Wednesday, May 27, 2009

The Bankruptcy Opinions of Sonia Sotomayor

Yesterday President Obama nominated Second Circuit judge Sonia Sotomayor to take David Souter's place on the Supreme Court. As a District Court Judge in the Southern District of New York and as a Judge on the Second Circuit Court of Appeals, Judge Sotomayor has come across bankruptcy issues from time to time. However, few of her opinions are the stuff that casebooks are made of.

Big Bankruptcies: Routine Opinions

One consequence of sitting in New York is that Judge Sotomayor has written opinions in some major cases,such as Adelphia, Bethlehem Steel, Eastern Airlines, R.H. Macy & Co. and Worldcom. In In re Adelphia Communications Corporation, 544 F.3d 420 (2nd Cir. 2008), she affirmed the confirmation of a bankruptcy plan which transferred claims being asserted by an Equity Committee to a plan trust. The problem was that the Equity Committee, which was far out of the money, had confused derivative standing to pursue claims on behalf of the estate with ownership of the claims themselves. As Judge Sotomayor stated:

We do not mean to trivialize, but only to place in context, the role of the derivative plaintiff. It serves "with the approval and supervision of a bankruptcy court" and shares the "labor" of litigation with the debtor-in-possession. (citation omitted). Contrary to the Equity Committee's arguments, however, it does not usurp the central role of the court or debtor in overseeing and managing the estate's legal claims.
In Official Committee of Unsecured Creditors v. Securities and Exchange Commission, 467 F.3d 73 (2nd 2005), an interesting provision of Sarbanes-Oxley came into play. The SEC brought claims on behalf of defrauded investors, which the debtor settled. The SEC then proposed its plan for distributing those funds to the investors. The Unsecured Creditors Committee didn't like the SEC's plan (which was separate from the plan of reorganization in the case). Judge Sotomayor held that the Official Committee of Unsecured Creditors had standing to appeal, even though it was not a party to the SEC action, but ruled against them on the merits. In another Worldcom appeal, she held that the confirmed plan of reorganization barred pursuit of a discharged claim. In re Worldcom, Inc., 546 F.3d 211 (2nd Cir. 2008).

In another case, the judge ruled that employee benefits earned by an employee over the course of his employment but payable when he was discharged during the bankruptcy were not entitled to administrative claim status because the right to payment had accrued pre-petition. In re Bethlehem Steel Corporation, 479 F.3d 167 (2nd Cir. 2007).

As a district court judge, she ruled on an appeal concerning whether a tax assessed post-petition and payable under an unexpired lease which was later rejected was entitled to administrative priority. She affirmed the ruling of the Bankruptcy Court which had found it to be an administrative claim. In re R.H. Macy & Co., 1994 U.S. Dist. LEXIS 21364 (S.D. N.Y. 2004). The most interesting thing about this opinion is that it consists of a transcript of her discussion with counsel on the record before she made her ruling. She displays a bit of humanity when she apologizes to counsel for her delay in ruling and acknowledges some unfamiliarity with the bankruptcy issues.

THE COURT: How are you counsel? I must apologize for the delay in addressing this case. There is no excuse other than the press of life in general in the court-house. You have also presented me with interesting issues, so once I did turn my attention to it, it has not been easy for me to resolve.

I have a series of questions for those of you who are bankruptcy lawyers. I would like to have you educate me and focus me a little bit.

In the Eastern Airlines case, the Bankruptcy Court approved a comprehensive settlement between the Debtor and the Airline Pilots Association. A group of dissident pilots objected to the settlement and appealed. Judge Sotomayor found that the settlement was not an abuse of discretion. Nellis v. Shugrue, 165 B.R. 115 (S.D. N.Y. 1994).

International Insolvency

Judge Sotomayor has also had a passing acquaintance with international insolvency cases. In In re Board of Directors of Telecom Argentina, S.A., 528 F.3d 162 (2nd Cir. 2008), she affirmed the decision to recognize a foreign proceeding under former Section 304. In Petition of Alison J. Treco and David Patrick Hamilton as liquidators of Meridien International Bank Ltd., 205 B.R. 358 (S.D. N.Y. 1997) and Allstate Insurance Company v. Hughes, 174 B.R. 884 (S.D. N.Y. 1994) she affirmed the granting of a Section 304 injunction to protect the assets of a foreign debtor.

Dischargeability of Debts

Judge Sotomayor has written several opinions dealing with dischargeability of marital obligations. In re Maddigan, 312 F.3d 589 (2nd Cir. 2002)(attorney's fees incurred in connection with support claim were nondischargeable under Section 523(a)(5)); Beier v. Beier, 1995 U.S. Dist. LEXIS 1702 (S.D. N.Y. 1995)(granting summary judgment on non-dischargeability was inappropriate when there were issues of fact)

She also ruled that in determining the dischargeability of a claim arising under a settlement agreement, it was appropriate to look to the facts surrounding the underlying claim. In re DeTrano, 326 F.3d 319 (2nd Cir. 2003).

In European American Bank v. Benedict, 1995 U.S. Dist. LEXIS 10051 (S.D. N.Y. 1995),Judge Sotomayor ruled that the deadline to file a complaint to determine dischargeability could not be extended after the expiration of the deadline.

Other Rulings

In re Millenium Seacarriers, Inc., 419 F.3d 83 (2nd Cir. 2005)(bankruptcy court's jurisdiction over property of the estate wherever located included jurisdiction to extinguish maritime liens).

Harris v. Albany County Office, 464 F.3d 263 (2nd Cir. 2006)(dismissing appeal based upon failure to provide designation of record on appeal and transcript was abuse of discretion where debtor was not given opportunity to cure defect first)

Beightol v. UBS Painewebber, Inc., 354 F.3d 187 (2nd Cir. 2004)(no appeal from order denying motion to abstain)

In re New Haven Projects Ltd. Liability Co., 225 F.3d 283 (2nd Cir. 2000)(where Section 505 gave bankruptcy court discretionary authority to redetermine tax liability it was not error for bankruptcy court to decline to exercise that authority).

In re Seatrain Lines, Inc., 198 B.R. 45 (S.D. N.Y. 1996)(debtor's action against insurer which denied indemnification post-petition was core proceeding so that reference would not be withdrawn).

Royal American Insurance Co. v. McCrory Corporation, 1996 U.S. Dist. LEXIS 5552 (S.D.N.Y. 1996)(bankruptcy court erred in refusing to lift stay to pursue suit against debtor's insurance carrier despite fact that claimant had failed to file a timely claim against debtor).

In re St. Johnsbury Trucking Company, Inc., 191 B.R. 22 (S.D. N.Y. 1995)(Negotiated Rates Act of 1993 was constitutional as applied in bankruptcy, but issue would be certified for interlocutory appeal).

First Fidelity Bank, N.A. v. Eleven Hundred Metroplex Associates, 190 B.R. 510 (S.D. N.Y. 1995)(order for use of cash collateral reversed where debtor made absolute assignment of rents)

In re Friedman & Shapiro, Inc., 185 B.R. 143 (S.D. N.Y. 1995)(disciplinary proceeding against attornrey by state bar could not be removed based upon law firm's pending bankruptcy).

Kuntz v. Pardo, 160 B.R. 35 (S.D. N.Y. 1993)(litigant whose appeal was dismissed for failure to designate record did not demonstrate excusable neglect entitling him to reinstatement of appeal)

The Bottom Line

In ten years as a circuit court judge, Judge Sotomayor has authored 232 opinions, twelve of which have concerned substantive bankruptcy issues. In eleven out of twelve cases, she affirmed the lower courts. Remarkably, her six year record as a district court judge contains many bankruptcy rulings. Her bankruptcy opinions appear to be competently written, although none jump out as having changed the face of the law.

For another perspective on the Sotomayor nomination, go to The Case Against Sonia Sotomayor: Arch-Conservative .


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