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Bankruptcy Litigation

Not My Client, Not My Problem. The Duty of Attorney’s to Non-Clients

By: Daniel Quinn

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In 2015, the United States Court of Appeals for the Second Circuit found that attorneys at May-er Brown, LLP had inadvertently terminated certain liens granted by General Motors (“GM”) in favor of J.P. Morgan Chase (“JPM”). GM repaid the Term Loan agreement in full in accordance with the bankruptcy court order and therefore made the retirement plaintiffs and Term Loan members subject to clawback provisions under the Bankruptcy Code. The members of the Term Loan agreement and retirement plaintiffs filed a lawsuit against Mayer Brown, the law firm responsible for the erroneous termination of liens, for negligent mis-representation and legal malpractice in the United States District Court of Northern District of Illinois.

Actual Knowledge Bars Section 546(e) Safe Harbor Defense

By: Amanda Tersigni

St. John’s Law Student

American Bankruptcy Institute Law Review, Staff

Section 546(e) of the Bankruptcy Code generally provides that a trustee may not avoid a “settlement payment” as a preference or a fraudulent transfer.[1] This so-called “safe harbor,” a defense to a trustee’s avoidance power, is designed to avoid uncertainty in security trading and to prevent an ultimate instability in the financial markets.[2] The United States Bankruptcy Court for the Southern District of New York in Picard v. Avellino (In re Bernard L. Madoff Inv. Sec. LLC),[3] held that having actual knowledge of fraudulent nature of a security trading precluded a defendant from using the safe harbor defense under Section 546(e).[4]

A Lender’s Knowledge of Alleged Breaches of Fiduciary Duties Shall Not Be Imputed Upon Debtors in a Statute of Limitations Analysis

By: Michael DeRosa

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re AMC Investors, the Delaware district court reversed the bankruptcy court’s decision granting summary judgment in favor of the officers and directors (“Defendants”) of AMC (the “Company”) because[1] Eugenia, as the sole creditor, was granted derivative standing to file suit on behalf of the debtors of the Company.[2] Prior to being granted derivative standing, Eugenia filed involuntary Chapter 7 bankruptcy petitions against the debtors in 2009.[3] The bankruptcy court granted summary judgment in favor of the Defendants, which was based on Defendants’ statute of limitation defense.[4] Eugenia and the debtors (collectively “Plaintiffs”) appealed summary judgment.

Pension Plans Retired by Section 1114

By: Courtney Sokol

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

The United States District Court for the Northern District of Alabama concluded that the Bankruptcy Court had jurisdiction and entered a valid termination of retirement benefits pursuant to Section 1114 of the Bankruptcy Code. Moreover, according to the District Court, it lacked jurisdiction to consider the Appellants' challenge to the Bankruptcy Court's ruling under Section 1113. This ruling allows Walter Energy to terminate collective bargaining agreements with retired coal miners, thus allowing the “necessary” reorganization of the debtor. This suit was an effort by the United Mine Workers of America to preserve the retirement plans of covered employees of Walter Energy, a company seeking a protection under Chapter 11 of the Bankruptcy Code. If retiree benefits were not halted the proposed purchaser, Warrior Met Coal, LLC, would not acquire Walter Energy.

Collateral Attacks May Allow Bankruptcy Courts to Alter Final Sale Orders

By: Louis Calabro

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Gunboat International, Ltd., the United States Bankruptcy Court for the Eastern District of North Carolina held that section 363(m) of the Bankruptcy Code, which protects a good faith purchaser from a reversal of an order approving a bankruptcy sale, does not apply to collateral attacks on a sale order under Rule 60(b) of the Federal Rules of Civil Procedure (“FRCP”). In that case, the debtor (“Gunboat”) agreed to sell its interest in the G4—a sailboat model contracted between the debtor and two other parties—to a third party, Mr. Chen. In the months leading up to the sale, The Holland Companies (“Holland”), which held certain exclusive manufacturing and usage rights over the G4, had been negotiating a settlement agreement to buy Gunboat’s interest in the G4. Holland was unaware that Gunboat was attempting to sell Gunboat’s G4 interest to another party and believed that Gunboat should have given Holland an opportunity to make a more attractive offer considering its ongoing attempts to settle. On May 10, 2016, the court entered a final order approving the sale of Gunboat’s assets to Mr. Chen. Thereafter, Holland filed a motion to reconsider with the court under FRCP Rule 60(b); in response, Gunboat opposed.

Debt Collection ‘versus’ Consumer Protection: The FDCPA’s Prohibition on False Representations of the Legal Status of Debt

By: Sara Brenner

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Murray, chapter 13 debtor Mr. Murray (the “Debtor”), sued Revenue Management Corporation and Donald Aucoin (“Defendants”), alleging that the Defendants violated the Fair Debt Collection Practices Act (“FDCPA”). According to the Debtor, the Defendants violated the FDCPA by including a reference to purported litigation as reflected by inserting a “vs” between the Defendants’ names and the Debtor in the top right corner of a collection letter.

New Developments of Federal Preemption under Section 303 of the Bankruptcy Code

By: J. Tyler Mills

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Rosenberg v. DVI Receivables XVII, LLC,[1] the Third Circuit held that an award of damages after the dismissal of an involuntary bankruptcy petition does not preempt a claim for tortious interference with contracts and business relationships brought against the petitioning creditors by injured parties who were not alleged debtors.[2] There, an involuntary bankruptcy was brought against a medical imaging company to collect on leases for various medical equipment.[3] After the involuntary petition was dismissed, the alleged debtor sued the petitioning creditors to recover costs, attorney’s fees, and damages for the bad faith filing of the involuntary petition.[4] The jury awarded the alleged debtor $1.1 million in compensatory damages and $5 million in punitive damages.[5]

Governmental Agency Can’t Foot the Bill by Repackaging its Claim

By: Christina Mavrikis

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re G-I Holdings, Inc., the Third Circuit of the United States Court of Appeals held that the New York City Housing Authority (“NYCHA”) could not repackage a claim for damages against G-I Holdings in the hopes of circumventing federal bankruptcy laws. G-I Holdings was the manufacturer of housing products containing asbestos. Seeking to address its asbestos related lawsuits, in 2001 GI Holdings filed for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of New Jersey. NYCHA submitted a half-billion dollar claim against G-I Holdings for property damage to its buildings. NYCHA claimed it had to take expensive measures to remove asbestos containing material from its buildings. In 2009, the District Court for the District of New Jersey and the Bankruptcy Court for the District of New Jersey approved a plan of reorganization that disposed all covered claims against G-I Holdings. Claim holders were also barred from reasserting such claims.

Foreign Representatives May Bypass The Recognition Process To Recover Debtor’s Property

By: Parm Partik Singh

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

A “foreign representative” must obtain recognition of a foreign proceeding pursuant to 11 U.S.C. § 1517 prior to “apply[ing] directly to a court in the United States.” However, under § 1509(f), a foreign representative may sue in a United States court “to collect or recover a claim which is the property of the debtor” without first obtaining recognition. The scope of this exception, however, is unclear.

Creditor’s Failure to File a Proof of Claim Inexcusable Where Potential Danger of Prejudice to Debtor Exists

By: Meghan Lombardo

St. John’s Law Student

American Bankruptcy Institute Law Review Staffer

In In re LMM Sports Management, the United States Bankruptcy Appellate Panel for the Ninth Circuit affirmed the bankruptcy court’s order disallowing a proof of claim that was filed after the deadline to file claims against the debtor (the “Bar Date”). Appellant Warner Angle Hallam Jackson & Formancek, P.L.C. (“Warner Angle”) filed proofs of claim against the debtor, LMM Sports Management (“LMM” or the “Debtor”), for legal services it provided to LLM in connection with a prior state court case against Your Source Pacific Fund I, LLP (“Your Source”). In the state court case, Your Source obtained a $2.4 million judgment against LLM, causing LLM to file for protection under chapter 11 of the Bankruptcy Code. The bankruptcy court approved a settlement of $1.5 million between Your Source and LMM (represented by new counsel) in full satisfaction of Your Source’s judgment over Warner Angle’s objection. Warner Angle filed its objection to the Debtor’s settlement motion on February 17, 2015, two months after the bar date. One day later, Warner Angle belatedly filed the proofs of claim. The Debtor objected to the proofs of claim arguing they should be disallowed as untimely. Warner Angle then filed a cross-motion requesting that the proofs be treated as timely because the late filing was the result of excusable neglect. The bankruptcy court rejected Warner Angle’s excusable neglect argument and denied its reconsideration motion. Warner Angle appealed.

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