to understand when you extend credit what’s going to happen. She also said that "risk equals money."</p><p class="MsoNormal" style="text-align: justify;">Judge Beckerman said that from the judicial perspective she is looking at how
far out is what I’m being asked to do? She said "I did hedge funds. If it’s bothering me, it’s way out there." </p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">She also said that she asks three questions:</p><p class="MsoNormal" style="text-align: justify;">Is there any basis for this?<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Who is this going to harm?<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">What is going to happen if I don’t approve it?<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Judge Beckerman said she also looks at whether she is being faced with a "faux emergency." She also said that she is wary of parties who make a big ask on the first day and it is essentially a first round of negotiation with the court. She added that "sometimes the parties are testing you."</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">She addressed how to know when the sky is falling. She said that when the debtor is down to $250,000 in cash and they can't get by on cash collateral, there is little choice other than to approve the financing. However, she said that when she is told that everyone is in agreement, she is looking at who is being left out of the deal and who is going to get damaged if they are not part of the financing.</p><p class="MsoNormal" style="text-align: justify;"><span style="color: #404040; font-size: 12pt;">Ms. Hagle asserted a very realpolitik view of large cases. She said that for lenders, "c</span><span style="color: #404040; font-size: 12pt;">ertainty is
currency" (which was actually the second time she used that phrase) and that for a creditor's committee, time and expense and delay are its currency.</span></p><p class="MsoNormal" style="text-align: justify;"><span style="color: #404040; font-size: 12pt;">Prof. Jacoby returned to defend the role of rules. She said that "t</span>he exception shouldn’t swallow the rule" and asked whether a subset of private parties should be able to get together and override
rule of law and say this is the only way to get this done. She added that as a matter of policy, the benefits of bankruptcy are a subsidy and that private parties have the ability to capture the big government subsidies that government offers. </p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Judge Beckerman said that she looks at the<span style="mso-spacerun: yes;"> </span>story I’m
being told. When I probe I ask is that really accurate? Did people really have a negotiation
session or is there something suspicious? She looks for validation. Was the company marketed for a year? Was this the only purchaser that came forward? Did they explore financing?</p>
<p class="MsoNormal" style="text-align: justify;">Ms. Hagle stressed the need for integrity in the process. She said that having an independent director or directors mans that they must have real independence. Having an investigation means having a real investigation. </p><p class="MsoNormal" style="text-align: justify;">One of the judges (Judge Beckerman or Judge Hammond I believe) said that there are things that we will routinely approve and there are things we don't. She stressed the importance of the Delaware first day guidelines and the efforts of other courts to lay out some hard and fast rules. One of the speakers (I think Ms. Hagle) said that she was all for due process as long as it's not on the first day. There was plenty of room for due process on the second day. (I think that was a joke).</p><p class="MsoNormal" style="text-align: justify;">There was also a discussion about the role of the judge in putting the brakes on overly aggressive requests. Sometimes the judge needs to suggest to the parties that they take a break and go out in the hall. Judge David Jones was given as an example of a judge who will independently review the assumptions in the bank's spreadsheet. However, Ms. Hagle asked "What is the judge's role in trying to renegotiate what has already been negotiated?" She also said that you can give someone all the time in the world except that the economics are already baked in. If there is funny business going on (my words, not hers), the Committee had an obligation to track it down after the fact. </p><p class="MsoNormal" style="text-align: justify;"><b>Bleedover Into Smaller Cases</b></p><p class="MsoNormal" style="text-align: justify;">Another topic beyond whether traffic laws apply in Delaware and New York was whether we are developing divergent systems. While there was some agreement that we are developing one system for mega cases and one for everyone else, there was some discussion about bleedover into smaller cases.</p><p class="MsoNormal" style="text-align: justify;">Someone (from the audience I believe) asked whether lawyers who do small cases and consumer cases get to be as creative as lawyers in the mega cases? Someone (probably Prof. Jacoby) raised the specter of the exception swallowing the rule. Lawyers in other cases are going to look for precedents in the big cases. Judges have to be willing to say "that was a very bespoke set of circumstances" that led to that result.</p><p class="MsoNormal" style="text-align: justify;">Judge Hammond echoed that lawyers in smaller cases are picking up on what they see the big cases doing. She said that it’s not just pro ses that pick up things on the internet. She added that it goes to fees as well. She has seen counsel for chapter13 debtors requesting $700 per hour. (Note: There are practical limits here. I could charge as much as a third year associate in New York, but where would I find the client who could pay that much?)</p><div style="text-align: justify;"><b>Tort Cases and Equitable Mootness</b></div>
<p class="MsoNormal" style="text-align: justify;">Ms. Hagle pointed out that the mass tort cases might be different than the melting ice cream cases. In the Purdue Pharma case, the court was told that without third party releases, there would be no billions going to tort victims. The District Court said no and called their bluff. </p><p class="MsoNormal" style="text-align: justify;">The panelists pointed out that the mass tort cases run the risk that the legislature steps in to fix the problem. A legislative fix was presented as only one step worse than the Supreme Court ruling on a case. </p><p class="MsoNormal" style="text-align: justify;">Professor Jacoby argued that equitable mootness allows for the law to get remade without the involvement of the legislature. She said the rules have changed. They haven’t changed because of Congress or the Supreme Court or even that much from circuits.<span style="mso-spacerun: yes;">
</span>Equitable mootness is a big carve out of circuit courts doing their job.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Overall the circuits may want to leave things going the way
they’re going. Do they want to resolve these issues? To the extent there
are concerns about what’s going on in big cases, circuits have some
responsibility. Is it constitutional? Where did this come from?<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Judge Beckerman said that some circuits are more willing to look at substantive issues in confirmation. She pointed to the Fifth Circuit's recent Highland Capital case as one where the court reversed a confirmation order in part notwithstanding equitable mootness. She pointed out that the Fifth Circuit has a lot of big cases.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Prof. Jacoby argued that the Fifth Circuit is different than the 2nd or 3rd circuits when it comes to equitable mootness.</p><p class="MsoNormal" style="text-align: justify;">Ms. Hagle noted that the Supreme Court has repeatedly passed on taking on equitable mootness. They have not wanted to spend their time on it. However, she said that the landscape is changing and what is changing it is the mass tort cases. She argued that these cases were not crisis driven, but rather public policy driven. She said that in the mass tort context there is a lot more willingness to grant stays pending appeal (which avoids equitable mootness). She said that it’s just different than when you have the DIP exploding.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Judge Beckerman said that she does not make decisions thinking about whether she is going to get overturned. People make decision
based on what they think right decision is. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Prof. Jacoby said that mass tort cases and equitable mootness are a terrible
combination. She said that in the Third Circuit oral argument on the Johnson and Johnson/LTL case, J & J's lawyers were asked whether it was better to resolve these mass tort cases through the bankruptcy system or the Multiu-District Litigation system. While this was not central to the issue of whether LTL filed in bad faith, it showed that the courts are thinking about how these cases get resolved.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">Judge Beckerman added that the appellate court has to look at commercial reality.</p><p class="MsoNormal" style="text-align: justify;"><b>Take-Aways</b></p><p class="MsoNormal" style="text-align: justify;">I thought the dynamic of this panel was interesting. You had the academic saying "stop, you can't do this" and the practitioner saying "we must do this" while the judge was left in the middle as the umpire trying to call balls and strikes in a setting where the strike zone is getting fuzzier. </p><p class="MsoNormal" style="text-align: justify;">This panel focused on issues that came up throughout the conference. Is bankruptcy a better way to resolve mass tort claims? Has equitable mootness become a monster gobbling up appellate review? Will practitioners go so far that they push Congress into taking ill-advised action?</p><p class="MsoNormal" style="text-align: justify;">The benefit of NCBJ is to hear what people are talking about at a high level. I think there was a recognition here (and in other programs) that some aspects of bankruptcy practice are going too far and may end up snapping back. I have a section in a law review article I am working on that talks about the revolt of the Article III judiciary against third party releases. Third party releases are one area where practice may be getting out ahead of the language of the code. However, at the opposite end of the spectrum, equitable mootness is an area where the Article III judiciary are arguably shirking their duty. </p><p class="MsoNormal" style="text-align: justify;">I also think that Jennifer Hagle (the panel's equivalent of Gordon Gecko) had a point that it is one thing to bend the rules in the name of economics and be candid that is what is happening. And there is a role for the judiciary to impose limits and call the lender's bluff. For example, a firm rule that chapter 5 causes of action are not subject to adequate protection liens will keep lenders from making that ask. On the other hand, the mass tort cases are clearly different and call for a different approach. Very often these are companies with a good business model who just can't handle the cost of litigation. It is not the case that the business will shut down unless the DIP lender's demands are met. As will be discussed in other articles from the conference, there is a major philosophical debate going on about whether the bankruptcy system or the MDL (multi-district litigation) system is better equipped to handle mass tort cases and whether the Bankruptcy Code as written furnishes the flexibility necessary to make it the better system. </p>
<p class="MsoNormal" style="text-align: justify;">Author's Note: My summary of this (and other programs) is only as good as my ability to listen and take notes at the same time. I apologize in advance if I have misquoted anyone. I have rearranged the order of some topics to make the summary flow better.</p></div>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com1tag:blogger.com,1999:blog-29130423.post-41089030125812727992022-10-27T17:43:00.001-05:002022-10-27T17:43:29.540-05:00NCBJ 2022: Post-Pandemic Ethics<p style="text-align: justify;">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. </p><span><a name='more'></a></span><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1IKVdfxS_anR5MSzWj7UXbgQ1Ev8tJqZD4qsKroCGZmcLI1xBG0zRfYQB9DaCL7oa7tnBosjpwAp7m6T-X9xr-wVLCarHh2ogiEnNUnvLUt48Fiz00CEC3BiojrrPFN6loBwZ3-NDYq7qFhj4UEzQBu1UPjCW7ibsFbEC5klC3WlCWJZL77I/s3024/IMG_20221020_135506.jpg" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><br /><img border="0" data-original-height="3024" data-original-width="3024" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1IKVdfxS_anR5MSzWj7UXbgQ1Ev8tJqZD4qsKroCGZmcLI1xBG0zRfYQB9DaCL7oa7tnBosjpwAp7m6T-X9xr-wVLCarHh2ogiEnNUnvLUt48Fiz00CEC3BiojrrPFN6loBwZ3-NDYq7qFhj4UEzQBu1UPjCW7ibsFbEC5klC3WlCWJZL77I/s320/IMG_20221020_135506.jpg" width="320" /></a></div><div style="text-align: justify;">Prof. Rapoport talked about how the pandemic changed us and the way we practice law. She pointed out that because of the pandemic we did things we didn't know we could do and did without things that we thought we had to have. Virtual platforms such as Zoom and Webex make it possible to connect remotely but pose their own challenges. She solicited stories from the audience and got the following.</div><p></p><p style="text-align: justify;">During the Gold's Gym case, there was an auction conducted by Zoom. There were two staid American bidders and a German contingent. The Germans were doing the auction from a hot tub. When they won the auction and jumped up to celebrate, the other participants were relieved to see that they were wearing swim trunks (although one was wearing a Speedo).</p><p style="text-align: justify;">In another case, a trustee was not so fortunate. A debtor was doing his 341 meeting from his phone in bed. When he shifted his position, the trustee saw more of the debtor than he cared to. </p><div style="text-align: justify;">In another case, a doctor was participating in a Zoom hearing when natured called. He forgot to turn off his camera when he went to use the restroom. An alert courtroom deputy warned the doctor's lawyer before things got too graphic.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Prof. Rapoport said that the first rule of virtual connections is that you must wear clothes.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">This led to the obligatory reference to Comment 8 to ABA Rule 1.1:</div><div style="text-align: justify;"><blockquote>To maintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology, engage in continuing study and education and comply with all continuing legal education requirements to which the lawyer is subject.</blockquote></div><div style="text-align: justify;">Failure to keep up with technology can lead to some humorous results, such as the attorney who didn't know how to turn off the cat filter on his Zoom and had to tell the judge that he was not a cat or the attorney whose vocal settings were sped up so that he sounded like a chipmunk. However, episodes like this do not make you look good in front of your client.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">In some cases technology can lead to temptations to cheat in ways that people would not do in person. Someone from the audience mentioned a case where they could see the shadow of cue cards being shown to the witness. Prof. Rapoport recommended asking the following questions during virtual depositions or hearings:</div><p style="text-align: justify;">Who is in the room with you?</p><p style="text-align: justify;">What electronic devices do you have turned on?</p><p style="text-align: justify;">Is your email turned on?</p><p style="text-align: justify;">In one virtual trial I was involved in, a married couple was testifying from the same room and using the same camera. The judge had to caution them to stop correcting each other's testimony. </p><p style="text-align: justify;">Virtual practice provides new opportunities for the unauthorized practice of law. Rule 5.5(a) states:</p><blockquote style="text-align: justify;">A lawyer shall not practice law in a jurisdiction in violation of the regulation of the legal profession in that jurisdiction, or assist another in doing so.</blockquote><p>What happens if a lawyer licensed to practice law in Texas begins practicing from his vacation home in New Mexico where he is not licensed? What happens if an attorney attending NCBJ in Florida appears for a WebEx hearing in Texas from his Florida hotel room? ABA Formal Opinion 495 addresses this issue:</p><div style="text-align: justify;"><blockquote>Model Rule 5.5(b)(1) prohibits a lawyer from “establish[ing] an office or other systematic and continuous presence in [the] jurisdiction [in which the lawyer is not licensed] for the practice of law.” Words in the rules, unless otherwise defined, are given their ordinary meaning. “Establish” means “to found, institute, build, or bring into being on a firm or stable basis.”2 A local office is not “established” within the meaning of the rule by the lawyer working in the local jurisdiction if the lawyer does not hold out to the public an address in the local jurisdiction as an office and a local jurisdiction address does not appear on letterhead, business cards, websites, or other indicia of a lawyer’s presence.3 Likewise it does not “establish” a systematic and continuous presence in the jurisdiction for the practice of law since the lawyer is neither practicing the law of the local jurisdiction nor holding out the availability to do so. The lawyer’s physical presence in the local jurisdiction is incidental; it is not for the practice of law. Conversely, a lawyer who includes a local jurisdiction address on websites, letterhead, business cards, or advertising may be said to have established an office or a systematic and continuous presence in the local jurisdiction for the practice of law.</blockquote><p> </p><blockquote><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgM6yJ8EZVQkH6e7e4mrUDEKnLt9Fyz000PqfZsYb4PJ2kG9M-M8Q9JtkyYLiWtD_ljUey6w3XJyUf2qv7KuONv17R6QzeKtjHNuyFaZ1yB_5IovLUkPE7EVIr8Qq7L9-xCt7d1yfe9aplTfs9H20-9Ku8Hv0LQL3-v7Hwf95q8r4_g7U0yZp8/s3024/IMG_20221020_135810.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="3024" data-original-width="3024" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgM6yJ8EZVQkH6e7e4mrUDEKnLt9Fyz000PqfZsYb4PJ2kG9M-M8Q9JtkyYLiWtD_ljUey6w3XJyUf2qv7KuONv17R6QzeKtjHNuyFaZ1yB_5IovLUkPE7EVIr8Qq7L9-xCt7d1yfe9aplTfs9H20-9Ku8Hv0LQL3-v7Hwf95q8r4_g7U0yZp8/s320/IMG_20221020_135810.jpg" width="320" /></a></div></blockquote><p>As Prof. Rapoport summarized it, you can take your hat to a new locale but you can't hang out a shingle there.</p><p>Remote work offers new opportunities for breach of privacy. If you are working on your laptop at Starbucks, can other people walk by and see what you are doing? If you are counselling a client and have Alexa or Siri turned on, can those electronic devices overhear your conversation? If you are sharing your screen on Zoom, be sure that you are not sharing more than you intend to. I had a hearing once where an attorney accidentally shared his outline for questions instead of an exhibit.</p><p>It is not enough for attorneys to guarantee their own security of confidential information. The ABA rules include the duty to supervise. That means that a firm should establish rules for attorneys working remotely and monitor that they are being followed.</p><p>While many younger attorneys enjoy the ability to work remotely, there is a darker side. Remote attorneys may experience more anxiety and isolation leading to substance abuse. Supervising attorneys need to do regular check-ins with their remote associates to make sure they are doing ok. </p><p>Prof. Rapoport also raised an interesting issue as to how we train young associates when many of the tasks they used to do, such as drafting contracts can now be done through Artificial Intelligence. Hopefully the answer is to engage associates with more meaningful substantive work and less routinized drudgery. </p><p>You can find Prof. Rapoport's slides <a href="https://ncbjmeeting.org/2022/materials/CLLA%20Ethics%20-%20Brave%20New%20World--Ethics%20Issues%20That%20We%20Never%20Knew%20We%20Had.pdf">here</a>. </p><p> </p></div><br /><br /><p></p>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com0tag:blogger.com,1999:blog-29130423.post-30691838266336632292022-10-24T17:17:00.001-05:002022-10-27T17:47:01.744-05:00NCBJ 2022: Five Secrets to a Magical Sub-V<p style="text-align: justify;">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.</p><span><a name='more'></a></span><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCU4FaaMclRcF0lRHWgiUnGOSZORdkwjEXY7B9Cj6JiYQ_S8NGUDXO81Szy4FaWr185wxtTrM66QJdj6jPKgkgwpZxRgd9BY5g25U1_92pPiJNhpWoJbWMy-wqpiTjrWtmqmQ83dyjB_IkksyGAr_mp4yVcxfQaCoyGujuOqoaOkXkWkgTKCE/s3024/IMG_20221020_101022.jpg" style="margin-left: 1em; margin-right: 1em;"><br /><img border="0" data-original-height="3024" data-original-width="3024" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCU4FaaMclRcF0lRHWgiUnGOSZORdkwjEXY7B9Cj6JiYQ_S8NGUDXO81Szy4FaWr185wxtTrM66QJdj6jPKgkgwpZxRgd9BY5g25U1_92pPiJNhpWoJbWMy-wqpiTjrWtmqmQ83dyjB_IkksyGAr_mp4yVcxfQaCoyGujuOqoaOkXkWkgTKCE/s320/IMG_20221020_101022.jpg" width="320" /></a></div><div class="separator" style="clear: both; text-align: center;"><br /></div><div style="text-align: justify;">1. Who Goes There? Eligibility.</div><div style="text-align: justify;"><span><br /></span></div><div style="text-align: justify;"><span>While many of the early cases dealt with Subchapter V eligibility, few actual cases have eligibility fights. Eligibility is not the same as jurisdiction and can be waived by the parties. Kirk said that eligibility fights were just not where he wanted to spend resources. When looking at the debt owed by a debtor, the distinction between business and consumer may not always be obvious. For example, a Home Equity Line of Credit might be used to finance a business. David said that while a Single Asset Real Estate Debtor might not be eligible for Subchapter V, the parties might want to wait and see where the case was going before immediately jumping on eligibility. (However, it is important to note that eligibility must be raised within thirty days after the 341 meeting or it is waived). In order to meet the commercial or business activity test, it is necessary to show that the business is currently doing something. However, to quote the Princess Bride, they said there is a big difference between mostly dead and completely dead.</span></div><div style="text-align: justify;"><span><br /></span></div><div style="text-align: justify;"><span>2.<span> The Marvelous, Mysterious Trustee.</span></span></div><div style="text-align: justify;"><span><span><br /></span></span></div><div style="text-align: justify;"><span><span>Amy said that the Subchapter V trustee is neither friend nor foe, but is there to assist in the process. David said that the trustee can deal with the different personalities in the case and build trust. Kirk said that many cases couldn't have gotten done without the help of the Subchapter V trustee. He said that anything that the trustee digs into is work that he doesn't have to charge his client for. </span></span></div><div style="text-align: justify;"><span><span><br /></span></span></div><div style="text-align: justify;"><span><span>Amy stressed that the SubV trustee is not a mediator. If the court requires "meet and confer" sessions, it is good to flag those conversations as Rule 408 settlement discussions. She said that debtors will sometimes provide drafts of their plans to the trustee for input. </span></span></div><div style="text-align: justify;"><span><span><br /></span></span></div><div style="text-align: justify;"><span><span>3.<span> Don't Run Out of Time</span></span></span></div><div style="text-align: justify;"><span><span><span><br /></span></span></span></div><div style="text-align: justify;"><span><span>Getting an extension of time to file a plan is tricky. The standard is whether the need for an extension "is attributable to circumstances for which the debtor should not justly be held accountable." The panelists said that "causal links" will be good for an extension while lazy, chronically late, generalized excuses will not be successful. The <i>Seven Stars</i> case illustrates that a debtor's decision to opt into Subchapter V after its deadlines had run was within the control of the debtor. </span></span></div><div style="text-align: justify;"><span><span><br /></span></span></div><div style="text-align: justify;"><span><span>The panelists recommended that debtor's always ask for an extension before the time expires. That way, if the court says no, you can still file a placeholder plan. While this is a matter of controversy, the Code says that a plan must be filed within the 90 days, not that it must be a confirmable plan.</span></span></div><div style="text-align: justify;"><span><span><br /></span></span></div><div style="text-align: justify;">4. Conjuring Confirmation</div><div style="text-align: justify;"><span><span><span><span><br /></span></span></span></span></div><div style="text-align: justify;"><span><span><span><span>David and Amy stressed the need to have good projections and to understand the numbers. David said that as trustee "to be credible, I must be informed." Amy recommended checking the projections against historical performance. They also said that if a debtor doesn't have good financial reporting, it had better get it fast. </span></span></span></span></div><div style="text-align: justify;"><span><span><span><span><br /></span></span></span></span></div><div style="text-align: justify;"><span><span><span><span>5.<span> Remedy for What Ails You</span></span></span></span></span></div><div style="text-align: justify;"><span><span><span><span><span><br /></span></span></span></span></span></div><div style="text-align: justify;"><span><span><span><span><span>This is a quirk of SubchapterV. Section 1191(c)(3)(B) says that a plan needs to provide "appropriate remedies, which may include the liquidation of nonexempt assets, to protect the holders of claims or interests in the event that payments are not made." Some courts have said that a plan need not contain "appropriate remedies" if the debtor is certain to make its payments. However, the bigger practice tip, according to Kirk, is that adequate default remedies are part of the standard for cramdown. If a debtor wants to get a consensual plan, it may agree to whatever remedies the creditor requests. Kirk stressed that the goal of remedies is to avoid having to go back to court if something goes wrong. For secured creditors, remedies should include fast ways to get at at their collateral. </span></span></span></span></span></div><div style="text-align: justify;"><span><span><span><span><span><br /></span></span></span></span></span></div><div style="text-align: justify;"><span><span><span><span><span>The panelists discussed several creative remedies for default. One option that was suggested was having the debtor grant a lien on certain property in favor of the SubV trustee for the benefit of the creditors. A landlord might negotiate a waiver of certain notice rights before terminating a lease. Creditors might ask for "Phoenix" claims in which the full amount of their claim springs back in the event of a default. If an equipment lender doesn't have a provision for GPS trackers in its current loan, it might get them in a negotiation. </span></span></span></span></span></div><div style="text-align: justify;"><span><span><span><span><span><br /></span></span></span></span></span></div><div style="text-align: justify;"><span><span><span><span>Creditors have an incentive to negotiate for default remedies. In the <i>Urgent Care</i> case, the Court said that preserving state court remedies was enough. </span></span></span></span></div><div style="text-align: justify;"><span><span><span><span><br /></span></span></span></span></div><div style="text-align: justify;"><span><span><span><span>The parties also discussed the Section 1111(b) election. Kirk stressed that there is nothing in Subchapter V that says the election doesn't apply. If the 1111(b) election is triggered, the plan may go for more than five years. While a Subchapter V debtor must pay disposable income for five years, the panelists suggested that the plan could go longer. They pointed to Chapter 12 as an example where payments to a secured creditor can go beyond five years. </span></span></span></span></div><div style="text-align: justify;"><span><span><span><span><br /></span></span></span></span></div><div style="text-align: justify;"><span><span><span>The written materials submitted with the program contain nine separate papers which can be found <a href="https://ncbjmeeting.org/2022/materials/NCBJ%20Five%20Secrets%20to%20Magical%20Sub-V.pdf">here</a>. </span></span></span></div><div style="text-align: justify;"><span><span><span><span><br /></span></span></span></span></div>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com0tag:blogger.com,1999:blog-29130423.post-60245556926591194432022-10-23T11:31:00.001-05:002022-10-27T17:46:42.782-05:00NCBJ 2022: Awards Edition<p></p><div class="separator" style="clear: both; text-align: center;"><div class="separator" style="clear: both; text-align: justify;"><span style="text-align: left;">Every year numerous awards are presented at the National Conference of Bankruptcy Judges. These awards are an opportunity to recognize people who have contributed to the insolvency profession.</span></div><div class="separator" style="clear: both; text-align: justify;"><span><a name='more'></a></span></div></div><p class="MsoNormal"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj6dCZNYk9UCDkyK2B9oG3zyDPlnX__NBQk0VW2NKtv3YlgPIribAK1YyTNZam-O9_txjyiQlaHAtGJfF21pLWPOVIRHz6h9PlnC1s-qrFhj7YOuAbn4nBXLtCH6LeKwZGKtZLVHYZQLdVdHTQQMKvj8EQ0GvI9NPJkQOJ0of9RtcANMw_D0gQ/s3024/IMG_20221020_084351.jpg" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="3024" data-original-width="3024" height="207" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj6dCZNYk9UCDkyK2B9oG3zyDPlnX__NBQk0VW2NKtv3YlgPIribAK1YyTNZam-O9_txjyiQlaHAtGJfF21pLWPOVIRHz6h9PlnC1s-qrFhj7YOuAbn4nBXLtCH6LeKwZGKtZLVHYZQLdVdHTQQMKvj8EQ0GvI9NPJkQOJ0of9RtcANMw_D0gQ/w207-h207/IMG_20221020_084351.jpg" width="207" /></a></p><div style="text-align: justify;">Ingrid Hillinger received the Excellence in Education Award. Her accomplishments include establishing the Boston College School of Law Public Interest Law Fund. Five oof her students have gone on to be judges. However, she was a reluctant bankruptcy educator. In 1985, she was invited to be a guest teacher at the University of Texas School of Law. She was asked to teach secured credit and bankruptcy. She demurred that she had never taught bankruptcy before but was assured that she would do fine. I was one of her students in that inaugural class. I remember that on the first day of class she said that bankruptcy was like someone proposing a law that said "debtors shall pay their debts" and someone popping up and offering an amendment to insert the word "not" into the statute. Said said that her hair was brown when she came down to Texas and it had turned gray when she returned. She said "bankruptcy did that." Her bio can be found <a href="https://www.bc.edu/bc-web/schools/law/academics-faculty/faculty-directory/ingrid-hillinger.html">here</a>.</div><p></p><p class="MsoNormal"><br /></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhPxox77Ox1Obo1LtWPJTBQ_p1Xbuyc3L0F7YXV7zxXUmnucWvM6S6G4Tz6p5wtCVzBcp2SjPMhCNNRkJ_McWivwD_O2oGu_PybqU6LJv2rjW9vOmOJQgT7O-6-Mfqe7MSwrgSpvCXnALpSVaOgqwFm966IiSUEUHpHmlO33caOU3QN_Sz1WZI/s3024/IMG_20221021_083639.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="3024" data-original-width="3024" height="268" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhPxox77Ox1Obo1LtWPJTBQ_p1Xbuyc3L0F7YXV7zxXUmnucWvM6S6G4Tz6p5wtCVzBcp2SjPMhCNNRkJ_McWivwD_O2oGu_PybqU6LJv2rjW9vOmOJQgT7O-6-Mfqe7MSwrgSpvCXnALpSVaOgqwFm966IiSUEUHpHmlO33caOU3QN_Sz1WZI/w268-h268/IMG_20221021_083639.jpg" width="268" /></a></div><p></p><p class="MsoNormal" style="text-align: justify;"><span style="background-color: white;">Judge Harlan "Cooter" Hale presented the </span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">Inns of Court
Award to </span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">Judge John E. Waites
(Bankr. D. S.C.). In his acceptance speech, he stressed the time and value of Inns of Court to younger members. More information on Judge Waites can be found <a href="https://www.businesswire.com/news/home/20220908005031/en/Judge-John-E.-Waites-Retired-to-Receive-the-2022-American-Inns-of-Court-Bankruptcy-Inn-Alliance-Distinguished-Service-Award">here</a>. </span></p><p class="MsoNormal"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;"><br /></span></p><p class="MsoNormal"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;"><br /></span></p><p class="MsoNormal"><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;"><br /></span></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhVvQcZb79SlBKauoJDyFDvaoXJKo8V_iMclkMcEQGQQHMyYltD5TINUN86EUPxUtT36OTA1VtNdEPTrSPkw7Rs22Fc0y2KWUC4bDbRaQ_V87KjxvV9M5PvjwsoFOHq_f4-9N20kszUQqCSfsNoM_qvFkGlT0oNe_jTMV6Bw16U9n9ZXcr5p0Y/s3024/IMG_20221021_084647.jpg" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="3024" data-original-width="3024" height="268" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhVvQcZb79SlBKauoJDyFDvaoXJKo8V_iMclkMcEQGQQHMyYltD5TINUN86EUPxUtT36OTA1VtNdEPTrSPkw7Rs22Fc0y2KWUC4bDbRaQ_V87KjxvV9M5PvjwsoFOHq_f4-9N20kszUQqCSfsNoM_qvFkGlT0oNe_jTMV6Bw16U9n9ZXcr5p0Y/w268-h268/IMG_20221021_084647.jpg" width="268" /></a></div><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">Judge John
Hopkins (Bankr. S.D. Ohio) received the DEI Leadership Award from the National Association of Bankruptcy Judges. Judge Hopkins's story is very inspiring. He m</span></span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">oved from
Georgia to Ohio to escape the Jim Crow South. His teachers in Ohio recognized his talent and recommended that he attend the prestigious </span><span style="background-color: white; color: #404040; font-family: "Times New Roman", serif; font-size: 12pt;">Middlesex School in Concord, Massachusetts. He graduated from the Moritz College of Law at the University of Ohio in 1985. He worked at Squire Sanders & Dempsey and the U.S. Attorney's Office before being named as a Bankruptcy Judge in 1996. He served as President of NCBJ in 2007. He has a long list of involvement in worthy causes, which can be found <a href="https://www.ohsb.uscourts.gov/judge-hopkins-biography">here.</a> President Joe Biden has nominated him to serve as a U.S. District Judge for the Southern District of Ohio. </span><p></p>
<p class="MsoNormal" style="text-align: justify;"><span class="classname"><span style="background: white; border: 1pt none windowtext; color: #404040; font-family: "Times New Roman",serif; font-size: 12pt; line-height: 107%; mso-border-alt: none windowtext 0in; padding: 0in;">In his acceptance speech, he said that his personal hero was Abe
Lincoln, the 16th President of the United States, who practiced bankruptcy law. He quoted from the Gettysburg Address:<o:p></o:p></span></span></p>
<p class="MsoNormal"><span style="background: white; color: #525150; font-size: 13pt; line-height: 107%;"></span></p><blockquote style="text-align: justify;"><span style="background: white; color: #525150; font-size: 13pt; line-height: 107%;">t</span>hat we here highly resolve that these dead shall not have died in vain—that this nation, under God, shall have a new birth of freedom—and that government of the people, by the people, for the people, shall not perish from the earth.</blockquote><p><br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEnxIZhSkKuRMirJCqJYdTygnwT_c_-B-CL3ocepIDUNGqj9hFmo0FqsmCplZsSnG-wl71HX62XaJOqyodgg2CY83XymLcr9Tq1m8mpKDLWt_YK6Vy-35QOjVXFxXn21hohWW8ol8z7tCEhKQ_3DGDiO9vBE5wof0qtw1xLD_HXIrPGgur0dw/s3024/IMG_20221020_134943.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="3024" data-original-width="3024" height="242" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEnxIZhSkKuRMirJCqJYdTygnwT_c_-B-CL3ocepIDUNGqj9hFmo0FqsmCplZsSnG-wl71HX62XaJOqyodgg2CY83XymLcr9Tq1m8mpKDLWt_YK6Vy-35QOjVXFxXn21hohWW8ol8z7tCEhKQ_3DGDiO9vBE5wof0qtw1xLD_HXIrPGgur0dw/w242-h242/IMG_20221020_134943.jpg" width="242" /></a></p><p>Ron Peterson presented the Lawrence P. King Award for Excellence in Bankruptcy on behalf of the Commercial Law League of America to Prof. Bruce Markell of Northwestern University's Pritzker School of Law. Prof. Markell clerked for Judge Anthony Kennedy when he served on the 9th Circuit Court of Appeals. Prof. Markell served as United States Bankruptcy Judge for the District of Nevada and served on the 9th Circuit Bankruptcy Appellate Panel from 2004-2013 as well. In 2016, he completed a project redrafting Kosovo's bankruptcy law. </p><p></p><p><br /></p><p style="text-align: justify;">Judge Michael G. Williamson was awarded the Judger William L. Norton Judicial Excellence Award from the American Bankruptcy Institute. He was nominated by his colleagues from the Middle District of Florida where this year's NCBJ was being held. He was unable to attend due to health issues. However, his colleagues assured him that they had actually nominated him last year before his cancer struck. Judge Williamson spent two decades in private practice and has served as a bankruptcy judge for 22 years. He said that when he didn't understand something, he wrote on it. He has spoken at nearly 400 seminars and written numerous opinions. He has taught principles of insolvency in countries from Azerbaijan to Zimbabwe. He spent considerable time in Afghanistan. From his time abroad he learned that we often take the rule of law for granted. One of his contributions was authoring a Practical Evidence Manual, which can be found <a href="http://www.flmb.uscourts.gov/judges/tampa/williamson/practical_evidence.pdf?id=3">here</a>. </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVZSga-by_fAlOZ7gg45UnMnf0VNYdYlExR7uPwK7DtOVJM0hxGO_cMHqAwkqOjCK8CXPAnAvD5zGDhLhnqeyc5WICULc3vRgeEOeFZ_M_SMrIsUnoIA1zbOVSctx-OXXYU_meEdi0FcwtKxXGRzhWEwwSa7ApGIWpli0l1_LcXWYL0xObzbk/s1280/thumbnail_IMG_20221021_130903.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1280" data-original-width="1280" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVZSga-by_fAlOZ7gg45UnMnf0VNYdYlExR7uPwK7DtOVJM0hxGO_cMHqAwkqOjCK8CXPAnAvD5zGDhLhnqeyc5WICULc3vRgeEOeFZ_M_SMrIsUnoIA1zbOVSctx-OXXYU_meEdi0FcwtKxXGRzhWEwwSa7ApGIWpli0l1_LcXWYL0xObzbk/s320/thumbnail_IMG_20221021_130903.jpg" width="320" /></a></div><br /><p><br /></p><p><br /></p><p> </p><p> </p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p> </p><p></p><p></p>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com0tag:blogger.com,1999:blog-29130423.post-36758875516999329062022-10-22T12:23:00.002-05:002022-10-27T17:44:51.113-05:00NCBJ 2022: What's Hot <p style="text-align: justify;">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.</p><span><a name='more'></a></span><p style="text-align: justify;"><br /></p><p style="text-align: justify;"></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiif7inLECkQE0x7msktoB0ZSmCZJr7GQK764YdK3Sg8ZaJCBCjtS1oJyUXy70lDxTHTbraZCFGjgcQf-k0NgoksTaMgZLCIu2Kv4jwnFdObhTJCvukbY2JFriZZIAO0XKHs1ynmqO3z_ZQNeA7-191ZvVCtFSVLdMuCZL-GIdogO_i4NDXSHE/s1800/branded-1666405452067-image.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1200" data-original-width="1800" height="213" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiif7inLECkQE0x7msktoB0ZSmCZJr7GQK764YdK3Sg8ZaJCBCjtS1oJyUXy70lDxTHTbraZCFGjgcQf-k0NgoksTaMgZLCIu2Kv4jwnFdObhTJCvukbY2JFriZZIAO0XKHs1ynmqO3z_ZQNeA7-191ZvVCtFSVLdMuCZL-GIdogO_i4NDXSHE/s320/branded-1666405452067-image.jpg" width="320" /></a></div><div style="text-align: justify;">Another message of the conference was that bankruptcy is back. This year's conference drew nearly 1,100 attendees. There was a palpable feeling that we are on the brink of a major recession, a conclusion reinforced by one of ABI's sessions. If the extravagance of the Pachulski After Party is any indication, the business of failure is good. I have included a photo of me holding a snake at the Pachulski Party to provide I was really there. They wouldn't let me hold the alligator. </div><p></p><p style="text-align: justify;">Some of the other presentations included an excellent panel on Subchapter V, an ethics presentation from Nancy Rapoport, discussions of Crypto Companies in bankruptcy, a documentary about the City of Detroit bankruptcy and a panel on the role of judges. </p><p style="text-align: justify;">One thing that I enjoyed was two presentations which touched on Chapter 11-adjacent topics with non-bankruptcy speakers. This was the case with the opioid and City of Detroit presentations. </p><p style="text-align: justify;">I enjoyed the opportunity to meet with a lot of my colleagues and judges. While I may never appear in front of these judges (especially the retired ones), it is useful to hear from a number of judicial perspectives. I especially recommend the Dine-Around program where practitioners are paired with a judge for an intimate dinner. </p><p style="text-align: justify;">Next year's conference will be in Austin. I hope to welcome many of you to my town. <br /></p><p style="text-align: justify;"> </p>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com0tag:blogger.com,1999:blog-29130423.post-41900604626424072332022-10-16T16:55:00.000-05:002022-10-16T16:55:23.499-05:00Fifth Circuit Opinion on Solvent Debtor Illustrates Tension Between Text and Tradition<p style="text-align: justify;">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 <i>Ultra Petroleum Corp. v. Ad Hoc Committee (In re Ultra Petroleum)</i>, No. 21-20008 (5th Cir. 10/14/2022), which can be found <a href="https://www.ca5.uscourts.gov/opinions/pub/21/21-20008-CV0.pdf">here.</a> The majority relied on pre-Code practice to allow creditors of a solvent debtor to recover their full contractual interest. </p><span><a name='more'></a></span><p style="text-align: justify;"><b>A Series of Fortunate Occurrences</b></p><p style="text-align: justify;">Ultra Petroleum had a very good problem. It went into bankruptcy insolvent, recovered when natural gas prices rebounded, and was able to pay all of its creditors in full. However, when it proposed to pay its unsecured creditors post-petition interest at the federal judgment rate, they objected. The creditors argued that they were entitled to their full contractual interest based on Make Whole provisions in their contracts. The bankruptcy court disagreed. Creditors of a solvent chapter 7 estate are entitled to post-petition interest at the "legal rate" under 11 U.S.C. Sec. 726(a)(5), which the Court interpreted to mean the federal judgment rate. Therefore, the Bankruptcy Court approved a plan which paid unsecured creditors post-petition interest at the federal judgment rate which, at the time was 0.58%. The difference between rates was significant and the debtor set aside $400 million to cover the additional interest should it lose.</p><p style="text-align: justify;"><b>Make Whole Amount Not Allowed by Code</b></p><p style="text-align: justify;">The Debtor won the argument about whether a Make Whole Amount was not an allowed claim. Under 11 U.S.C. Sec. 502(b)(2), claims for "unmatured interest" may not be allowed. The Fifth Circuit ruled that "unmatured interest" included the “economic equivalent of ‘unmatured interest’” as well. The Court explained how the Make Whole Amount worked as follows:</p><p></p><div style="text-align: justify;"></div><blockquote><div style="text-align: justify;">Contractual make-whole amounts, like the one at issue here, are expressly designed to liquidate fixed-rate lenders’ damages flowing from debtor default while market interest rates are lower than their contractual rates. Lenders’ damages equal the present value of all their future interest payments. In other words, a make-whole amount is nothing more than a lender’s unmatured interest, rendered in today’s dollars.</div><div style="text-align: justify;"></div></blockquote><div style="text-align: justify;"><span style="text-align: left;">Opinion, pp. 9-10. The Court found that the Make Whole Amount was the economic equivalent of unmatured interest. So, did the Debtor win? No, because that was not the end of the analysis.</span></div><div style="text-align: justify;"><span style="text-align: left;"><b><br /></b></span></div><div style="text-align: justify;"><span style="text-align: left;"><b>Pre-Code Practice Carries the Day</b></span></div><div style="text-align: justify;"><span style="text-align: left;"><br /></span></div><div style="text-align: justify;"><span style="text-align: left;">The Court then turned to the Solvent Debtor exception. The current Bankruptcy Code has been in effect since 1978. However, the Court went back 300 years to find the authority for its ruling. The Court wrote:</span></div><p></p><blockquote><p></p><div style="text-align: justify;">For some three centuries of bankruptcy law, courts have held that an
equitable exception to the usual rules applies in the unusual case of a solvent
debtor. When a debtor proves solvent—that is, when the debtor’s assets
exceed its liabilities—bankruptcy’s ordinary suspension of post-petition
interest is itself suspended. When a debtor can pay its creditors interest on
its unpaid obligations in keeping with the valid terms of their contract, it
must. </div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">As with many of our bankruptcy rules, this doctrine originated in
eighteenth-century English practice. See 2 William Blackstone,
Commentaries *488 (“[T]hough the usual rule is, that all interest on debts
carrying interest shall cease from the time of issuing the commission, yet, in
case of a surplus left after payment of every debt, such interest shall again revive, and be chargeable on the bankrupt . . . .”)(additional citations omitted). Our forebears adopted English practice in our nation’s nascent
nineteenth-century bankruptcy system. (citation omitted). And as the Supreme Court has said, the English solvent-debtor
exception “ha[s] been carried over into our system.” (cleaned up, except that I left in the reference to Blackstone's Commentaries because that was just too cool to take out).</div><p></p><p></p></blockquote><p>Opinion, pp. 18-20. Thus, because the Debtor had the ability to pay its creditors in full according to their contracts, it was required to do so. </p><p><b>Trump Appointee Says Not So</b></p><p>Judge Andrew Oldham, a Trump appointee, dissented. He wrote:</p><p></p><blockquote><p style="text-align: justify;">The majority correctly concludes that the Make-Whole Amount is
unmatured interest in disguise. And it acknowledges that the Bankruptcy
Code bars all unmatured interest. See 11 U.S.C. § 502(b)(2). In my view, it
necessarily follows that the Code bars the Make-Whole Amount.
The majority nevertheless holds that an unwritten solvent-debtor
exception “operates in this case to suspend § 502(b)(2)’s disallowance of
[the] Make-Whole Amount.” I recognize that the majority is
attempting to faithfully apply confusing Supreme Court precedent in a
difficult case. But the clear statutory text governing this issue compels me to
respectfully dissent</p><p></p></blockquote><p style="text-align: justify;">Opinion, p. 35.</p><p style="text-align: justify;"><b>Take-Aways</b></p><p style="text-align: justify;">The first and easiest take-away is that Make-Whole Amounts are not allowed claims in the Fifth Circuit absent a solvent debtor. This will help to eliminate these claims in most cases.</p><p style="text-align: justify;">Second, this case illustrates the tension between two different forms of statutory interpretation: text and pre-Code practice. These two schools of thought are illustrated by two Supreme Court decisions. In <i>United States v. Ron Pair Enterprises, Inc.</i>, 489 U.S. 235 (1989), the Court held that oversecured creditors were only entitled to costs and fees arising under a contract and not under a statute. It reached this decision, in part, on the placement of a comma within 11 U.S.C. Sec. 506(b). In contract, <i>Dewsnup v. Timm</i>, 502 U.S. 410 (1992) held that a lien passed through Chapter 7 unaffected even though a code provision appeared to reduce the amount of the lien to the value of the collateral. The Court relied on pre-Code practice to reach this result in apparent derogation of the statutory text.</p><p style="text-align: justify;">A cynic might argue that resort to pre-Code practice allows a judge to disregard reasonably clear Code text whenever he doesn't like the result. After all, in this case, the Bankruptcy Code provision of 11 U.S.C. Sec. 502(b)(1) said that Make Whole Amounts are not allowed while 11 U.S.C. Sec. 726(a)(5) set the interest rate for a solvent estate at the federal judgment rate. Judge Oldham thought this was a clear repudiation of the pre-Code practice. His colleagues in the majority, Judges Elrod and Jolly, thought otherwise. In support of her historical approach, Judge Elrod, writing for the majority appealed to Antonin Scalia, who offered supporting words in a book he wrote on statutory interpretation who said “the good textualist is not a
literalist”. As long as the Supreme Court allows resort to pre-Code practice, clever lawyers faced with inconvenient text will do well to crack open Blackstone's Commentaries and look for a different result. </p><p style="text-align: justify;">The final take-away is that judges are not slaves to the ideology of the President who appointed them, especially when dealing with cases that are technical and apolitical. In this case, Judge Jennifer Elrod, appointed by President George W. Bush, and Judge Grady Jolly, appointed by President Ronald Reagan, ruled in favor of the creditors in their quest for payment of their full interest. Judge Andrew Oldham, appointed by President Trump, took the opposite position. Three judges appointed by Republican Presidents disagreed on how the law should be applied in this particular case. </p><p><br /></p>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com1tag:blogger.com,1999:blog-29130423.post-91087517360791087582022-10-02T17:47:00.002-05:002022-10-02T17:48:55.897-05:00Fifth Circuit Holds Line on Exculpation Clauses But Offers Some Help<p style="text-align: justify;"><span style="font-size: medium;">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, <i>Republic Supply Co. v. Shoaf</i>, 815 F.2d 1046 (5th Cir. 1987),
but will not sustain such a provision if a timely objection is filed, <i>Ad
Hoc Group of Vitro Noteholders v. Vitro SAB De CV (In re Vitro SAB De
CV), </i>701 F.3d 1031 (5th Cir. 2012). It is also resistant to bar
orders, <i>Feld v. Zale Corp., (In re Zale Corp). </i>62 F.3d 746
(5th Cir. 1995) and most exculpation clauses, <i>Bank of New York
Trust Co., NA v. Official Unsecured Creditors' Comm. (In re Pacific Lumber Co.)</i>,
584 F.3d 229 (5<sup>th</sup> 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). </span></p><p style="text-align: justify;"><span style="font-size: medium;">The Court recently rebuffed
an attempt to distinguish its jurisprudence on exculpation clauses but offered
other limited relief. The case is <span _ngcontent-c21="" id="previewtextvalue" name="statute" style="-webkit-font-smoothing: antialiased; display: inline-block; font-stretch: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit;"><span class="ac"><i><span style="border: 1pt none windowtext; font-family: "inherit", serif; padding: 0in;">Nexpoint Advisors, L.P. v. </span></i></span></span><span _ngcontent-c21="" name="statute" style="-webkit-font-smoothing: antialiased; display: inline-block; font-stretch: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit;"><span class="ac"><i><span style="border: 1pt none windowtext; font-family: "inherit", serif; padding: 0in;">Highland </span></i></span></span><i style="font-variant-caps: inherit; font-variant-ligatures: inherit; font-weight: inherit;"><span style="border: 1pt none windowtext; font-family: "inherit", serif; padding: 0in;">Capital Mgmt., L.P. </span></i><i style="font-variant-caps: inherit; font-variant-ligatures: inherit; font-weight: inherit;"><span style="border: 1pt none windowtext; font-family: "inherit", serif; padding: 0in;">(In re Highland Capital</span></i><span _ngcontent-c21="" name="statute" style="-webkit-font-smoothing: antialiased; display: inline-block; font-stretch: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit;"><span class="ac"><span style="border: 1pt none windowtext; font-family: "inherit", serif; padding: 0in;"><i>Mgmt., L.P.), </i>2022 U.S. App. LEXIS 25107 (5th Cir. 9/7/22).</span></span></span><span _ngcontent-c21="" name="statute" style="-webkit-font-smoothing: antialiased; display: inline-block;"><span class="ac"><span style="border: 1pt none windowtext; padding: 0in;"> </span></span></span></span></p><p style="text-align: justify;"><span class="ac"><b><span style="border: 1pt none windowtext; padding: 0in;"><span style="font-size: medium;">What Happened<o:p></o:p></span></span></b></span></p><p style="text-align: justify;"><span class="ac"><span style="border: 1pt none windowtext; padding: 0in;"><span style="font-size: medium;">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. <o:p></o:p></span></span></span></p><p style="text-align: justify;"><span class="ac"><span style="border: 1pt none windowtext; padding: 0in;"><span style="font-size: medium;">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. <o:p></o:p></span></span></span></p><p style="text-align: justify;"><span class="ac"><span style="border: 1pt none windowtext; padding: 0in;"><span style="font-size: medium;">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. <o:p></o:p></span></span></span></p><p style="text-align: justify;"><span class="ac"><span style="border: 1pt none windowtext; padding: 0in;"><span style="font-size: medium;">The Bankruptcy Court confirmed the Plan and appeals followed. The
Fifth Circuit generally affirmed the plan but pared back the exculpation
clauses.<o:p></o:p></span></span></span></p><p style="text-align: justify;"><span class="ac"><b><span style="border: 1pt none windowtext; padding: 0in;"><span style="font-size: medium;">Exculpation<o:p></o:p></span></span></b></span></p><p style="text-align: justify;"><span class="ac"><span style="border: 1pt none windowtext; padding: 0in;"><span style="font-size: medium;">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. <o:p></o:p></span></span></span></p><p style="text-align: justify;"><span class="ac"><span style="border: 1pt none windowtext; padding: 0in;"><span style="font-size: medium;">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.<o:p></o:p></span></span></span></p><p style="text-align: justify;"><span class="ac"><span style="border: 1pt none windowtext; padding: 0in;"><span style="font-size: medium;">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.” <o:p></o:p></span></span></span></p><p style="text-align: justify;"><span class="ac"><span style="border: 1pt none windowtext; padding: 0in;"><span style="font-size: medium;">According to the Fifth Circuit:<o:p></o:p></span></span></span></p><blockquote style="text-align: justify;"><span style="font-size: medium;">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.</span></blockquote><p style="text-align: justify;"><span class="ac"><span style="border: 1pt none windowtext; padding: 0in;"><span style="font-size: medium;">The Fifth Circuit also explained the gatekeeper clause as follows:<o:p></o:p></span></span></span></p><p style="text-align: justify;"><span class="ac"><span style="font-size: medium;"><span style="border: 1pt none windowtext; padding: 0in;"></span></span></span></p><blockquote style="text-align: justify;"><span style="font-size: medium;">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 <i>jurisdiction to determine
whether a claim or cause of action is colorable" and then to</i>
adjudicate the claim if the court has jurisdiction over the merits.</span></blockquote><span style="font-size: medium;"><o:p></o:p></span><p></p><p style="text-align: justify;"><span class="ac"><b><span style="border: 1pt none windowtext; padding: 0in;"><span style="font-size: medium;">The Court’s Ruling<o:p></o:p></span></span></b></span></p><p style="text-align: justify;"><span class="ac"><span style="border: 1pt none windowtext; padding: 0in;"><span style="font-size: medium;">The Court upheld the exculpation clause as to the Debtor, the
Unsecured Creditors’ Committee and the independent directors. Under <i>Pacific
Lumber</i>, 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
<i>Pacific Lumber</i> found that the Code provisions relating to members of the Unsecured
Creditors’ Committee allowed their exculpation. <o:p></o:p></span></span></span></p><p style="text-align: justify;"><span class="ac"><span style="border: 1pt none windowtext; padding: 0in;"><span style="font-size: medium;">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:<o:p></o:p></span></span></span></p><p style="text-align: justify;"><span class="ac"><span style="font-size: medium;"><span style="border: 1pt none windowtext; padding: 0in;"></span></span></span></p><blockquote style="text-align: justify;"><span style="font-size: medium;">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).</span></blockquote><span style="font-size: medium;"><o:p></o:p></span><p></p><p style="text-align: justify;"><span class="ac"><span style="border: 1pt none windowtext; padding: 0in;"><span style="font-size: medium;">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.”<o:p></o:p></span></span></span></p><p style="text-align: justify;"><span class="ac"><span style="border: 1pt none windowtext; padding: 0in;"><span style="font-size: medium;">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:<o:p></o:p></span></span></span></p><p style="text-align: justify;"><span class="ac"><span style="font-size: medium;"><span style="border: 1pt none windowtext; padding: 0in;"></span></span></span></p><blockquote style="text-align: justify;"><span style="font-size: medium;"><span class="ac"><span style="border: 1pt none windowtext; padding: 0in;">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." </span></span>In <i>Villegas</i>, 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).</span></blockquote><p></p><p style="text-align: justify;"><span class="ac"><b><span style="border: 1pt none windowtext; padding: 0in;"><span style="font-size: medium;">What Does It Mean?<o:p></o:p></span></span></b></span></p><p style="text-align: justify;"><span class="ac"><span style="border: 1pt none windowtext; padding: 0in;"><span style="font-size: medium;">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.<o:p></o:p></span></span></span></p><p style="text-align: justify;"><span class="ac"><span style="border: 1pt none windowtext; padding: 0in;"><span style="font-size: medium;">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 <i>In re Seatco</i>, 257 B.R. 469 (Bankr. N.D.
Tex. 2001). <o:p></o:p></span></span></span></p><span style="font-size: medium;">The message to plan drafters in the Fifth Circuit is that if you can’t get consensus, be modest, be practical, and find a hook in the Code or existing precedent. <br /></span><br /><p><span _ngcontent-c21="" class="ac" name="statute" style="-webkit-font-smoothing: antialiased; border: 0px; display: inline-block; font: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><br /></span></p><p style="text-align: justify;"><span _ngcontent-c21="" class="ac" name="statute" style="-webkit-font-smoothing: antialiased; border: 0px; display: inline-block; font: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><br /></span></p><p style="text-align: justify;"><span _ngcontent-c21="" class="ac" name="statute" style="-webkit-font-smoothing: antialiased; border: 0px; display: inline-block; font: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><br /></span></p><p style="text-align: justify;"><span _ngcontent-c21="" class="ac" name="statute" style="-webkit-font-smoothing: antialiased; border: 0px; display: inline-block; font: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><br /></span></p><p style="text-align: justify;"><span _ngcontent-c21="" class="ac" name="statute" style="-webkit-font-smoothing: antialiased; border: 0px; display: inline-block; font: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><br /></span></p><p style="text-align: justify;"><span _ngcontent-c21="" class="ac" name="statute" style="-webkit-font-smoothing: antialiased; border: 0px; display: inline-block; font: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><br /></span></p><p style="text-align: justify;"><span _ngcontent-c21="" class="ac" name="statute" style="-webkit-font-smoothing: antialiased; border: 0px; display: inline-block; font: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><br /></span></p><p style="text-align: justify;"><span _ngcontent-c21="" class="ac" name="statute" style="-webkit-font-smoothing: antialiased; border: 0px; display: inline-block; font: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><br /></span></p><p style="text-align: justify;"><span _ngcontent-c21="" class="ac" name="statute" style="-webkit-font-smoothing: antialiased; border: 0px; display: inline-block; font: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><br /></span></p>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com0tag:blogger.com,1999:blog-29130423.post-56175990859982221532022-08-11T10:40:00.000-05:002022-08-11T10:40:19.659-05:00Chapter 11 Trustee Recovers Enhanced Lodestar for Superior Result<p style="text-align: justify;"> 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. <i>In re WC Met Center, LLC</i>, Case No. 21-10698 (Bankr. W.D. Tex. 7/15/22). The opinion can be found <a href="https://www2.txwb.uscourts.gov/opinions/opdf/21-10698-tmd_WC_Met%20Center,%20LLC_2022-07-15_230515.pdf">here</a>. </p><p style="text-align: justify;"><span></span></p><a name='more'></a><p></p><p style="text-align: justify;">WC Met Center, LLC was one of dozens of cases filed in Austin relating to Nate Paul and World Class Capital. On March 31, 2022, the U.S. Trustee appointed Randolph Osherow as Chapter 11 trustee. The assignment was undesirable because the Debtor faced a deadline of April 15, 2022 at noon to sell or refinance its properties. The diligent trustee found a buyer for the property with just three days to go. Following an auction, the properties were sold to an affiliate of the Debtor for $53.5 million. The sale exceeded the liens on the property by approximately $9.5 million. Then the case was converted to Chapter 7 and Mr. Osherow was appointed as Chapter 7 trustee. </p><p style="text-align: justify;">Mr. Osherow requested compensation of $1.3 million based upon the commission structure set out in 11 U.S.C. Sec. 326. Rather than commending the Trustee for his exceptional service, the Debtor objected that the fee was too high. The Court agreed, at least in part. The Court found that because the case was in Chapter 11, that the fee was determined based upon the factors set out in 11 U.S.C. Sec. 330(a). The Court explained:</p><p style="text-align: justify;"></p><blockquote>Section 330(a)(7) states that “[i]n determining the amount of reasonable compensation to be awarded to a trustee, the court shall treat such compensation as a commission, based on Section 326.” Section 326(a) then limits compensation to a chapter 7 or chapter 11 trustee to reasonable compensation under Section 330, not to exceed certain percentages based on monies disbursed or turned over in the case. So the compensation awarded is capped at the 1.3-million-dollar amount calculated using the formula in section 326(a). </blockquote>In other words, a Chapter 11 trustee's fee is based on the lodestar method, but is capped by the amount recoverable under section 326(a). <p></p><p style="text-align: justify;">In this case, the Trustee testified that he spent 125 hours and that he has billed as much as $1,500 per hour. The Debtor did not put on testimony to contest the rate even though it clearly exceeded customary rates in the Austin area. Based on 125 hours x $1,500/hr., the lodestar came out to $187,500. However, the court also considered the customary fee that a real estate broker would charge. The Trustee contended that a broker would have charged 4-6%. However, the Court countered that "the Court has routinely seen broker commissions and breakup fees of much lower than 3% when the transactions are priced at $50 million or higher." The Court found that a commission of 1% was reasonable. </p><p style="text-align: justify;">Thus, the Court awarded the Trustee $437,124.46 based on a 1% commission. While this was much lower than the $1.3 million the Trustee would have received if the sale had been concluded in Chapter 7, it was more than the $187,500 that a straight lodestar would have produced. </p><p style="text-align: justify;">The takeaway here is that compensation for a Chapter 11 Trustee is different than compensation for a Chapter 7 Trustee. However, the Court has the ability to adjust the lodestar based on the facts of the case. In this case, because the Trustee fulfilled the role of both Chapter 11 Trustee and real estate broker, he got paid at the low end of what a broker would have received but considerably higher than what he would have received on a straight hourly basis. Parties can also use this opinion as authority for the proposition that hourly rates of up to $1,500 per hour are permissible in extraordinary cases in the Western District of Texas and that real estate commissions on transactions above $50 million should be in the 1-3% range. <br /></p><p> <br /></p><p> </p><p><br /></p>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com0tag:blogger.com,1999:blog-29130423.post-64054853161212106862022-07-31T10:13:00.002-05:002022-07-31T11:18:26.617-05:00Another Alex Jones Entity Seeks Bankruptcy Protection<p style="text-align: justify;"> 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. </p><span><a name='more'></a></span><p style="text-align: justify;">The prior cases were filed in an apparent effort to shield Jones from having to face multiple juries. This was shown by the fact that the Jones entities filed on the eve of trial and then removed the cases to bankruptcy court. The current case was filed after a jury trial had already started in Austin. However, this time Free Speech Systems immediately filed a motion to allow the trial to go forward. This suggests a more modest goal. Rather than pre-empting the jury trials, Free Speech Systems has filed while the state court lawsuits remain as unliquidated liabilities. </p><p style="text-align: justify;"><b>Eligibility for Subchapter V</b></p><p style="text-align: justify;">Filing while the claims were still unliquidated was necessary to gain access to Subchapter V. Subchapter V is the small business reorganization provision of the Bankruptcy Code which first became effective in February 2020. It allows a small business to confirm a plan which provides for payment of "projected disposable income" to creditors over a five year period. 11 U.S.C. Sec. 1191(c)(2). Unlike regular Chapter 11, creditor voting does not determine whether the plan may be confirmed. </p><p style="text-align: justify;">Subchapter V is limited to entities with qualifying debts of $7.5 million or less. However, there are two exceptions which may allow Free Speech Systems to file with much greater liabilities. According to published accounts, the plaintiffs in the Travis County suit are seeking damages of $150 million. However, unliquidated claims are excluded from the eligibility calculation. 11 U.S.C. Sec. 1182(1)(A). Because the case was filed before the juries awarded damages, they didn't count toward eligibility. </p><p style="text-align: justify;">Free Speech Systems may also benefit from another exclusion. Debts owed to insiders or affiliates are not counted. 11 U.S.C. Sec. 1182(1)(A). According to documents filed in the case, Free Speech Systems owes over $70 million to an entity known as PQPR. According to a declaration filed in the case, PQPR is beneficially owned by Alex Jones's parents, David and Carol Jones. Dr. David Jones is an Austin dentist. According to a declaration filed in the case, he was the first advertiser on one of Alex Jones's predecessor shows. PQPR sells nutritional supplements which are advertised on the Alex Jones Show. </p><p style="text-align: justify;">If PQPR qualifies as an "affiliate" or "insider" of Free Speech Systems, its debts will not be counted toward eligibility. According to 11 U.S.C. Sec., 101(2), an "affiliate" means (1) an entity that controls 20% of the voting securities of an entity, (2) a corporation 20% of whose securities are controlled by the debtor, (3) a person whose business is is operated under a lease or operating agreement with the debtor or (4) an entity that operates the business of the debtor under a lease or operating agreement. This definition does not seem to apply. </p><p style="text-align: justify;">However, the definition of insider may be a better fit. One type of "insider" is a "relative of . . . a person in control of the debtor." 11 U.S.C. Sec. 101(31)(b)(vi). Alex Jones is the person in control of Free Speech Solutions since he is its sole member. David and Carol Jones are Alex Jones's parents and therefore are his relatives. It could be argued that PQPR itself is not a "relative" of Alex Jones. However, the definition of insider says that it "includes" the stated categories, which means that it can include other unstated categories. In <i>U.S. Bank, N.A. v. Village at Lakeridge, LLC</i>, 138 U.S. 960 (2018), the Supreme Court did not provide a clear answer to who qualifies as a non-statutory insider, but suggested that it did not include persons who did business at arms length. Thus, any examination into whether PQPR is a non-statutory insider will likely look at whether its business dealings with Free Speech Systems were done on an arms length basis. The Court would also likely look at the close relationship between PQPR and Alex Jones's parents. </p><p style="text-align: justify;"><b>Venue Abuse?</b></p><p style="text-align: justify;">As with the previous Alex Jones entity filings, Free Speech System, LLC filed its case in Victoria, Texas. This seems to be an apparent case of judge shopping. Judge Christopher Lopez is the sole judge assigned to the Victoria Division of the Southern District of Texas. Thus, by filing the case in Victoria, Free Speech Solutions ensured that Judge Lopez would be assigned to the case as opposed to one of the two judges in the Austin Division of the Western District of Texas. </p><p style="text-align: justify;">According to the bankruptcy petition, Free Speech System, LLC had its "domicile, principal place of business, or principal assets in this district for 180 days
immediately preceding the date of this petition or for a longer part of such 180 days than in any other
district." However, the address listed on the petition is 3019 Alvin Devane Blvd., Suite 301, Austin, TX 78741. The initial declaration filed by Marc Schwartz, the proposed Chief Restructuring Officer, mentions Austin at least ten times in connection with the business and references Victoria only as the place where the case was filed. </p><p style="text-align: justify;"><b>What Comes Next?</b></p><p style="text-align: justify;">Will this case be more successful than the prior ones? At least this time, Jones has placed his primary business into bankruptcy. To use a chess analogy, in the prior cases, Jones placed three of his pawns into bankruptcy, while this time, he has filed his queen. However, Jones himself has not filed. This leaves both Mr. Jones and his membership interest in Free Speech Systems, LLC vulnerable to claims of creditors. </p><p style="text-align: justify;">One consequence of filing under Subchapter V is that the case will move quickly. Free Speech Systems will be required to file its plan of reorganization within 90 days. Thus, unless FSS obtains an extension, the plan confirmation process will begin before Halloween. </p><p style="text-align: justify;"><br /></p>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com0tag:blogger.com,1999:blog-29130423.post-45734275542990342082022-07-22T11:29:00.003-05:002022-07-22T11:29:36.740-05:00Nevertheless, FERC Persisted<div style="text-align: justify;"></div><p style="text-align: justify;">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, <a href="https://en.wikipedia.org/wiki/Nevertheless,_she_persisted">"Nevertheless, she persisted."</a> 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, <a href="https://www.ca5.uscourts.gov/opinions/pub/21/21-60017-CV0.pdf"><i>Gulfport Energy Corporation v. Federal Energy Regulatory Commission</i></a> (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.</p><p style="text-align: justify;"><span></span></p><a name='more'></a><p></p><p style="text-align: justify;">Judge Smith ably summed up the issue in the case:</p><div style="text-align: justify;"><blockquote>The parties dispute how two legal regimes—the Bankruptcy Code and the Natural Gas Act—interact. But their dispute is narrow. The question is how a bankrupt debtor’s power to reject executory contracts interacts with FERC’s power to decide whether a party may change or cancel filed-rate contracts, which the agency regulates. To answer that question, we must review what rejection does and then explain how it relates to the Natural Gas Act.</blockquote></div><p style="text-align: justify;">Opinion, p. 2. Skipping ahead to the end, the Natural Gas Act gives FERC the power to decide whether to "change or cancel filed-rate contracts." Rejection, on the other hand, allows the debtor to breach an executory contract and excuses future performance. Those are different things and they don't conflict.<br /></p><p style="text-align: justify;"><b>What Does Rejection Mean? </b><br /></p><p style="text-align: justify;">The opinion has a good explanation of what rejection means. </p><p style="text-align: justify;"></p><blockquote>The Bankruptcy Code empowers debtors, “subject to the court’s approval,” to “assume or reject any executory contract.” 11 U.S.C. § 365(a). That means that a debtor may choose either to perform (assume) or “breach” (reject), § 365(g), any contract “that neither party has finished performing,” That tool might seem unhelpful. Breaching a contract does not erase that contract; it entitles the contract’s counterparty to seek damages for the debtor’s nonperformance. But here’s the rub: Most debtors are broke and cannot pay in full that damages claim. So “in a typical bankruptcy,” the counterparty to a rejected contract “may receive only cents on the dollar” for its claim against the debtor, yet the debtor will retain the benefit of having ceased performance. Ibid. In that way, “rejection can release the debtor’s estate from burdensome obligations that can impede a successful reorganization.” </blockquote><p></p><p style="text-align: justify;">Opinion, pp. 2-3. </p><p style="text-align: justify;">Under the Natural Gas Act, FERC has the right to approve or reject changes to filed-rate contracts. Rejecting a contract does not terminate or cancel the contract. Therefore, rejection does not conflict with the Natural Gas Act. As explained by the Court:</p><p style="text-align: left;"></p><blockquote style="text-align: left;"><div style="text-align: justify;">Rejection does not change or cancel a contract; it breaches that contract, giving the debtor’s counterparty a damages claim for the value of the debtor’s continued performance. The contract itself does not change; nor does the filed rate. No change is wrought where the counterparty’s claim for damages is “calculated using the filed rate,” even if the debtor cannot pay that claim in full.</div></blockquote>Opinion, pp. 3-4. The opinion goes on for another 23 pages. However, the excerpts above contain the important lessons about what it means to reject a contract. <p></p><p style="text-align: left;"><b>Nevertheless, FERC Persisted</b></p><p style="text-align: left;">What should we make of the Court's Elizabeth Warren reference? On the one hand, it's kind of clever. It takes a phrase from public discourse and adapts it to a dull bankruptcy issue. Because of my politics, I think that Sen. Warren was well-justified in persisting and the purchasers of many tshirts and bumper stickers seem to agree. Judge Smith is definitely trying to send a message to FERC to stay in its lane and not interfere with bankruptcy jurisdiction, which I appreciate as a bankruptcy practitioner. Finally, given that Elizabeth Warren is a bankruptcy expert, inserting a Warren reference into a bankruptcy opinion is even more clever. </p><p style="text-align: left;">The bottom line is that this case will be useful to practitioners needing to explain what rejection means. We have progressed so far from the days when it was assumed that rejection vaporized the contract. <br /></p><p style="text-align: left;"> <br /></p><p style="text-align: left;"><br /><br /></p><p> </p><p> </p><br /><br /><p></p>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com0tag:blogger.com,1999:blog-29130423.post-29171572331983926692022-06-08T15:43:00.000-05:002022-06-08T15:43:06.612-05:00What Is the Difference Between Clerical and Compensable?<p> A short order crossed my desk the other day in <i>In re Preferred Ready-Mix</i>, 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 <i>Siegel v. Fitzgerald</i>, No. 21-411 (U.S. 6/6/22), which came out the same day, it will affect many more cases.</p><p><b><i>A Little Background</i></b></p><p>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. </p><p><i><b>What Judge Norman Ruled</b></i></p><p>In his Judge Norman stated:</p><p style="text-align: justify;"></p><blockquote style="text-align: justify;">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.</blockquote><p><i><b>What are Clerical Tasks?</b></i></p><p style="text-align: justify;"> 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.</p><p style="text-align: justify;">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. </p><p style="text-align: justify;">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.</p><p style="text-align: justify;">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. </p><p style="text-align: justify;">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). </p><p></p>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com2tag:blogger.com,1999:blog-29130423.post-86706964714925639082022-06-08T12:17:00.001-05:002022-06-08T12:22:06.922-05:00Judge Jernigan Debuts Her Second Novel<p style="text-align: justify;">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 <i>In re Tinsley</i>, 2010 Bankr. LEXIS 4156 (Bankr. N.D. Tex. 20100 about a cowboy trying to keep the ranch he inherited from his father and <i>In re Pearson</i>, 2020 Bankr. LEXIS 972 (Bankr. N.D. Tex. 2020) in which Judge Jernigan cited an article that I wrote. <i>Lee v. Weatherford (In re Weatherford)</i>, 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 <i>He Watches All My Paths</i> (2019) and <i>Hedging Death</i> (2022).</p><span><a name='more'></a></span><p style="text-align: justify;">The lead character in both books is Judge Avery Lasiter, a federal bankruptcy judge married to a police officer who has a King Charles Spaniel. Judge Jernigan is quick to point out that even though the characters are similar to her real-life family, they are fiction. However, Judge Jernigan shows the wisdom of writing what she knows about.</p><p style="text-align: justify;">The first book, <i>He Watches All My Paths,</i> is about a federal bankruptcy judge terrorized by a disgruntled party. She receives threats at home, on her office voicemail, on a pad left in the courtroom and even on a family vacation in Portugal. This is a very personal story that could have happened to Judge Jernigan or one of her colleagues. (She discusses the case where an angry lawyer killed one of her Haynes & Boone colleagues as well as several other judges and lawyers). Not to give away too much, but the judge survives so that she can return in <i>Hedging Death</i>. </p><p style="text-align: justify;"><i>Hedging Death</i> shares part of its plot with the <i>In re Life Partners</i> case (which was not Judge Jernigan's but was pending in the Northern District), but also gives intimate glimpses into what goes on in court and in chambers. In this case, a trial over responsibility for a Ponzi scheme is interrupted when one of the minor players notices that the funds were not being squandered but rather redirected to another entity leasing the former Superconducting Supercollider in Ellis County, Texas. Meanwhile, Officer Max has retired from the force and is tracking down a hedge fund manager who faked his own death to collect the insurance money. The hedge fund guy was involved in raising money for the Ponzi scheme so the two stories start to connect. The plot also involves Mexican cartels, viatical settlements, and a scheme to kill off retired people who have sold their insurance policies so that the cartel can get its money. There are numerous other plot twists and the bad guys from the first book play an important role.</p><p style="text-align: justify;">The writing styles for the two books are quite different. The first book is very personal and when the narrator is addressing the reader, it is clear that it is Judge Jernigan speaking through her alter ego's voice. In <i>Hedging Death</i>, there is a consistent third-party fly on the wall narrator who observes various events, whether it is Judge Lassiter explaining viatical settlements to the "kids," her collection of interns, law clerks and courtroom staff, or observing a meeting between shady characters that happened years earlier. <i>He Watches All My Paths</i> would not have worked with an omniscient narrator, since the thrill lies in viewing the danger through the eyes of the judge. On the other hand, <i>Hedging Death</i>, requires a wider lens to take in all of its varied subplots. </p><p style="text-align: justify;">The books are also fun for bankruptcy nerds looking for common tropes. You can't practice in Texas without having a missing cow case or an impoverished heir/heiress who is not sure where all the money went. I am thankful to Judge Jernigan for writing about the world of bankruptcy. For some reason, John Grisham and Jay Brandon<i>,</i> two of my favorite writers of lawyer fiction, have never ventured into our world. If they did, I don't think they could provide as insightful of a view as the one provided by Judge Avery Lassiter. </p>Steve Satherhttp://www.blogger.com/profile/03568954281320035875noreply@blogger.com0