Benchnotes Feb 2001

Benchnotes Feb 2001

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In Gillman v. Continental Airlines Inc., 254 B.R. 93 (D. Del. 1998), in December 1990, the debtor, Continental and its subsidiaries, filed chapter 11 petitions. As part of the plan, and based primarily on creditor committee concerns, the debtors provided for a $5 million settlement fund to settle and enjoin pending and threatened litigation, including any claims against former and present officers and directors. The amount of the settlement was a result of several indemnification agreements between the debtors and the officers and directors. The plan required that the court issue a permanent injunction against pending or future actions against the D&O insurer and/or any of the debtors' former or present officers and directors. Appellants subsequently filed a class action against certain of the debtors' officers and directors, asserting securities fraud. They also appealed from the injunction and asserted three primary arguments: (1) the order and plan violated the limited discharge in §524(e); (2) the order violated the due-process provision of the 14th Amendment of the U.S. Constitution; and (3) the plan violated Fed. R. Civ. P. 23. They also asserted that the bankruptcy court did not have sufficient legal and factual record upon which to grant the injunction. Relying primarily on §105, District Judge Farnan held that bankruptcy courts have the ability to permanently enjoin future lawsuits against non-debtors where such a step is essential to the confirmation of a plan, while recognizing that non-consensual releases of third parties are generally looked upon with disfavor. In light of the evidence that continued litigation (including the extensive discovery that would be part of any litigation) would heavily burden the new corporation, the court found, inter alia, that the permanent injunction of future lawsuits was essential to confirmation and to disturb the plan at this stage would impede the reorganization. Therefore, the court found no compelling reason to modify the plan and rejected the argument that §523(e) prohibits such discharge. The court also found that the 14th Amendment claim failed because the appellants were given adequate notice of the plan. Finally, the court held that the relevant provisions of the plan did not constitute a settlement, but were rather a release and injunction. Thus, Rule 23 did not apply.

Contractor's "Intent to Deceive"

In In re Orsine, 254 B.R. 184 (Bankr. N.D. Ohio 2000), Chief Bankruptcy Judge Richard L. Speer ruled on a complaint to determine dischargeability of debt that arose from the failure of a contractor to install windows. After reciting the facts of the case, the court identified the necessity for determining a debtor's intent to deceive and found that once a contractor accepts money for services, that contractor must take reasonable steps to protect the creditors' interests, and a failure to do so when coupled with the false representations will rise to the level of an intentional deception for purposes of §523(a)(2)(A). In this case, the defendant had contracted to install windows, obtained a 50 percent deposit, failed to order the windows, not used any portion of the deposit in order to obtain the windows and had not taken any other action to safeguard the money plaintiffs had given to the debtor. As a result, the court held that the plaintiffs had met their burden of proof with regard to establishing that representations were made by the debtor with the intent to deceive the creditor. As to the issue of reasonable reliance, the court examined statements in Field v. Mans, 516 U.S. 59 (1995), noting that the parties had dealt with each other formerly on "amicable terms," the down payment was only 50 percent of the project, this down payment was similar to contracts like this, and there was nothing else that would have alerted the plaintiff or any other party to the problems they were to encounter. The court held that the plaintiffs had established the non-dischargeability of the obligation owed by the contractor.

Bid-rigging and "Fraud on the Court"

In In re Clinton Street Food Court, 254 B.R. 523 (Bankr. S.D.N.Y. 2000), Chief Bankruptcy Judge Stuart M. Bernstein considered allegations of bid-rigging that arose after the sale of debtor's assets by a chapter 7 trustee. The trustee asserted fraud, "fraud on the court" and fraudulent concealment. In ruling on the defendant's motion for summary judgment, Judge Bernstein found that the "law of the case" was that §363(n) allegations seeking to set aside the bankruptcy sales orders were subject to and thus barred by the one-year period of limitations established by Fed. R. Civ. P. 60(b)(3). The court then considered the issue of fraud on the court, reviewing in particular Leber-Krebs Inc. v. Capitol Records, 779 F.2d 895 (2nd Cir. 1985). Judge Bernstein identified four basic elements: (1) the defendant's misrepresentation to the court, (2) an action by the court based on the misrepresentation, (3) a lack of an opportunity to discover the misrepresentation by either bringing it to the court's attention or bringing some other timely action against the offending party, and (4) the benefit the defendant derived by inducing the erroneous decision. The court found that in the context of the §12(b) motion before the court, the fraud-on-the-court claim would not be dismissed.

Recovering Proceeds from Pre-petition Check

In re Franklin, 254 B.R. 718 (Bankr. W.D. Tenn. 2000), addressed efforts to recover proceeds from the post-petition presentment of a pre-petition check. Bankruptcy Judge G. Harvey Boswell held that the check qualified as a "negotiable instrument" and that the presentment after the petition date did not violate the automatic stay. The court also held that the bank that was without notice of the debtor's chapter 13 filing was not liable for failing to turnover the entire checking account balance on the petition date to the trustee. Ultimately, the court held that the money received upon presentment of the check could be recovered for the benefit of the bankruptcy estate as the avoidance of an unauthorized post-petition transfer from the debtor's account.

Motion to Dismiss for Failure to Attend §341 Meeting

In In re Rodriguez, 255 B.R. 118 (Bankr. S.D.N.Y. 2000), the chapter 7 trustee moved to dismiss the case based on the debtor's failure to attend the §341 meeting. Bankruptcy Judge Robert E. Gerber held that the relief requested was ineffective and inappropriate to deal with the real issue—the discharge of the debtor where the debtor was not examined. The court took judicial notice that under Fed. R. Evid. 201(1) and (2), the debtor had already been discharged. Under Bankruptcy Rule 4004(a), the trustee had 60 days from the time first set for the §341 meeting to object to the discharge, but did not do so. The trustee could have sought an extension of time to object to discharge, and the failure to attend a §341 examination would have constituted cause for such an extension. However, the time for filing such a motion had already expired. Thus, the court denied the motion to dismiss the case, but authorized and directed the trustee to seek an order authorizing the examination of the debtor pursuant to Bankruptcy Rule 2004. If the debtor ignored the Rule 2004 order, the trustee could request an arrest under Bankruptcy Rule 2005, seek to revoke the discharge under §727(d)(3) and/or seek to dismiss the case as prejudiced under §349(a).


Journal Date: 
Thursday, February 1, 2001