Sunday, October 15, 2017

NCBJ Report: Jevic--The Inside Story and the Impact on Future Chapter 11s

Jevic--The Inside Story and the Impact on Future Chapter 11s featured participants from the case offering their perspective on the case and what it meant.   Dan Dooley of MorrisAnderson was the Chief Restructuring Officer for Jevic.   Domenic Pacitti of Klehr Harrison was Debtor's counsel.   Rene Roupinan of Outten & Golden represented the WARN Act claimants.   The panel was moderated by Judge Gregg W. Zive (Bankr. D. Nev.).    

I have previously written about Jevic here.

Jevic Holding Company was a trucking company based in New Jersey.   It had been acquired by Sun Capital and was financed by CIT Group.    CIT requested that the debtor liquidate itself in Chapter 11.   The Debtor apparently gave WARN Act notices.   However, New Jersey had its own state statute which was stricter than the national statute.

When the case was filed, the CRO Dan Dooley, negotiated a wind-down budget which included $3.0 million for paying accrued wages and related payroll obligations.   After the company was liquidated, the Debtor was holding $1.7 million which was subject to Sun's lien (it was also a secured creditor).   There were two other important pieces of litigation.   The WARN Act claimants sued the Debtor and Sun Capital.  They alleged that the Debtor and Sun were a unitary employer.   The Official Committee of Unsecured Creditors sued Sun and CIT to unwind the leveraged buyout as a fraudulent transfer.     

Eventually a settlement was reached where Sun allowed the $1.7 million to be used to pay creditors and CIT paid another $2.0 million to cover priority and administrative claims.  However, in the settlement Sun did not want any money to go to the WARN Act claimants because they were also suing Sun.  As a result, a structured dismissal was set up which provided that the settlement funds would be paid to creditors but not to the WARN Act claimants.   This involved skipping over the WARN Act claimants' priority claims.   

The Bankruptcy Court approved the structured dismissal and the Third Circuit affirmed under the "rare circumstances" doctrine.   The Supreme Court reversed finding that a debtor could not violate the priority scheme under the Bankruptcy Code in a non-consensual an end of case distribution.  The Court left open the possibility that paying creditors out of sequence would be allowed in cases such as paying employee wage claims and critical vendor claims where doing so would advance Code-related goals.

Mr. Pacetti (the Debtor's lawyer) explained that they used a structured dismissal because there are only three ways to end a chapter 11 case--a plan, conversion or dismissal.  11 U.S.C. Sec. 349(b) says that the parties shall revert to the status quo ante unless the court "orders otherwise."  The structured dismissal was an attempt to have the court "order otherwise."    

Judge Zive focused on the Court's reference to allowing priorities to be skipped based on a Code-related objective.   He raised the case of Motorola, Inc. v. Official Committee of Unsecured Creditors (In re Iridium Operating, LLC), 478 F.3d 452 (2nd Cir. 2007).   In Iridium,  the debtor had claims against its parent, Motorola, and Motorola had administrative claims against the estate.    In settlement of other litigation, a fund of money was created to fund a litigation trust to sue Motorola.  Any money remaining in the litigation trust would go to the unsecured creditors.  Motorola objected to diverting funds which could have paid its administrative claim to the trust.   The Second Circuit generally found that the settlement was permissible because having a well-funded creditors' trust would increase the value of the claims against Motorola.  However, it remanded for an explanation of why the residual funds in the trust would go to the unsecured creditors instead of being distributed in priority order.

Mr. Dooley stated that the Code-related objective here was maximizing the pie.

Judge Zive said that other areas where priority-skipping would be allowed would be wage orders, critical vendor motions and roll-ups as part of DIP financing.   He said these are all orders that allow the case to proceed.   

Ms. Roupinan was asked how Jevic would change WARN Act litigation.   She said that requiring parties to follow the absolute priority rule would provide clarity and predictability and improved ability to negotiate.

Mr. Pacetti said that in skipping priorities, it was important to consider what the stage of the case is.  First day motions will get greater latitude than end of case distributions.  He also stressed the importance of making an evidentiary record.

Judge Zive seconded this notion stating that any time you want the court to do something you should provide sufficient facts.  He gave the example of routine motions for cash management and continuing bank accounts which could result in de facto sustantive consolidation.  

Ms. Roupinian asked whether priority-skipping would be ok if all parties consented.   She asked what would happen if the U.S. Trustee was the only party objecting.

Judge Zive replied that the policy of the U.S. Trustee is not the Bankruptcy Code.  He said that "if everyone is consenting, I don't have a problem with that."   However, he focused on what constituted consent?   He said that if a party is given notice and fails to object, they have waived their objection.

Mr. Dooley said that the take-away from the case was that it was really about the absolute priority rule, not structured dismissals.

Judge Zive said that one of the problems with Jevic was that there was no going concern value to protect and no jobs.  As a result, the Code-related objective was much weaker.   A few moments later, he emphasized that priority skipping can be allowed to protect going concern value, jobs, etc. but that "there has to be a significant reason."   

The panel also discussed gifting, that is, where one creditor gives up value so that it can go to a creditor with lesser priority.   Judge Zive pointed out In re LCI Holding Co., 802 F.3d 547 (3rd Cir. 2015) where lenders acquired the debtor's asset via a credit bid but deposited funds in escrow for professional fees and paid some funds directly to unsecured creditors.   Where the funds were paid directly by the secured lender, they were never property of the estate and thus the court had no jurisdiction over them.  

Mr. Pacetti that lawyers should cut deals earlier in the case and read Jevic for what it says.   However, Ms. Roupinian said that parties should either follow the absolute priority rule or get consent.

Judge Zive said that courts would be skeptical about non-consensual priority-skipping and that lawyers should get the evidence that shows why the settlement is proper.

Mr. Dooley said that doing priority skipping "requires real proof."   He also said that structured dismissals must be squeaky clean and that first day orders may be more carefully examined.  He said that the ruling will embolden the U.S. Trustee.   

The take-aways from the panel were build your evidentiary record, identify a Code-related objective and do your deal at a time when it will still advance the reorganization.


NCBJ Report: Asset Protection Trusts--How to Make Them and How to Break Them

Asset Protection Trusts--How to Make Them and How to Break Them examined a phenomenon emerging in the laws of several states, including Nevada.   This panel was moderated by Ron Peterson of Jenner & Block with Neal Levin of Freeborn & Peters, Judith Greenstone Miller of Jaffe Raitt Heuer  Heuer & Weiss, P.C., Rebecca Hume of Kobre & Kim, and Judge Brian F. Kenney of the U.S. Bankruptcy Court for the Eastern District of Virginia.

According to Judith Greenstone Miller, there are now seventeen states that allow Debtor Asset Protection trusts ("DAPs").    Some states have a statute of limitations as short as eighteen months to challenge a DAP while others may allow up to four years or more for an existing creditor that did not have knowledge of the transfer.   Some states require an affidavit of solvency.

Michigan was the seventeenth state to allow DAPs in March 2017 and amended the Uniform Fraudulent Transfer Act (UFTA) to exempt a "qualified disposition."    There are also variations in state law between those following the Uniform Fraudulent Transactions Act (UVTA) and the Uniform Voidable Transfers Act.   While UFTA does not have a specific choice of law provision, UVTA does.

Ms. Miller explained that DAPs require giving up control and that high net worth indiiduals don't like to give up control.    DAPs are attractive to individuals with plenty of assets now who fear future liabilities such as doctors.

In Michigan, DAPs must be irrevocable.   The Trustee must reside in Michigan.   The settlor must execute an affidavit that the transfer of assets into the trust will not render them insolvent and that they are not subject to pending litigation other than as described.     They may retain the power to direct investments and request distributions of income and principal although they cannot demand a distribution.   The sole means to challenge a DAP is to bring an action under the UVTA by clear and convincing evidence.      The statute of limitations in Michigan is shortened from six years to two years, although it starts at the time of the qualified disposition.   If a claim arises after the disposition, the statute of limitations is two years from when the claim arises.   Beyond the state statute of limitations, the only resort is to Sec. 548 of the Bankruptcy Code for actual intent to hinder, delay or defraud.   If a transfer is set aside, the property reverts to the settlor and only to the extent necessary to satisfy the claim.  

Neal Levin described Nevada's DAP law, which he described as an "absolute shield" for assets.  It has been around since 1999 and has a two year statute of limitations with a six month discovery rule.  There is no requirement for an affidvait of solvency.   The burden of proof is clear and convincing evidence. Additionally, the settlor retains incredible control over the trust assets.   He said that the only exception to the Act's protections is an action under the UVTA.

Judge Brian F. Kenney described the Virginia law as being one of the least protective.  He said that his state statute says that a transfer is not voidable solely because is was made to a self-settled trust without consideration.   As with the law of several other states, Virginia's statute contains a provision shielding professionals who structure a transfer from liability.    However, at the same time, Virginia adopted a statute providing for sanctions against any party within its jurisdiction who transfers assets with knowledge of a judgment.   Thus, there is some conflict in the law.

Rebecca Hume came all the way from the Cayman Islands to discuss foreign asset protection trusts which she described as a war between the world and the debtor's assets with a gate that only the debtor has a key to.   She described the Cook Islands as the worst jurisdiction for creditors with the Island of Nevis close behind.   The law of the Cayman Islands provides that issues relating to Cayman Islands trusts must be governed by the law of the Cayman Islands and that any order of a foreign court attempting to assert control over a Cayman Islands trust would be unenforceable.   In the Cook Islands, a claim must be brought within two years of when the transfer was made.   The creditor must prove a fraud beyond a reasonable doubt.   Further, the creditor must hire a lawyer in the Cook Islands and may not enter into a contingent fee arrangements.   She said she knew of only one case where a Cook Islands Trust was set aside. 

Judge Kenney said that Sec. 548(e) was added to the Code to address the problem of DAPs.   He said that it allows a ten year lookback for a self settled trust and requires an intent to hinder, delay or defraud.    This standard relies on the traditional badges of fraud analysis.     The Trustee has two years to commence an action but that the statute could be equitably tolled.

Ron Peterson asked Judge Kenney what he could do to a debtor who was ordered to repatriate assets from a Cook Islands Trust but refused to do so.   He said that under Sec. 105(a), he has the power to enforce his orders.   He said that as a practical matter, incarceration for civil contempt will often be referred to the U.S. District Court because the District Court has more tools available to deal with incarceration.   In one case, a debtor named Sala raised the defense of impossibility but the Court ruled that where is the impossibility is self-created, the defense would be rejected.   He described it as a game of chicken between the debtor who is willing to sit in jail without giving up his funds and the Court that keeps him there.

In U.S. v. Grant, Neal Levin said that the settlor's widow raised the impossibility defense saying "I asked for the money back but they said no."   The Court found that this was not sufficient to purge the contempt. 

Mr. Levin pointed out that one-third of the world's wealth is kept in off-shore jurisdictions.    He said that it was important to work with professionals in the affected jurisdiction.  

Ms. Hume said that many offshore jurisdictions allow the settlor to retain great control over the trust and would only impose an independent trustee when "things get dicey."  She said that settlors frequently retain the policy to change the trustee.   She pointed to a court of appeals decision which required a settlor to disclose where trusts were located and what was within them.   She described a Privy Council decision where a settlor had a power to revoke the trust but refused to exercise that power.   The Council held that it could appoint a receiver over the power of revocation which allowed the trust to be revoked and the money collected.

Mr. Levin talked about how most wire transfers pass through New York banks.   Because these banks are in the United States, the U.S. Courts have jurisdiction over them and they can be brought into the case. 

Ron Peterson pointed out that the U.S. has treaties with countries such as Switzerland and that the U.S. Attorney can be brought to enforce the treaty in limited instances.

Mr. Levin pointed out that on the other side are "the forces of evil" such as foreign judges who view their responsibility as limited solely to enforce their laws and foreign professionals who want to protect their fees.    He also said that the United States is now considered to be the largest recipient of offshore funds as foreign citizens are transferring funds to DAPs in the United States.  He described the problem of professionals helping people conceal their assets as a "pervasive problem."

Ms. Hume pointed out that the Cayman Islands are now parties to various statutes requiring disclosures of cash transfers so that there is greater transparency and less advantage to hiding assets in the Cayman Islands.

 The main take-away from the panel was that when dealing with DAPs or offshore trusts, the key is to engage qualified professionals who understand the local law in order to avoid committing malpractice whether trying to set up one of these vehicles or challenging one.

Thursday, October 12, 2017

NCBJ Report: Dean Chemerinsky Says It's Formalism for the Foreseeable Future

The Commercial Law League of America presented a keynote address from Dean. Erwin Chemerinsky, of UC Berkeley Law School at its annual luncheon.  Dean. Chemerinsky discussed his main area of expertise in a talk entitled The Supreme Court:   Appointments to and Statutory and Constitutional Interpretation by the Court in Bankruptcy Cases.   He spoke for over an hour without notes.

He started by talking about the place of bankruptcy cases in the Supreme Court's jurisprudence.  Although bankruptcy cases outnumber every other case in the federal system, the Supreme Court only takes two or three bankruptcy cases in a given term.   He noted that of the current justices on the court only one had served as a trial court judge and several justices had never argued a case in any court before being appointed to the Supreme Court.   As a result, the Court is taking fewer and fewer cases.   For much of the 20th Century, the Court heard as many as 200 cases a term.  Last term the Court heard only 59 cases (not counting cases decided without argument). 

The bulk of his talk discussed the battle between the formalists and the realists on the Court.  He offered three theses:  1)  we have and are likely to continue to have a conservative Supreme Court; 2)  the conservatives and some of the liberals tend to be quite formalistic; and 3) this trend is undesirable.  

Wednesday, October 11, 2017

NCBJ Report: Awards Edition

One thing that conferences like NCBJ celebrate are the best in the profession.  This year I went to three awards presentation.   Prof. Nancy Rapoport of the University of New Las Vegas Law School received the Lawrence P. King Award for Excellence in Bankruptcy from the Commercial Law League of America.   Judge Mary Walrath (Bankr. D. Del.) received the Norton Judicial Excellence Award from the American Bankruptcy Institute and Thompson Reuters.   Finally Judge Homer Drake (Bankr. N.D.Ga.) received the Distinguished Service Award from the Bankruptcy Alliance of the American Inns of Court.    

Tuesday, October 10, 2017

NCBJ Report: What is a Limited Liability Company and Why Does It Matter in Bankruptcy?

This panel discussed some of the unusual issues raised by limited liability companies.   The panel consisted of Bankruptcy Judge Ashely Chan from the Eastern District of Pennsylvania,  Prof. Carter Bishop from Suffolk University Law School, Craig Goldblatt form Wilmer Hale, Paul L. Lion, III from Morrison & Foerster, LLP and Emily Pagorski from Stoll Keenon Ogden PLLC   Emily Pagorski and Craig Goldblatt played the role of litigators in two moot court arguments.

NCBJ Report: The Wolf (of Wall Street?) at the Door

The Wolf (of Wall Street?) at the Door:   Lending to the Financial Underclass examined a variety of issues affecting those with limited means.   Bankruptcy Judge D. Sims Crawford from the Northern District of Alabama moderated a discussion with Thad Bartholow with Kellett & Bartholow and Prof. Creola Johnson from the Ohio State University Moritz College of Law.

NCBJ Report: Broken Bench TV

This year's National Conference of Bankruptcy Judges takes place in Las Vegas at the Paris Hotel and Casino.   The conference kicked off just one week after the horrific shootings here.  Mass shootings represent a break down of the social contract.  The law is intended to resolve disputes between people without the need for violence.   Bankruptcy law deals with break downs of financial relations.   It can involve such weighty matters as whether a company goes out of business or a family loses their home.  It is an imperfect system.   However, the terrible tragedy that occurred here is a reminder of the alternative to the rule of law.  #VegasStrong.

The conference opened with Broken Bench TV, NCBJ's current events program anchored by Judge Bruce Harwell (Bankr. D. N.H.), Prof. (and candidate for Congress) Katherine Porter from the University of California Irvine School of Law and Prof. John Pottow from the University of Michigan School of Law.     Last year, NCBJ opened with Broken Bench Radio.   This year brought the conference into the 21st Century with a combination of highly produced video reports and live in-studio conversations. 

Thursday, October 05, 2017

Remembering R. Glen Ayers (1947-2017)

R. Glen Ayers, who passed away on September 27, 2017,  was according to his obituary, "a force of nature in a bow tie."   He was a Southern gentleman.  He was at various times a professor, a judge, a practicing attorney and a Sunday School teacher.   He was a devoted family man.   To those of us who knew him as a bankruptcy professional, he was brilliant, irascible, and gracious often all at once.
The Life of Glen Ayers

Glen was born in Horry County, South Carolina.  He grew up feeding the chickens and hanging tobacco leaves.   He once described South Carolina as too small for a nation and too large for an asylum.

He graduated from Clemson in University in 1969.   At his funeral service, his law partner Bob Werner said that Glen could be counted on to state why Clemson was the champion, should have been the champion or would be in the future.   He earned a Master's Degree from the University of North Carolina in 1971 and served in the U.S. Army from 1971-72.

Glen met his wife Jan Miller Oldham on a blind date at Columbia College and married in 1972.   They had two children, Roderick and Claudia.    

Glen graduated summa cum laude from the University of South Carolina School of Law in 1975 and received an LLM from Harvard Law School in 1979.   If you are counting, that makes four degrees by the time he was 32.

Glen taught at St. Mary's Law School from 1981-1985.   According to Bob Werner, there were two types of lawyers in Bexar County, those who studied under Prof. Ayers and those who wished they did.    

Glen served as a Bankruptcy Judge for the Western District of Texas from 1985-1988.    More about that later.

After leaving the bench, Glen practiced in Washington, D.C. for a time and then returned to San Antonio where he practiced with Langley & Banack.    Bob Werner gave an anecdote about how Glen would be holding forth on some important story when the phone would ring with a call from a client or another counsel.   He said that Glen would pick up the phone and at that moment, whoever was on the phone would be the most important person in the world to him.   He would then resume the story in mid-sentence.    

Glen was a Sunday School teacher at United Presbyterian Church in San Antonio.   His friend, Robert Browning said that on the two Sundays before he passed away, they co-taught a class on Thomas Cahill's Heretics and Heroes.   Glen said that a heretic was someone who might one day be a hero.   His Pastor, Rev. San Williams, said that with Glen's death the collective IQ of the Sunday School class dropped precipitously.    

Pastor Williams used the text of Romans 14:7-9 to describe Glen's life, saying that he did not live to himself and neither did he die to himself.    In addition to his church work, he offered pro bono help to the San Antonio Battered Women's Shelter and the VA Clinic as well as helping individuals in need.

Glen leaves behind his wife of 45 years, Jan, his son Roderick, III, his daughter Claudia and her husband, George, granddaughter, Ellie and many family members and friends. 

The Bankruptcy Legacy of Glen Ayers

Glen came on to the Bankruptcy Bench in 1985 which was a tumultuous time in the bankruptcy world.   The jurisdictional scheme of the Bankruptcy Code had been declared unconstitutional the year before.    Texas was in the midst of a real estate crash which was flooding the courts with single asset chapter 11 filings.    Judge Ayers contributed thirty-six opinions to the fledgling West Bankruptcy Reporter which would not reach volume 100 until after his time on the bench.

In one of his earliest rulings, Judge Ayers reversed the Fifth Circuit.    In the case of In re Thompson, 59 B.R. 690 (Bankr. W.D. Tex. 1986), Judge Ayers discussed a recent Fifth Circuit decision stating:

Most commentators have found Allen to be a less than satisfactory opinion. Quite simply, the ruling is incorrect.
When Judge John Akard followed Judge Ayer's decision in In re Rogers, 63 B.R. 686 (Bankr. N.D. Tex. 1986), he was reversed.   This prompted Judge Akard to remark that he only followed the Western District of Texas once and he regretted it.   

In another early opinion, In re Hurbace, 61 B.R. 563 (Bankr. W.D. Tex. 1986), he ruled that equal co- partners did not owe each other a duty to account within the meaning of 11 U.S.C. Sec. 523(a)(4), a conclusion the Fifth Circuit would later reach in Matter of Gupta, 394 F.3d F.3d 347 (5th Cir. 2004), some eighteen years later.    

Another groundbreaking case was In re SI Acquisition, Inc., 58 B.R. 454 (Bankr. W.D. Tex. 1986) where he ruled that a creditor's suit against non-bankrupt parties seeking to pierce the corporate veil was not subject to the automatic stay.   While the Fifth Circuit disagreed with him, the case involved one of many areas that were unclear in the early days of the Bankruptcy Code.   

In In re Estate of Patterson, 64 B.R. 807 (Bankr. W.D. Tex. 1986), Judge Ayers ruled that a probate estate was not a "person" qualified to file bankruptcy.   

In re Fry Associates, Ltd., 66 B.R. 602 (Bankr. W.D. Tex. 1986) was an early decision discussing the concept of a bad faith filing for a single asset real estate entity.   However, in In re Oakgrove Village, Ltd., 90 B.R. 246 (Bankr. W.D. Tex. 1988), he declined to enter sanctions against a debtor exhibiting new debtor syndrome where the debtor reasonably believed that the bank would accept a workout proposal and did not oppose relief from the automatic stay.

In In re Triplett, 87 B.R. 25 (Bankr. W.D. Tex. 1987), Judge Ayers ruled that an objection to use of cash collateral should not be a substitute for a motion to dismiss or convert under Sec. 1112.    The Court wrote:  

 Here, the focus on collateral and its use interferes with proper analysis of the case. Instead of being concerned with one item of "cash", the creditor should draw the court's attention to all of the problems with the case so that the debtor can either be placed on a timetable, the case converted, or the case dismissed.

In a footnote he pointed out that both of the lawyers had been his law students and were used to his editorializing.   

In re Kipp, 86 B.R. 490 (Bankr. W.D. Tex. 1988) established that a party could not conduct a Rule 2004 examination when it had a pending adversary proceeding.

Judge Ayers dealt with creative classification in the case of In re Meadow Glen, Ltd., 87 B.R. 421 (Bankr. W.D. Tex. 1988) where he did not allow a secured creditor's deficiency claim to be separately classified from other unsecured creditors.   The ruling predicted the Fifth Circuit's holding in Matter of Greystone III Joint Venture, 995 F.2d 1274 (5th Cir. 1992) which also took a restrictive approach to classification (although the Fifth Circuit later moderated its position).   

In his final opinion, In re Abramoff, 92 B.R. 698 (Bankr. W.D. Tex. 1988), Judge Ayers ruled that a prepayment penalty combined with a due on sales clause constituted an unreasonable restraint on alienation and would not be enforceable under Texas law.    One of the lawyers on the case was Ronald King, who would shortly take Judge Ayers' place on the bench.

After leaving the bench, Glen Ayers had a long and productive career practicing in Washington, D.C. and San Antonio, Texas.   The cases that he tried as an attorney encompassed issues ranging from professional compensation, trustee liability, PACA, chapter 11 reorganization and property of the estate.

Final Thought

At the time that Glen passed away, we were working on a case together.   In our last conversation, he inquired, as he always did, about the health of one of my colleagues who had been experiencing some medical issues.   That was Glen Ayers.