Thursday, November 01, 2018

NCBJ San Antonio: Highlights of Day 3

The final day of this year's NCBJ only included two panels so I don't need an introduction.

Twelve Years of Turbulence:  Keynote by Gary Kennedy and Terry Maxon

 Former American Airlines General Counsel Gary Kennedy and his co-author Terry Maxon gave the keynone address on the final day of the conference.   They have authored a book entitled Twelve Years of Turbulence which discusses Mr. Kennedy's time as GC, including the bankruptcy of American Airlines.   You can find the book here.  You can also watch a promo video for the book which they played during the talk here.   It is worth 90 seconds of your time to watch.

Gary Kennedy described his position as General Counsel to American Airlines during its bankruptcy as having the dual role of being the lawyer to the board of directors and the client to the outside counsel.    He began his career at a firm that did chapter 11 work, experience that would prove a benefit many years later.  He spent thirty years at American Airlines, including a stint as General Counsel.   As GC, he fulfilled many roles.  Once a lawyer called him to say that American had lost the luggage with his fiancee's wedding dress and that the wedding was in two days.  Although GC's typically do not track down lost luggage, he put the word out and the dress was located the day before the wedding.   His advice was to never check money, medications or a wedding dress.

American's turbulence began before Kennedy became general counsel.  On September 11, 2001, a flight attendant named Betty Ong called the reservations number to say that her flight had been taken over by three men who had killed a passenger and stabbed a flight attendant.  The call was routed to the operations center and she remained on the phone with American until her plane hit the World Trade Center.  Hour later, another American flight crashed into the Pentagon.   On the morning of the terrorist attacks of 9/11. the entire air transportation system closed.  When it re-opened people were leery of flying.   To make matters worse, another American flight crashed two months later, killing all on board.

This left the airline in an extremely fragile condition.  The company was losing billions of dollars.  No revenue was coming in to a business that had heavy fixed costs.   By 2003, American was insolvent and had no room to maneuver.  It was at this time that the company's CEO, Don Carty, asked Gary Kennedy to take the position of General Counsel.  At this point he had been out of the legal department for ten years and was running one of the business units.  However, he had begged for the General Counsel's job and was not in a position to turn it down.

CEO Carty told him, "As GC, you will have to tell me things that I don't want to hear and stand up to me when I do things I shouldn't do."   Mr. Kennedy said that "In short time his words came back to haunt me."

In 2003, Gary Kennedy was told that his first job was to put the company into bankruptcy.  The company announced that it was going to file bankruptcy on April 15, 2003 unless it could re-negotiate its contracts with its three employee unions to give the company two billion dollars a year in concessions.   On April 14, 2003, after working round the clock for weeks the bankruptcy was ready to file.  Boxes of paper filings were lined up on dollies and a fleet of cars was ready to take the documents to the U.S. Bankruptcy Court in the Southern District of New York.   Two of the three unions approved the deal but the flight attendants said no.  They delayed the filing to allow the flight attendants to re-vote.  They approved the concessions on the re-vote and bankruptcy was avoided.

Then things got ugly.  In its Form 10-K filing, which was due the next day, the company would disclose that it had agreed to buy millions of dollars in retention bonuses in connection with the bankruptcy filing.   Within sixty minutes of the securities filing, the employees felt deceived and were "as angry a group as you could imagine."   

Co-author Terry Maxon (of the Dallas Morning News) explained that announcement of the retention bonuses put the company in immediate jeopardy of filing bankruptcy.  "There is no incentive program for management that the employees like.  When you are giving big concessions, it's even worse.  They are getting theirs.  We are not getting ours.  It set up a situation that American Airlines would have to file for bankruptcy unless they did something extraordinary."

CEO Don Carty called up Kennedy and told him to rescind the bonuses.   He agreed.  When he told his wife what had happened, she said "That was an expensive phone call.  If he calls again, don't answer."   

However, the unions still wanted blood.  Kennedy told his CEO that he needed to go to the board and tell them of the possibility that the CEO should resign.  As General Counsel, his job was to be loyal to the company and not to the individual who had hired him.   Carty resigned.

The company began to pull away from the cliff when the Great Recession of 2008 hit and oil went to $150 a barrel.   Kennedy remembered a manta that had been taught during his brief tenure as a bankruptcy lawyer--"thou shalt not wait too long to file bankruptcy."  However, the new CEO was almost religiously opposed to chapter 11.   

The company began leveraging every asset it could find to raise a pool of cash to get through the recession.   Company Treasurer Beth Goulet said that the company was pulling all of the cookies out of the cookie jar and and borrowing against them until they could get their costs under control.   She said they tapped five or six financial markets in one day.  They were borrowing huge sums of money but couldn't continue to support a business that was generating such heavy losses.

By November 2001, the other airlines that had previously filed for bankruptcy had all received concessions from their employees.  Because American had not filed bankruptcy, they were at the top of the heap in terms of costs.  The Board instructed Kennedy to be ready to file in three weeks. 

This time the company did not publicly announce that it was filing.  They worked feverishly to prepare a massive bankruptcy and keep it quiet.  No one knew about the proceeding except for one pesky reporter who seemed to want to blow a hole in the plan.   Terry Maxon explained that on November 28, 2011, he checked his iPhone and saw an email from a friend who worked at the airport asking him if he knew that American was going to make a big announcement the next day.   He began calling all around Dallas.  At 8:15 p.m., he called the CEO's office.  He said that if someone answered the phone in the CEO's office at 8:15 on a Monday night, something big must be up.   Half an hour later, the head of corporate communications called back and asked him what he was going to run.  He told him that he was going to say that the company was going to make a big announcement amid rumors of bankruptcy.  The communications head confirmed that the company would be filing bankruptcy but asked him to hold the story until 6:00 a.m., which he did.  When the company did file the next day, the Dallas Morning News got the scoop.

He decided to ask one more question about the CEO who so adamantly opposed bankruptcy and was told that he had suddenly decided to retire.

Before the company could file, it had to decide where to file.  The two logical choices were either the Northern District of Texas where the company was located or the Southern District of New York.   Kennedy felt strongly about filing in the DFW area.  "Being a hometown airline, not only would we have a vested interest in the outcome but so would the people administering the case."  He said he felt that they should be in their hometown.  However, outside counsel insisted that the level of sophistication of the judges in New York was such that they had to file in New York.  The company ultimately filed in New York.  "I will say as a postscript that if I had the opportunity to do it again, I would have filed in Dallas Fort Worth.  Part of the difficulty for me was that club atmosphere of the lawyers and financial advisors based in New York.  I felt like an outsider looking in."

  Once the company filed, nothing went as planned.   Where they thought the U.S. Trustee would appoint one union to the creditors' committee, it appointed all three of them.   They were assigned a brand new, untested judge.  When the CEO unloaded on him, he explained that he could not control these factors but acknowledged his responsibility to move the case along.

Meanwhile U.S. Airways decided that it wanted to merge with American.   When American was not receptive to the proposal, the employees who distrusted management teamed up with U.S. Airways and agreed to new conditional agreements.  At that point, he said he had to look at his fiduciary duty to do what was in the best interest of the creditors and others.

The negotiations were made more difficult by the differing corporate cultures.  Kennedy described American as being a a conservative Brooks Brothers never have a day of fun in their lives company, while U.S. Airways never had a day when they weren't having fun.  

One day after a hard day of negotiations, Kennedy heard someone calling his name.  It was the president of U.S. Airways inviting him to join them for drinks and dinner.  Kennedy asked, "Who's buying?  We're in bankruptcy."  He said they had a raucous good time but he felt guilty about having a good time with the enemy.

They ultimately reached a deal but had to get the government to agree to the deal.  It was clear that the Department of Justice was opposed to the deal. The government agreed to give an answer by August 2013.  One day Kennedy was walking the stairs when he stopped to check his phone.  He received a message, "They are going to file."   The Department of Justice sued to block the merger.  Kennedy knew that he had to tell the CEO the bad news and tried to find someone to go with him.  He wasn't able to persuade anyone, including the janitor to join him.

The government took the position that all of the woes of the airline industry stemmed from mergers.  American tried to persuade the regulators and proposed changes to meet the government's concern.  He received a reply from an Assistant U.S. Attorney that was laced with profanity including some curse words he didn't know the meaning of.   However, they were finally able to reach an agreement.

Approval of the merger allowed American to exit bankruptcy.  He said, "The story closes on this note.  We were able to close the transaction in bankruptcy."  Between the value of the merger and the value obtained in bankruptcy, the company was able to pay its creditors in full, the employees received raises and few lost their jobs and even shareholders received some value.  Having guided the company in and out of bankruptcy, Kennedy retired and decided to write a book.  American has turned out to be quite successful following its bankruptcy. 

For me, having listened to this story, there are three takeaways.  Bankruptcy is a powerful tool.   Bankruptcy can be unpredictable and scary.  You should trust your gut when it comes to choosing venue in your home town. 

Don't Judge . . . Until You've Walked a Mile in a Judge's Boots

This was a workshop where a judge who had decided a case would introduce the facts and issues and then invite people at each table to discuss how the court should rule.   Each table had at least one judge.  My table had four judges, one professor and one other practitioner besides myself.

The first problem had to do with post-confirmation jurisdiction.   Prior to bankruptcy, one brother offered to purchase the other brother's property.   After he failed to close, he sued his brother and filed filed a lis pendens.   The debtor who owned the property filed bankruptcy.   The state court suit was dismissed but the lis pendens was not released.   After litigation in bankruptcy, the court ruled that the brother who had filed suit in state court (the non-debtor brother) was entitled to nothing and awarded damages against him.   The debtor brother confirmed a plan which said that he reserved the right to challenge the lis pendens.   Eight months after confirmation, the reorganized debtor realizes that the lis pendens is still in place and runs to bankruptcy court to have it removed.  The non-debtor brother objects saying that the bankruptcy court lacks jurisdiction.   What should happen?

I was part of a minority who thought the bankruptcy court did not have jurisdiction because the dispute did not involve enforcement of an express plan provision, although in the real world I would have argued for bankruptcy jurisdiction because I like litigating in bankruptcy court.   Other more creative thinkers argued that the bankruptcy court had jurisdiction because 11 U.S.C. Sec. 1141(c) vested the property in the debtor free and clear of all claims and interests.  They argued that the lis pendens was a claim against the property that would have been wiped out by the plan.  However, the most creative thinkers (who included a Texas Bankruptcy Judge sitting at my table) thought that the debtor could file a motion to enforce the judgment in the adversary proceeding, a maneuver that would not require re-opening the bankruptcy case).   The lis pendens that was filed in state court gave notice of the non-debtor brother's claim to the property.   The adversary proceeding denied that claim.   Therefore, the adversary proceeding judgment could be enforced to expunge the lis pendens.

The actual judge who handled the case, Judge Charles Walker of the Bankruptcy Court for the Middle District of Tennessee, said that he found jurisdiction based on enforcing the plan.  He added that the brothers were still fighting and that the appeal of the adversary proceeding judgment was pending before the Sixth Circuit.  

The second problem involved a scenario that was discussed in several panels during the conference.  For a number of years, parents had paid for the college education of their three children, two of whom were in graduate school and one who was an undergraduate.  After losing all of their money to a Ponzi Scheme in 2018, the parents file bankruptcy.   The Trustee sues the universities to recover the funds as a fraudulent transfer.    

Once again, I started out in the minority saying that if the parents did not have a legal obligation to pay the tuition, they did not receive reasonably equivalent value.   However, the majority stretched to find a benefit that the parents received from educating their children.  Some participants focused on the societal benefit to having an educated workforce.   Some focused on the obligation of parents to support the family even when the children are grown.  Still others found value in the possibility that the children would be able to support their parents in their old age.  At this point in time, there are cases going both ways and no circuit court decisions.  As a result, this is an area where the court is free to vote its conscience.    

The judge who handled the case was Michele J. Kim from the Southern District of Georgia.  She ruled that the trustee could not recover the college tuition.  She added that as an immigrant to this country, there was no question of whether she would go to college and no doubt that the parents would pay for it.

Final Thoughts

I love the city of San Antonio.  It is a city celebrating its Tricentennial with a wealth of history and culture.  The first NCBJ I ever attended was in San Antonio in 2005.   As we say farewell to this year's conference, I will leave you with a duck on the Riverwalk and some of the local-flavored music that greeted attendees.

I look forward to next year's conference in Washington, D.C.

Wednesday, October 31, 2018

NCBJ San Antonio: Highlights of Day 2

On Day 2 of NCBJ San Antonio, I went for a run, laughed at a musical about ethics, listened to a debate over equitable mootness, went to a fraudulent conveyance program and listened to an economist predict the next recession.

An Early Morning Run and an Opportunity to Give Back

Day 2 of this year's NCBJ dawned early for about 5% of the conference attendees who shrugged off the prior night's eating and drinking for an early morning Wake Up and Run.   The event, which is sponsored by Bernstein-Burkley, was particularly poignant because of the recent terrorist attack in Pittsburgh.   Here is what the firm had to say:
These horrific events have hit us close to home at Bernstein-Burkley, having occurred only a few miles from the firm's headquarters in Pittsburgh. Our employees lost friends and family members, and together as a united city, we grieve the loss of 11 neighbors.
The firm will donate $100 for every person entered in the race and will match contributions from NCBJ registrants up to $7,500.00.   To donate, please visit Send a receipt of your donation to and Bernstein-Burkley will match your donation. 

Getting back to the run itself, it was really dark out and was a reminder that there are a lot of lawyers and judges who are in better shape than I am.  However, I did finish the race and I got to see half of the judges in the Western District of Texas.   Congratulations to everyone who participated.   Robert Miller was the fastest runner, finishing in a blistering 17:32.   Judge Elizabeth Stong from the Eastern District of New York was the fastest judge.    

Ethics Follies

What could be a better way to learn about ethics than singing and dancing lawyers?   Ethics Follies 2018 presented a parody of Sister Act called Shyster Act.  I have posted a few clips below.

Since the point of an ethics presentation (beyond getting ethics hours) is to learn about ethics, here are a few takeaways.   Some of them were pretty obvious.  In the story an attorney who manages a singer co-mingles her trust funds with his client funds and then uses the money to hire internet trolls to try to influence a senate election.   When his associate refuses to participate in the scheme and quits the firm, lawyer Shyster shoots him.   The singer Lola sees this and goes into witness protection at a convent.   The obvious points here are don't co-mingle client trust funds, don't embezzle client trust funds and don't commit murder.   The less obvious point (only because the others were so glaringly apparent) is that an attorney may not commit an act he knows to be illegal or unethical and in the face of a demand to do so, must resign.   The ethical rules do not address how to avoid being murdered when you find out you are working for a criminal law firm.

There were a number of other ethical issues interspersed with the singing and dancing.  In one scene, an associate of the firm takes a selfie with Lola and is about to post it on Instagram when he has to be reminded about client confidentiality.   (In this case, Lola's location was confidential since she was hiding from Shyster). 

One song dealt with lawyers who went to mediation in bad faith so that they could run up their hours.  The bad male lawyers also made a plan to object to all the other side's discovery responses and set hearings when they knew the other side was going to be out of town.   This segment dealt with the duty not to overbill your client, the requirement to convey settlement offers to your client, the duty of fairness to the other side and counsel, and the duty of candor to the tribunal.

In another scene, an associate is passed over for promotion and is drinking heavily.   The partners discuss the resources available from the State Bar to help lawyers with substance abuse problems as well as the risks of allowing an impaired lawyer to advise clients.   However, the most moving part was the young associate's self-revelation when he sings "Before I can save someone else, I have to save myself."

There is also a random scene of bankruptcy judges singing about the Judicial Code of Conduct which all of us should find reassuring.

In the finale, Shyster forces his way into the convent and tries to shoot Lola.  The nuns offer to lay down their lives for their new friend who has taught them how to sing.  However, the heroic FBI agent disarms Shyster and receives a chaste kiss on the cheek from Lola.

The study guide to the musical covered at least twenty different rules from the ABA Model Rules of Professional Conduct.

Hooked on the Horns of a Legal Dilemma:  Can "Moo"tness Be Equitable? 

This was a moot court demonstration on the issue of ethical mootness.   The demonstration was more informative about the substantive issue than on how to argue an appellate case because both of the advocates were too good.   What I mean is that the advocates, Danielle Spinelli and Susan Freeman, did such a good job arguing their positions that there weren't any mistakes to learn from.

The case being argued was based on the facts of Sunnyslope, the affordable housing project that was worth more in foreclosure than as an ongoing business.   You can read more about the case at the CLLA Bankruptcy Blog here.    The oral argument highlighted the odd situation that equitable mootness runs counter to the principle that courts must hear cases within their jurisdiction but is accepted by all circuits.  

Ms. Spinelli lead off by arguing that equitable mootness was neither equitable nor about mootness.  She pointed out that prudential mootness exists where a court cannot craft a remedy of any sort so that any opinion would be advisory.  Equitable mootness on the other hand prevents review of a substantially consummated plan even when a remedy could still be fashioned.  She pointed out that the Bankruptcy Code expressly provides for two situations in which an order which has not been stayed is shielded from review:  DIP financing and sales free and clear of liens.  Since Congress expressly provide for non-review in those areas, it should be presumed not to have intended it in other cases.  She distinguished equitable mootness from abstention doctrines.  If a federal court abstains from hearing a case, it can still be heard by another court.  With equitable mootness, the appeal dies and the case is  not heard at all. She said that the role of equitable mootness should be limited to crafting a remedy which does not disturb the interests of third parties who have relied upon the confirmation order.

Ms. Freeman highlighted the impact on parties who have relied on the confirmation order, such as the investor who put funds into the project, the city that wanted to promote affordable housing and the tenants of the affordable housing project.   She argued that if plans could be reversed after substantial consummation that sophisticated investors would refrain from committing to a plan if there was a possibility of appeal of a confirmation order.  She said that reversal of the confirmation order would eviscerate the plan because the only effective remedy would be to allow foreclosure.  She distinguished the case from one involving third party releases where a discrete issue could be carved out without undermining the entire plan.   She also faulted the bank for not seeking a stay pending appeal noting that the bank had the resources to post a supersedeas bond but made the tactical decision not to do so.   

It was an interesting debate.  I have used equitable mootness and have argued against it.   I don't like it because it cuts off appellate review of plan confirmations and believe that it should be used sparingly.

ABI Roundtable on Fraudulent Conveyance Law

This presentation was mislabeled since everyone sat at a rectangular table.   The panelists discussed several hot issues in fraudulent conveyance law and invited discussion from the audience.

The first issue discussed was whether a deposit into a bank account was a "transfer."   This seemed like a silly issue to me but the courts have come up with different rationales for arriving at the same result.   In re Whitley, 848 F.3d 205 (4th Cir.), cert. denied, 138 S. Ct. 314 (2017) said that deposit of funds into a bank account was not a transfer.   Meoli v. The Huntington National Bank, 848 F.3d 716 (6th Cir. 2017) said that it was a transfer but that the bank was not the immediate transferee so that the transfer could not be avoided.   In re Tenderloin Health, 849 F.3d 1231 (9th Cir. 2017) involved a deposit of funds into an account that was used to pay a bank debt.   The bank argued that once the funds were deposited in the account, it had a right of setoff.  However, the Ninth Circuit said that in a hypothetical liquidation, the deposit of the funds giving rise to the setoff would have been an avoidable transfer itself.   The premise  behind these cases is that the funds are long gone.   It does not seem right to allow the trustee to recover the funds when the bank only held them in a technical sense.

The next issue had to do with clawback of parents paying tuition for their children.  The cases break down between the formalistic view stating that the parent did not receive a benefit from paying for their child's education and the broad view that moral or societal value constitutes reasonably equivalent value.  Boscarino v. Bd. of Trs. of Conn. State Univ. Sys. (In re Knight), No. 15-21646, 2017 WL 4410455, (Bankr. D. Conn. Sept. 29, 2017) applied the strict view.  DeGiacomo v. Sacred Heart Univ. (In re Palladino), 556 B.R. 10 (Bankr. D. Mass. 2016) held that the parents' view that having a financially self-sufficient child constituted reasonably equivalent value.   Sikirica v. Cohen (In re Cohen), Adv. No. 07-02517, 2012 WL 5360956 (Bankr. W.D. Pa. Oct. 31, 2012), rev'd on other grounds, 487 B.R. 615 (W.D. Pa. 2013) found that  a debtor received “reasonably equivalent value” for funds used to satisfy reasonable and necessary expenses for the maintenance of the debtor’s family, and that payments for post-secondary undergraduate educational expenses are reasonable and necessary for the maintenance of the Debtor's family.  

Ron Peterson brought up  In re Adamo, 582 B.R. 267 (Bankr. E.D.N.Y. March. 29, 2018) which involved a payment made by parents to a student's tuition account.   The court found that the initial transfer was to the student and not to the college.  As a result, the college as mediate transferee could defeat the claim.   Mr. Peterson also raised the anomaly of a debtor who was obligated to pay for college tuition for an adult child under a divorce decree and the parent who remained married and paid for college tuition.  In the first case, the parent had a legal obligation to pay.  In the second, the obligation was only moral or societal.

The next topic was payment of fines.  I'm not sure what the issue is here.  If there is a legally enforceable debt, it is clearly reasonably equivalent value.   If a person pays a fine to avoid prison time, that would be reasonably equivalent value because a person can 't earn any money while they are in jail.  If it is a corporation paying a fine to prevent its executives from going to jail, that is not reasonably equivalent value.   First, the corporation does not benefit from protecting its execs.  Second, the incompetence of the executives was probably what put the corporation in bankruptcy in the first place.  Therefore, removing the executives would be a net benefit to the corporation.

Finally, there were issues relating to taxes.   In re DBSI, Inc., 869 F.3d 1004 (9th Cir. 2017) involved a sub-s corporation that paid its shareholders' tax liability.   The IRS argued that it would have been entitled to sovereign immunity under state law.   The Court of Appeals held that section 106 waived that sovereign immunity.   The transfer at issue occurred more than two years pre-petition.  As a result, the transfer could only be avoided under section 544.   Outside of bankruptcy, sovereign immunity would prevent recovery of the transfer.  However, the court found that section 106 overroad the result that would otherwise occur.   The Seventh Circuit went the other way.   In re Equipment Acquisition Resources, Inc., 742 F.3d 743 (7th Cir. 2014) found that sovereign immunity would prevent recovery of the transfer outside of bankruptcy and that because section 544 is based on remedies available under state law that sovereign immunity had to be included.  It found that the reference to section 544 in section 106 had to be understood as referring to section 544(a) only.

ABI Luncheon:  Honoring Keith Lundin and a Not So Gloomy Recession

Retired Judge Keith Lundin accepted the Norton Judicial Excellence Award.   Presenter William Norton discussed Judge Lundin's Zelig-like presence at all of the important bankruptcy developments of the past thirty years and his super-authoritative treatise on Chapter 13.   Rather than talk about himself, Judge Lundin essentially gave a roast for the twelve prior recipients of the award, demonstrating that he is a genius and has a sense of humor to boot.

Dan White, a Senior Economist with Moody's Analytics, presented the economic forecast.  He told a story about the time J.P. Morgan was asked what would happen with the stock market.  Morgan replied "There will be volatility," a perfectly accurate answer with little practical import.  Mr. White said that the one thing he could be 100% certain of was that there will be a recession.  However, he could not say with certainty when it would happen or how severe it would be.   On these topics, all he could do was offered educated guesses.   To avoid keeping you in suspense, his education guesses were that there would probably be a recession in mid-2020 and that it would likely be mild unless one or more accelerators kicked in.  (My term not his).      

He said that several factors pointed to a recession in mid-2020.   First, it has been nine years since the last recession.   This is the second longest period of expansion in recent history.  He added that ten years is a long time to avoid screwing up the economy.   Their forecast assumes a strong 2019 which would then peter out shortly.   The Trump administration has jacked up the economy with tax cuts and increased spending.   

He gave the example of his six year old son trick or treating and coming home shaking from the amount of sugar he had consumed.  After the sugar rush wore off, he immediately fell asleep, not even making it through the opening credits of "It's the Great Pumpkin, Charlie Brown."  In this case, the Trump administration has given the economy a sugar rush with tax cuts and increased spending.  When this wears off in 2020, the economy will likely fall.

Mr. White also said that when we blow past full employment, we usually have a recession within three years.   The economy passed 4.5% unemployment in 2017.  If full employment is at the 4.0% unemployment rate, we may have a little more time.

He also talked about the yield curve in a slide I copied below.   In order for bankers to lend, there needs to be a spread between the 3 month interest rate and the ten year interest rate.   When the yield curve inverts, we are usually a year away from a recession.  He also said that whenever the yield curve falls to 1%, it is likely to invert.   We are currently at 1%.  He said that many economists will go on TV and explain why the yield curve doesn't matter.   "Friends don't let friends doubt the yield curve" he explained.

All of these factors point to a recession in 2020, but the big question is how bad will it be?  He gave three examples.   The recession of 2001 was mild, the recession of 1991 was more severe and the great recession of 2009 was, well, it was the great recession.   In  the 2001 recession, GDP dropped 0.6 percent from its peak.  In 1991, the drop was 1.5%.   The 2001 recession was over within a quarter while the 1991 recession lasted a year.   (I took these numbers from an article that I found, not from Mr. White's presentation).    Mr. White explained that there could even be a growth recession, that is, where the economy declines but continues to expand.

He explained that "having a recession is not the end of the world."  A recession "brings some of the excess crap out of the economy.  Small recessions help avoid big recessions."

Mr. White said that the likelihood was for a soft landing but there were a broad range of possibilities.  He explained several wild cards that could make a recession worse.   If President Trump and President Xi follow through on all of their threats regarding tariffs, it could raise the tariff rate from 1% to 5%, something that has not been seen in many years.  This would hurt agriculture and any industry that relies on steel.   He described the two world leaders as engaging in a game of chicken and predicted that they would ultimately back away.

Debt was another factor that could influence a recession.   Household debt is actually at a good level.  Federal government debt is on an unsustainable course but will not dramatically affect the economy for 10-15 years if entitlements are not reined in.   Local government spending is a problem because the percentage of mandatory spending by local governments has been steadily rising along with defaults and bankruptcies by local government.   Because local governments cannot engage in deficit spending, they will have to curtail other spending as mandatory expenditures rise.  This could hurt the economy.   Finally, non-financial corporate debt is not scary on an aggregate level but the distribution of that debt is.   He described corporate debt as a barbell.   There are a lot of well-collateralized, very secure corporate debts.  At the other extreme, there are "leveraged" debts which is a euphemism used to avoid describing them as junk debt.  Leveraged firms are leveraging up.  Because every business with good credit has already received all the loans they need, banks need to make riskier loans to continue making money.   However, because of the transparency required by Dodd-Frank, they will not keep these loans on their own balance sheets.   Instead, they are creating "Collateralized Loan Obligations" and selling them to pension funds and other investors.  However, the size of these debts is not large enough to tank the economy.

His opinion was that these risk factors would likely mean the difference between a 2001 recession and a 1991 recession.  Either way, it is not an apocalyptic scenario unless someone does something really stupid that we can't see at this point.   You can always bet on stupid.  (My comment, not his). 

Monday, October 29, 2018

NCBJ San Antonio: Highlights of Day 1

NCBJ 2018 opened in the historic Lila Cockrell Theater with current NCBJ president Judge Michael Romero belting out a welcome in song adapted from Cabaret.    For me, Day 1 featured an awards show with head-snapping array of bankruptcy trivia and video, a valuation mock trial and the Commercial Law League's program.   Themes throughout the day included trying to find some importance in this term's three bankruptcy-related Supreme Court decisions and the Tempnology case which just received a grant of cert.

Broken Bench Awards Show

The opening plenary session featured a highly produced awards show in which judicial writing was honored along with more than a little substance thrown in.   The show began with Cinderella (Prof. Nancy Rapoport) facing foreclosure from her bank after it finds out that its collateral has turned into a pumpkin and some mice.  Fairy Godmother (U.S. District Judge Pam Pepper) saved Snow White by telling her about bankruptcy and gave her some schedules to fill out in the five minutes before the judge arrived.   The part about completing schedules in five minutes truly had a fairy tale quality to it.

There were a number of awards, some silly and some not so silly.    

Best Judicial Turn of Phrase went to Supreme Court Justice Sonia Sotomayor who made this quip in her opinion in Wellness International Network, Ltd. v. Sharif, 135 S.Ct. 1932, 1947 (2010):

"The principal dissent warns darkly of the consequences of today's decision.  To hear the principal dissent tell it, the world will end not in fire, or ice, but in a bankruptcy court."

The award for the best Bench Slap went to In re Lynch, 2017 WL 416782, 63 Bankr. Ct. Dec. 176 (Bankr. N.D. Oklahoma) where Judge Cornish chastised a lawyer for hiring professionals found on Craigslist.
The Court was stunned that Hyde chose attorneys and experts to assist her by shopping for them on the website Craigslist.  Traditional avenues for finding and vetting attorneys such as the Lawyer Referral Service of the Oklahoma Bar Association, County Bar Association and Martindale-Hubbell Legal Directory seem much more reliable and trustworthy sources of information rather than searching classified ads on the internet. 
Best Ethics Rant went to Judge Jeffrey Norman of the Western District of Louisiana (now sitting in the Southern District of Texas.  His In re Banks, 2018 WL 735351 (Bankr. W.D. La. 2018) opinion said that:
This case is an unfortunate tale of attorney delay, promises to a client made by counsel but not kept, deception, and professional negligence.
They said that the lesson is that judges have a lot on their dockets.  They don't want to spend pages and pages calling someone out.  Make good choices (followed by a clip from Pitch Perfect).

Retired Judge Michael Ninfo (dressed as Captain America) received a lifetime achievement award for his work founding CARE, Credit Abuse Resistance Education.   The presentation made me want to volunteer for the group.

The award for Best Use of a Song Lyric in an opinion went to In re Drew Transportation Services, 2016 WL 8892459 (Bankr. E.D.N.C. 2016) for its use of the Rolling Stones' "You Can't Always Get What You Want."  (However, I felt that Judge H. Christopher Mott got robbed since he used the phrase in his In re SCC Kyle Partners, Ltd., 2013 Bankr. LEXIS 2439 (Bankr. W.D. Tex. 2013) relating to cram-down interest.   He led his opinion with the quote and added:  "In the Court's view, neither party will get all they want, but both will get what they need."

Prior to the conference, attendees voted on the Best Bankruptcy Cinderella Story.   Receiving the award was the City of Detroit case.   Judge Steven Rhodes, Kevin Orr and Corinne Ball accepted the award on behalf of the case.    Judge Rhodes thanked Jones Day for not filing the case in Delaware.

Valuation Mock Trial

Judge Laurie Silverstein (Bankr. D. Del.), Ian Peck of Haynes & Boone, Camisha Simmons of Simmons Legal and Bob Stearn of Richards, Layton & Finger presented a mock trial of a hearing to value a company in the context of a chapter 11 confirmation hearing.   

I am not going to discuss the specific valuation issues raised since a lot of it was over my head.   However, I do have a few takeaways from watching the mock advocates.   There is a lot of jargon used in valuation.   While some judges may understand the difference between a WAC and a Beta input, it is important for the advocates to take the time to explain these concepts and how they fit into a valuation decision.   In this case, the Judge understood a lot of concepts which were never explained.   However, in real life, the parties might not get so lucky. 

I thought that the attempts to attack the qualifications of the experts were of limited value.   If you are not going to get the expert thrown out or substantially discredit them, questioning about the number of zinc mines appraised doesn't add much.

I thought that the demonstratives that the lawyers used were helpful but would have liked to see more of them.

I liked the way that one of the attorneys used his cross-examination of the other side's expert to lay out themes that his expert would be raising in his direct.    

I was also impressed by the extent that the mock advocates understood the underpinnings of their opponent's expert's opinions.   In one case, an expert had relied on a proprietary report.  The advocate effectively challenged the fact that the expert had no way to verify the conclusions reached by the analysts who prepared the report.   He referred to it as a black box in his cross and closing, a term that was echoed by the judge in her ruling.   

It is hard to do a practice skills presentation with tight deadlines.   I found this one to be very realistic (because it was based on a real case) and a good teaching exercise.  (NCBJ is offering videos of all of the plenary sessions for sale in case you want to watch the presentation for yourself).

King Award Luncheon

Every year the Commercial Law League of America awards the Lawrence P. King Award for Excellence in Bankruptcy to a distinguished judge, academic or practitioner.   This year the award went to Prof. Jay Westbrook of the University of Texas School of Law.   Prof. Westbrook has been one of the leading bankruptcy academics in the country for many decades.  His ground breaking empirical work (with Teresa Sullivan and Elizabeth Warren) has helped us to better understand bankruptcy and the people who file bankruptcy.  He is one of the bright lights of international insolvency law.  He has also worked to accomplish venue reform, helping to draft a bill that was introduced in the Senate by two unlikely co-sponsors:  John Cornyn of Texas and Elizabeth Warren of Massachusetts. 

He was introduced by his former research assistant Eric Van Horn and a video message from his former collaborator U.S. Sen. Elizabeth Warren.  I recorded both Sen. Warren's introduction and Prof. Westbrook's acceptance on my phone.  I apologize for the quality.   This is the first time I have attempted to incorporate video into a blog article. 

Focus on the Supreme Court

I am combining one segment from Broken Bench Awards with Prof. John E. A. Pottow's address to the Commercial Law League luncheon since they both dealt with last term's Supreme Court decisions as well as one case that the Court has granted cert on for this term.   

In the awards category, three presenters made pitches for why each of the Court's decisions was the best.   Craig Goldblatt and (I think ) Danielle Spinelli from Wilmer Hale made pitches for Lamar, Archer & Cofrin, LLP v. Appling, 138 S. Ct. 1752 (2018)  and  Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018) explaining why each of these decisions faithfully followed the text of the Code.   Prof.  Troy McKenzie of New York University School of Law argued for U.S. Bank Nat’l Ass’n v. Vill. at Lakeridge, LLC, 138 S. Ct. 960 (2018).   Village at Lakeridge received the highest votes from the audience although I personally voted for Appling.   

Prof. Pottow sought to provide some context to the decisions in his presentation titled Is Functionalism Back?    The Professor stated that the Supreme Court has a hard time getting bankruptcy.  He explained that this makes sense since they are generalists who must deal with many different areas of the law.   However, it means that they often have a poor idea of what is going on in the trenches.   This feeds into the formalism vs. functionalism dichotomy.   Formalism looks at the words of the text while functionalism looks at how a given interpretation will work in practice.  (My words, not his).

This leads to the three cases that the Court decided last term.   I did not describe them above because I wanted to do so in the context of Prof. Pottow's talk.  

The first case up was Lamar, Archer & Cofrin, LLP v. Appling, 138 S. Ct. 1752 (2018), a case about a client who not only stiffed his lawyers, but lied to them to get them to continue representing him.  Mr. Appling told his lawyers that he would be receiving a tax refund of "about" $100,000 and would use it to bring their bill current.   The refund was closer to $59,000 and the debtor apparently did not intend to pay his lawyers.   He filed bankruptcy after they sued him.   The lawyers argued that their ex-client had induced them to keep doing work for them by lying about the tax refund.  The issue before the Supreme Court was whether Appling's verbal statements about the refund were statements "respecting" the debtor's financial condition.   Any claim based on a lie "respecting" the debtor's financial condition must be in writing.  The lawyers said that a statement about one asset was not made "respecting" the debtor's financial condition.  The Supreme Court disagreed.

In making its ruling, the Court started with a formal analysis--what does the dictionary say that "respecting" means.   Then it went to an historical analysis--how were these claims treated under the Bankruptcy Act.   Finally, the Court looked at the consequences of a rule requiring that a statement of financial condition must refer to more than one asset.   What if the debtor makes one statement listing his assets and a separate statement concerning his liabilities?   He has not made a  single statement concerning his financial condition.   The definition urged by the lawyers would be difficult to apply and would lead to bizarre results.   Only the third rationale reflected functionalism.   Prof. Pottow likened it to the dessert of the opinion, but added that at least Justice Thomas didn't dissent.

The Court also discussed legislative history, specifically a House Report.   The Supreme Court had previously relied on this same report in Field v. Mans, 116 S.Ct. 437 (1995).  This was one step too far for Justices Gorsuch, Thomas and Alito who did not join this portion of the opinion.

Next up was U.S. Bank Nat’l Ass’n v. Vill. at Lakeridge, LLC, 138 S. Ct. 960 (2018).  According to Prof. Pottow, this was not really a bankruptcy case at all because it dealt with the standard of review on appeal rather than what rule the court should apply under bankruptcy law.  The case dealt with how to determine whether a person was a non-statutory insider.   According to the professor, the opinion  starts out formalistically and ends on a functionalist crescendo.   The formalistic part of the opinion notes that there are three types of issues on appeal:  issues of fact, issues of law and mixed questions of fact and law.  Factual determinations receive deferential review while questions of law are reviewed on a clean slate.   For mixed questions, it depends.   The functionalist part of the opinion looked at what the Court was doing as it examined the mixed question of law and fact.  If what the court was doing was closer to fact finding than applying the law, then the more deferential standard would apply.   Prof. Pottow pointed out that the institutional competency of the Supreme Court was deciding difficult issues of law in a manner that would provide guidance to the lower courts.   The institutional competency of the bankruptcy court was listening to evidence and making decisions about the facts.   

Having established that appellate courts should defer to the fact finding of trial court's, individual justices began to weigh in on what the rest should be.   This was a problem because the Supreme Court had not granted cert on this issue.  Nevertheless, Justice Sotomayor said that the test used by the Ninth Circuit was dumb.  Justices Alito, Thomas and Kennedy joined in the concurrence.  Justice Kennedy concurred in the concurrence.   This probably show buyer's remorse that the court had not granted cert on the substantive issue and was left with a narrow, insignificant opinion.   (My words, not Prof. Pottow's).

Finally, there was Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018), a case about whether the safe harbor for securities clearing transactions should apply in a case where funds for a stock purchase flowed through two banks before reaching their ultimate destination.   According to Prof. Pottow, this would have been a great case for the Supreme Court to dive deeply into the question of what is a transfer.   In point of fact, funds travelled from the buyer (Party A) into his bank (Party B) to the Seller's Bank (Party C) to the Seller (Party D).    The Supreme Court disregarded the parties in the middle, stating that while there was a transaction, there was not a transfer.   Prof. Pottow claimed that the Supreme Court merely stated that the transfer was from A to D without analyzing why that was the case.  I personally believe that they were looking at the economic reality of the transaction.   The banks were akin to a courier rather than parties who came into ownership of the funds.   Sure, a courier could make off with the funds and not delivered them, but that is not what happened here.  Expressing his disappointment with this case, Prof. Pottow suggested that it might not be a good case to include in the next textbook.

Prof. Pottow pointed out that the judges who were the most functionalist went along with all three opinions.  Of course, they were all 9-0 decisions, so that the judges who were most formalist went along with them as well.  

Interesting Stuff That Didn't Fit Anywhere Else

There is more that I wanted to write about.  However, the hour is late and tomorrow starts with a run at 6:00 a.m.   I may add to this section after I return home.


Friday, July 13, 2018

Rule 9006 Creates Trap for Date-Specific Deadlines

A debtor was liberated from an objection to discharge where the deadline was extended to January 15, 2018, which was Martin Luther King, Jr. Day and the objection was not filed until the next day.    Smart-Fill Management Group, Inc. v. Froiland (In re Froiland), 18-1006 (Bankr. W.D. Tex. 7/6/18).    While most practitioners are familiar with the rule which extends deadlines that fall on a Saturday, Sunday or national holiday, there is an important caveat:  the rule only applies to deadlines stated in days or a longer unit of time.   Where a deadline is set for a date certain, there is no extension.

Tuesday, July 10, 2018

How Would Supreme Court Nominee Brett Kavanaugh Approach Bankruptcy?

President Donald Trump has selected D.C. Circuit Judge Brett Kavanaugh to be his second Supreme Court nominee.    A post describing his bankruptcy opinions would be very short.  I could find only one opinion authored by Judge Kavanaugh arising out of bankruptcy court and that case dealt with equitable subrogation under the laws of the District of Columbia.   Smith v. First American Title Ins. Co. (In re Stevenson), 789 F.3d 197 (D.C. Cir. 2015). This is not surprising given the D.C. Circuit's footprint.   The D.C. Circuit has one bankruptcy court with one bankruptcy judge.  By contrast, the Fifth Circuit has nine districts staffed by 26 judges.   

Monday, June 25, 2018

Fifth Circuit Report: First Quarter 2018

Bankruptcy Cases

            During the first quarter of 2018, the Fifth Circuit’s bankruptcy opinions gave a break for Chapter 7 trustees on their fees, resolved important issues on exemptions and explored the interplay between valuation and the elusive Section 1111(b) election among others.

Trustee’s Compensation; Appellate Procedure (Section 326)

LeJeune v. JFK Capital Holdings, LLC (In re JFK Capital Holdings, LLC), 880 F.3d 747 (5th Cir. 1/26/18)

A trustee sought compensation under 11 U.S.C. §326.   Although no objection was filed, the bankruptcy court substantially reduced the trustee’s commission.   The district court reversed and remanded because the bankruptcy court had failed to give a reason for its action.   The trustee argued that certain creditors in another bankruptcy estate lacked standing to participate in the appeal.    The Fifth Circuit found that because those creditors had claimed an interest in the estate at issue, they had standing to participate in the appeal.   The Court of Appeals then found that the statutory formula under11 U.S.C. §326 was not only the maximum for trustee compensation but was also “a baseline presumption for reasonableness in each case.”  
Sale Free and Clear of Interest of a Co-Owner; Claims (Sections 363(h) and 502)

UTSA Apartments, LLC v. UTSA Apartments 8, LLC (In re UTSA Apartments 8, LLC), 886 F.3d 473 (5th Cir. 3/27/18)

A student housing complex was owned by multiple tenants-in-common.   The tenants-in-common had multiple disagreements with Woodlark, the management company for the complex.  Some but not all of the tenants-in-common filed bankruptcy.    While the bankruptcy was pending, several non-bankrupt co-tenants assigned their interests to UTSA, an affiliate of the management company.    The property was sold free and clear of the interests of the co-owners pursuant to 11 U.S.C. Sec. 363(h).  

The debtor co-tenants objected to paying the affiliate of the management company based on the interests that were assigned to it post-petition.  Instead, they sought to limit the affiliate to the interest it owned on the petition date and to award the interests that were transferred to it to the co-tenants who had filed bankruptcy.     The Bankruptcy Court agreed and reduced the interest of UTSA from 21.17% to 3.14%.

The Debtors also sued Woodlark for breach of fiduciary duty.   The Court found breach of fiduciary duty but did not find any specific damages.   Instead, it denied the portion of Woodlark’s claim for deferred management fees based on Texas law allowing for fee forfeiture in a case of insider dealings.   However, it affirmed the portion of the claim relating to funds advanced to the project.

On appeal, the debtor co-tenants argued that the share attributable to UTSA, the affiliate of the management company, could be reduced as an “equitable remedy” for Woodlark’s breaches of fiduciary duty.  However, UTSA was never sued.   The Fifth Circuit found that the Bankruptcy Court could not reduce the share of proceeds payable to a non-debtor party who had not been sued.   

The Fifth Circuit affirmed the reduction in the proof of claim based on breach of fiduciary duty.
Disclosure:   I represented Woodlark and UTSA in the Bankruptcy Court and subsequent appeals.   There is a motion for rehearing still pending.

Valuation/Section 1111(b) Election (Sections 506 and 1111)

Houston Sportsnet Finance, LLC v. Houston Astros, LLC (Matter of Houston Regional Sports Network, LP),  886 F.3d 523 (5th Cir. 3/29/18)

The Houston Astros and the Houston Rockets formed a television network (the Network) to televise their games.   The Network entered into an agreement with the Teams granting them the exclusive rights to broadcast their games.  It also entered into an Affiliation Agreement with Comcast to carry the Network on its cable systems in return for a fee.  An affiliate of Comcast  loaned the Network $100 million secured by tangible and intangible assets.  

After the Network defaulted on its payments to the Astros, the Astros threatened to terminate their agreement.   This would have jeopardized Comcast which would not have been able to broadcast the games.   Various Comcast entities filed an involuntary petition against the Network.  

The Network reached an agreement with AT&T and DirecTV for those entities to acquire its equity and to enter into separate agreements to pay the Network to broadcast its content.   In connection with this deal, the Teams agreed to waive $107 million in media-rights fees which had accrued during the bankruptcy.

Comcast made an 1111(b) election to have its claim treated as fully secured.   The election did not apply to the Network’s tangible assets because those assets were to be sold and the 1111(b) election does not apply in the context of a sale.   The Bankruptcy Court valued the Affiliation Agreement with Comcast as of the petition date.  As of the petition date, the Court concluded that the value of the Affiliation Agreement was less than the amount of the media-rights fees to be paid by the Network.  As a result, the Court valued the Affiliation Agreement at $0.   Because an 1111(b) election cannot be made with regard to property which is of inconsequential value, the Court denied the election.

On appeal, the Fifth Circuit evaluated whether the collateral should have been valued as of the petition date or as of the effective date of the plan.   It stated:

We conclude that a court is not required to use either the petition date or the effective date. Courts have the flexibility to select the valuation date so long as the bankruptcy court takes into account the purpose of the valuation and the proposed use or disposition of the collateral at issue.
Because the proposed use was under the plan, the Affiliation Agreement should have been valued based on that use.   Because the Teams had agreed to waive the media rights fees, the Fifth Circuit found that it was error to deduct them from the value of the collateral.  The Court stated:

Therefore, the value of the Agreement in the reorganized debtor’s hands is unaffected by these waived fees. Subtracting those costs from the value of Comcast’s collateral would value the Agreement in light of a hypothetical disposition of the property—i.e. liquidation—that will not occur.
As a result, the Court remanded for a new valuation.   

It is important to note that this result is unique to a Chapter 9, 11 or 12 proceeding.   In 2005, Congress amended Section 506 to state that valuation in Chapter 7 and 13 cases should be made as of the petition date based on replacement value.

Exemptions (Section 522)

Lowe v. DeBerry (In re DeBerry), 864 F.3d 526 (5th Cir. 3/7/18)

A debtor filed chapter 7 and claimed a Texas homestead as exempt.  No party objected.  While the case was still open, the debtor sold the homestead and used the proceeds to hire a criminal attorney among other items.   The trustee then sued to recover the proceeds on the basis that failure to re-invest them in another Texas homestead within six months caused the exemption to lapse.   The bankruptcy court denied the trustee’s motion but the district court reversed.

The Fifth Circuit ruled that property claimed as exempt in a chapter 7 case could not re-enter the estate based on subsequent events.   The Court distinguished its prior precedent in Frost as being limited to the chapter 13 context.

Peake v. Ayobami (In re Ayobami), 879 F.3d 152 (5th Cir. 1/3/18)

A chapter 13 debtor sought to exempt 100% of the value of an asset up to the applicable limit under the federal exemptions.   Following several rounds of objections to exemptions, the bankruptcy court certified a question to the Fifth Circuit as follows:  “May a debtor claiming federal exemptions under §522 of the Bankruptcy Code ever exempt a 100% interest in an asset?”   The Court’s answer was yes.   Where the value of the asset, taken together with other exemptions in the same category, is below the statutory cap, the debtor may properly exempt 100% of the value of the asset.  However, the Court declined to address whether exempting 100% of the value would be the same as exempting the asset itself.    

Sanctions; Appellate Procedure

Kenneth Michael Wright, LLC v. Kite Bros., LLC (In re Kite), 710 Fed. Appx. 628 (5th Cir. 1/12/18)(unpublished)

A creditor filed an untimely appeal to the U.S. District Court.   The District Court dismissed the appeal and awarded sanctions.   The creditor appealed to the Fifth Circuit and the appellees again asked for sanctions.

On appeal, the appellant argued that the time limit of Rule 8002 to file a notice of appeal was not jurisdictional.    The Fifth Circuit said that “an appeal is frivolous if the result is obvious or the arguments of error are wholly without merit and the appeal is taken 'in the face of clear, unambiguous, dispositive holdings of this and other appellate courts.”   The Court noted that a deadline is jurisdictional if it is mandated by Congress.   Because 28 U.S.C. §158(c)(2) specifically adopts the time limit set forth in Fed.R.Bankr.P. 8002, the deadline was jurisdictional and the argument that it was not was frivolous.    The Court awarded nominal damages of $1 and double costs.  


Mandel v. Thrasher (Matter of Mandel), 720 Fed.Appx. 186 (5th Cir. 2/15/18) (unpublished)

A debtor misappropriated trade secrets.   The bankruptcy court awarded $1 million to the inventor and $400,000 to the company’s chief creative officer.   In the first appeal, the Fifth Circuit affirmed the liability finding but remanded for a new hearing on damages.   On remand, the bankruptcy court awarded the same damages.   

The Fifth Circuit quoted its prior opinion that damages for theft of trade secrets could be based on:

the value of plaintiff's lost profits; the defendant's actual profits from the use of the secret, the value that a reasonably prudent investor would have paid for the trade secret; the development costs the defendant avoided incurring through misappropriation; and a reasonable royalty.
The Fifth Circuit affirmed the damages awards from the lower courts.   

Judge Jennifer Walker Elrod dissented.    She said, “Our caselaw cannot be bent to support the award of unproven damages.”    She explained that in the first instance, the bankruptcy judge had rejected all of the damage models offered and then awarded damages without stating what model it did use.   On remand, the bankruptcy court awarded damages on a model it had previously rejected—the lost asset theory.   She faulted the bankruptcy court for accepting a valuation based on a range of values of successful companies without considering the risk of failure.   She concluded:

Valuing intellectual property is hard, and the misappropriation of that technology is potentially as easy as a download to a flashdrive. The difficulty of determining a correct valuation methodology, however, does not excuse the burden to show that the technology's value rises above mere speculation and is based on just and reasonable inferences from the credible evidence. Our flexible and creative standard is not a license for pie-in-the-sky damages; rather, damages must be grounded both in theory and fact.
The opinion is interesting not so much for the majority opinion but for the spirited dissent.

 Non-Bankruptcy Decisions

Here are a few non-bankruptcy decisions that I found interesting.


Trois v. Apple Tree Auction Center, Incorporated, 882 F.3d 485 (5th Cir. 2/5/18)

A Texas resident sued Ohio citizens in a Texas court based on breach of contract and fraudulent misrepresentation.   The breach of contract claim was based on a contract executed and performed in Ohio.    The fraudulent misrepresentation claim was based on a conference call from Ohio to Texas.   

The Fifth Circuit found that there were not minimum contacts with regard to the breach of contract claim.   The only Texas contacts were phone calls with regard to the contract.   "[C]ommunications relating to the performance of a contract themselves are insufficient to establish minimum contacts.").    
However, the Court found jurisdiction with regard to the fraud claim although narrowly so.  The Court stated:

This case falls within the fuzzy boundaries of the middle of the spectrum. Although Schnaidt did not initiate the conference call to Trois in Texas, Schnaidt was not a passive participant on the call. Instead, he was the key negotiating party who made representations regarding his business in a call to Texas. It is that intentional conduct on the part of Schnaidt that led to this litigation. So Schnaidt is not being haled into Texas court "based on [his] 'random, fortuitous, or attenuated' contacts."  To be sure, we are somewhat wary of drawing a bright line at who may push the buttons on the telephone.
Texas Debt Collection Act

Clark v. Deutsche Bank National Trust Company, 719 Fed. Appx. 341 (5th Cir. 1/22/18)(unpublished)

Homeowner sued under Texas Debt Collection Act Sec. 392.304(a)(19) which prohibits debt collectors from using any other false representation or deceptive means to collect a debt.   The Court found that communications with regard to renegotiation of a debt do not concern the collection of a debt.   Therefore the District Court was correct to dismiss the action for failure to state a claim.


Williams v. Wells Fargo Bank, N.A., 884 F.3d 239 (5th Cir. 2/26/18)

Swis Community, Limited built a low-income housing project.   The project was financed with debt which was assigned to Fannie Mae with Wells Fargo Bank as servicer.   Swis Community defaulted on the debt.   A Wells Fargo employee provided incorrect notice addresses to the substitute trustee.  As a result, at least some obligors did not receive notice of acceleration or substitute trustee’s sale.    Fannie Mae purchased the property at foreclosure.   

Parties associated with the debtor brought suit against Fannie Mae, Wells Fargo and the substitute trustees.   The District Court granted summary judgment in favor of the Defendants.  The plaintiffs appealed the summary judgments in favor of Wells Fargo and Fannie Mae.  

The Fifth Circuit affirmed the judgment as to Wells Fargo.   Because Wells Fargo was merely the servicer of the debt, it was not a party to the deed of trust.   Therefore, it could not have breached the deed of trust.   However, the Fifth Circuit reversed the judgment in favor of Fannie Mae for breach of contract.   Generally under Texas law, a party who has materially breached a contract cannot bring an action for breach of contract.   However, the plaintiffs argued that the obligation to give proper notice under the deed of trust was an independent covenant which could still be enforced notwithstanding default under the note.   The Fifth Circuit agreed.   The notice provisions under the deed of trust could only come into play in the event of default.   If they could not be enforced based on breach of the note, they would be of little benefit.

Smitherman v. Bayview Loan Servicing, LLC, 2018 U.S. App. LEXIS 5660 (5th Cir. 3/6/18)

Smitherman acquired property in 2005.  He stopped making payments in 2011.   When Bank of America sought to foreclose, he filed various suits to stop the foreclosure.   In June 2016, he brought his fourth suit in which he alleged wrongful foreclosure and to quiet title.   The District Court dismissed his claims and enjoined him from interfering with future foreclosure sales.   

The Fifth Circuit found that the wrongful foreclosure claim was premature at the time the claim was dismissed since no foreclosure had occurred.  The quiet title claim failed because the plaintiff made only conclusory claims that the assignment to the current lender was improper.  As a result, it failed to state a cause of action.  

Warren v. Bank of America,  N.A., 717 Fed.Appx. 474 (5th Cir. 3/9/18)(unpublished)

A lender foreclosed upon a property and sent its contractor to change the locks.  The lender did not allow the borrower to remove her property.   The Court found that Warren was a tenant at sufferance following the foreclosure.  As a result, the Court found that the District Court properly dismissed the borrower’s claims for wrongful foreclosure, unlawful lockout, trespass and invasion of privacy.    The opinion raises the possibility that the borrower could have raised a claim for conversion.    However, this point is not developed.