Bankruptcy Headlines

Helena, Montana Roman Catholic Diocese Settles Abuse Claims

Bankruptcy Judge Terry Myers yesterday approved a $21 million plan to compensate about 380 people who allege they were sexually abused by the clergy of Montana’s Roman Catholic Diocese of Helena, the Wall Street Journal reported today. Judge Myers had been widely expected to sign off on the plan, which drew no objections and was approved by more than 98 percent of the alleged victims when put to a vote earlier this year. The plan will settle about 380 sexual-abuse claims brought against the Helena diocese, 235 of which were filed jointly against both the diocese and the Ursuline Sisters of the Western Province, a religious order of nuns. The settlement also resolves the claims against the Ursuline Sisters. The judge’s signature also clears the way for the diocese to exit chapter 11 protection later this year.

Judge Tells Atlantic City's Revel Casino to Seek Higher Bid

Advisors to the shuttered Revel Casino Hotel in Atlantic City, New Jersey, failed to get approval yesterday for an agreement to sell the hotel for $82 million and were told by Bankruptcy Judge Gloria Burns to look for a better price, Reuters reported yesterday. The decision by Judge Burns could open the door for a Los Angeles developer, Izek Shomof, whose attorney told yesterday’s court hearing he could offer more money. The ocean-front Revel has already lost two deals in the last six months, with the price dropping from $110 million to the current price. The massive hotel cost $2.4 billion to open in 2012. Revel had asked Judge Burns to approve the sale agreement with Florida developer Glenn Straub, who had failed to close a prior sale agreement. The current agreement required Straub to close the deal by March 31.

Bankruptcy Judge Okays Disputed Bonus Plan for RadioShack Execs

The judge overseeing RadioShack Corp's chapter 11 bankruptcy case yesterday approved a revised $1.5 million bonus plan for eight top executives at the electronics retailer, over the objection of the U.S. Trustee in the case, Reuters reported yesterday. Bankruptcy Judge Brendan Shannon said that while he shared some of the trustee's concerns over the key executive incentive plan, he was convinced the executives would be "up to their elbows" with the sale of 2,000 RadioShack stores. Shannon also said he was impressed the plan's payout had been reduced through negotiations. Acting U.S. Trustee Andrew Vara on Saturday filed an objection to the plan, initially set at $2 million. Vara said it would reward the executives for staying put at RadioShack after reaching the stalking-horse bid for the 2,000 stores. The bid was reached before RadioShack filed for bankruptcy in February. RadioShack said that its executives worked to increase the value of the bid by $30 million during negotiations.

In related news, RadioShack Corp.'s creditors ironed out the final details of a $285 million bankruptcy loan at a court hearing yesterday amid indications that suppliers, landlords and other unsecured creditors will sustain significant damage in the retailer's chapter 11 proceeding, Dow Jones Daily Bankruptcy Review reported today. The Fort Worth, Texas, company filed for bankruptcy on Feb. 5 after a long losing streak. It is selling off and shutting down about half its 4,000-store chain, but hopes to keep the rest in operation, in the hands of new owners. (Subscription required.)

Former Dewey COO Claims No Knowledge of Illegal Finances

The former chief operating officer of Dewey & LeBoeuf, Dennis D'Alessandro, told prosecutors he was unaware of inappropriate accounting at the firm and did not believe his colleagues were doing anything illegal, the New York Law Journal reported today. The disclosure of D'Alessandro's statements turned over to the defense by the Manhattan District Attorney's office comes less than two months before trial is set to begin against three former Dewey leaders: ex-chairman Steven Davis, former executive director Stephen DiCarmine and chief financial officer Joel Sanders. Defense attorneys said that D'Alessandro's statements will be "very helpful" in establishing their clients' innocence. The Dewey defendants face more than 100 charges alleging they caused others at Dewey to make tens of millions of dollars of fraudulent accounting entries, which contributed to the firm's 2012 collapse.

Lehman Settles Lawsuit Against N.Y. Giants

Lehman Brothers and the New York Giants have settled their long-running dispute over a soured interest-rate swap tied to the financing of the football team’s stadium, the Wall Street Journal reported today. Lehman sued Giants Stadium LLC in 2013, claiming it was owed $100 million under the swap. Giants Stadium LLC was set up by the team’s owners, the Mara and Tisch families, to fund the construction of MetLife Stadium. To finance the stadium, the Giants unit issued $650 million in bonds, the bulk of which were underwritten by Lehman. The Giants entered an interest-rate swap agreement with the bank. Lehman offered a lower interest rate to the Giants to beat out Goldman Sachs Group Inc. for the business. But in September 2008, Lehman collapsed, causing it to default on the deal and apparently creating a loss for the Giants. The Giants eventually filed a $301.8 million claim against the investment bank and then sold the claim to Seth Klarman’s Baupost Group hedge fund, a firm which specializes in distressed debt investments. Lehman’s lawsuit alleged that Baupost and Giants Stadium then “devised a plan to ratchet up the pressure on Lehman to settle at an unreasonable level” by nearly doubling the claim against Lehman and its derivatives subsidiary to $585 million. Terms of the settlement, announced in a court filing, weren’t disclosed.

Student Loans can be Discharged (at Least Partially) in Bankruptcy After All

By: Carmella Gubbiotti

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, the United States Bankruptcy Court for the Southern District of Indiana in In re Fecek,[i] partially discharged a substantial portion a debtor’s student loan debt even though the debtor was working full time and earned an income that was above the state median.[ii] In particular, the Fecek court applied section 523(a)(8) of the Bankruptcy Code’s[iii] undue hardship exception to award a partial discharge of student debt in a chapter 7 bankruptcy in which the debtor was actually utilizing her degree in a full time position.[iv] The debtor in Fecek earned professional degrees in both psychology and nursing.[v] As result financing these degrees by taking out student loans, the debtor owed nearly $280,000 to private student loan lenders in addition to almost $65,000 in federal student loan debt. Unfortunately for the debtor, the value of her loans was less than her earing potential and further, the Sallie Mae was unwilling to engage in loss mitigation negotiations.[vi] Faced with an impossible situation, in November 2012, the debtor filed for chapter 7 relief in the Southern District of Indiana. She initiated an adversary proceeding to determine whether she would be eligible for a discharge of her student loans due to undue hardship. The court ultimately found her loans to be partially dischargable.

They’re Rare and They’re Exceptional: Fee Enhancement Authorization by Bankruptcy Courts

By: Adrianna R. Grancio

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Asarco,[i] the Fifth Circuit held that a bankruptcy court did not abuse its discretion in authorizing fee enhancements to two law firms representing a chapter 11 debtor in connection with their remarkably successful fraudulent transfer litigation.[ii] The Fifth Circuit also agreed with the lower court decision in rejecting compensation for the defense of fee applications[iii]. In In re Asarco, Baker Botts L.L.P. (“Baker Botts”) and Jordan, Hyden, Womble, Culbreth & Holzer, P.C. (“Jordan Hyden”) served as debtor’s counsel to the chapter 11 debtor and helped the debtor confirm a plan that paid creditors in full[iv]. In connection with that representation, Baker Botts and Jorden Hyden successfully prosecuted complex fraudulent transfer claims against the debtor’s parent corporation resulting in an unprecedented judgment valued at between $7 and $10 billion.[v] While Baker Botts and Jordan Hyden were compensated pursuant to section 330(a) of the Bankruptcy Code, the bankruptcy court authorized a twenty percent fee enhancement for Baker Botts and a ten percent fee enhancement for Jordan Hyden.[vi] The bankruptcy court based the authorization of the fee enhancements on the “rare and exceptional” performance of the firms in successfully prosecuting a multi-billion dollar fraudulent conveyance action and the fact that the rates charged by Baker Botts were roughly twenty percent below market rate.[vii] On appeal to the district court, the fee enhancements were affirmed.[viii] After the parent corporation appealed again, the Fifth Circuit affirmed the lower court’s authorization of the fee enhancements.[ix] Further, the Fifth Circuit, ruling in line with the Eleventh Circuit[x] held that based on the plain meaning reading of Section 330(a) compensation for the cost counsel or professionals incur in defending fee applications is not permissible.

The Nature of a Parent-Subsidiary Relationship Determines How to Allocate a Refund in a Tax Sharing Agreement

By: Samuel Cushner

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in FDIC v. AmFin Financial Corp.,[i] the Sixth Circuit held that a tax sharing agreement between a bank holding company and its subsidiary was ambiguous as to the ownership of an income tax refund and that the district court erred in refusing to consider extrinsic evidence concerning the parties’ intent as to the ownership of the funds.[ii] In 2009, the bank holding company filed for chapter 11 bankruptcy protection.[iii] As a result, the Office of Thrift Supervision closed the bank holding company’s bank subsidiary and placed it into FDIC receivership.[iv] Later on, the bank holding company filed a consolidated 2008 federal tax return on behalf of itself and its affiliates showing a total net operating loss of $805 million, with the bank subsidiary’s losses accounting for $767 million of that total.[v] After the IRS issued a refund of approximately $195 million to the parent company, the FDIC claimed[vi] that over $170 million of that refund belonged to the bank subsidiary. Finding that the tax sharing agreement was unambiguous, the United States District Court for the Northern District of Ohio concluded that the tax sharing agreement created a debtor-creditor relationship with respect to tax refunds between the parent and its affiliates, including the subsidiary, and thus, the parent owned the refund.[vii] The Sixth Circuit reversed and remanded to the district court to determine whether the tax sharing agreement created either a debtor creditor relationship or a trust or agency relationship under Ohio law with respect to the tax refunds.

Bankruptcy Attorneys Potentially Face Sanctions for Failure to Reasonably Investigate the Accuracy of Bankruptcy Petitions Prior to Filing

By: Nancy Bello

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Parikh,[i] a bankruptcy court imposed sanctions pursuant to Rule 9011 of the Federal Rules of Bankruptcy Procedure against a debtor’s attorney who signed a chapter 7 petition that contained incomplete and incorrect information that was clearly refuted by the debtor’s previous chapter 13 petition.[ii] In Parikh, the debtor initially filed under chapter 13 of the Bankruptcy Code.[iii] Subsequently, the debtor’s chapter 13 case was dismissed for the debtor’s failure to produce documents.[iv] The debtor then filed a second bankruptcy case under chapter 7 of the Bankruptcy Code in order to stop a judgment creditor’s enforcement action in state court.[v] Although the debtor’s chapter 7 attorney could access the chapter 13 petition and schedules on PACER, there were several discrepancies between the information provided in the petition and schedules in the chapter 13 case in comparison to the information contained in the petition and schedules in the chapter 7 case.[vi] For example, the Schedule H to the chapter 13 petition indicated there were co-debtors, while the Schedule H to the chapter 7 petition did not.[vii] Further, the chapter 13 petition reflected monthly payments on the debtor’s first mortgage of $823.73, while the chapter 7 petition reflected a monthly first mortgage payment of $1,700.[viii] In addition, the chapter 7 petition failed to reveal a Citibank bank account, which the debtor disclosed in the chapter 13 petition.[ix] Subsequently, the judgment creditor commenced an adversary proceeding seeking to dismiss the chapter 7 petition as a bad faith filing, or alternatively, to deny the debtor’s discharge.[x] While the bankruptcy court refused to dismiss the case, the court did enter an order denying the debtor’s discharge.[xi] Shortly after the court entered that order, the judgment creditor moved for sanctions against the debtor and the debtor’s attorney pursuant to Rule 9011, § 707(b)(4)(C) and (D), 11 U.S.C. § 105, 28 U.S.C. § 1920, 28 U.S.C. § 1927, and the court’s inherent powers.[xii] The bankruptcy court initially denied the sanctions motion.[xiii] On appeal, however, the district court remanded the matter for further findings.[xiv] On remand, the bankruptcy court found that the debtor’s chapter 7 attorney’s conduct was sanctionable pursuant to Rule 9011(b)(3) as to the attorney and his firm.[xv] The bankruptcy court declined to impose monetary sanction; instead, the court determined that publication of its decision was an appropriate sanction against the chapter 7 attorney and his firm.[xvi]

Uncertainty Remains as to How a Rejected Trademark License Agreement will be Treated in the Eighth Circuit

By: Crystal Lawson

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Interstate Bakeries Corp.,[i] the United States Court of Appeals for the Eighth Circuit recently held that a trademark license agreement was not an executory contract because it was part of a larger, integrated sale agreement that had been substantially performed by both parties.[ii] Accordingly, since the debtor could not reject the agreement, the Eighth Circuit did not determine whether the rejection of a trademark-licensing agreement necessarily terminates the licensee’s rights in the trademark.[iii] In 1996, Interstate Brands Corp (“IBC”), a subsidiary of Interstate Bakeries Corporation (“Interstate Bakeries”), transferred two of its brands and certain related assets to Lewis Brothers Bakeries (“LBB”) pursuant to an antitrust judgment.[iv] In connection with the sale, the parties entered into an asset purchase agreement and a trademark license agreement.[v] In 2004, Interstate Bakeries and eight of its subsidiaries, including IBC, filed for bankruptcy under chapter 11 of the Bankruptcy Code.[vi] After Interstate Bakeries disclosed that it intended to assume the trademark license agreement, LBB commenced an adversary proceeding seeking a declaration that the agreement was not an executory contract under section 365(a) of the Bankruptcy Code and therefore, was not subject to assumption or rejection.[vii] Finding that both parties owed material obligations under the trademark license agreement, the bankruptcy court held that the agreement was executory.[viii] The district court affirmed that decision.[ix] The Eighth Circuit, however, reversed, holding that the trademark license agreement was not executory because it was part of a larger, integrated contract that had been substantially performed.[x]