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Benchnotes Mar 2006

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Westmoreland Human Opportunities Inc. v. Walsh, 327 B.R. 561 (W.D. Pa. 2005), addressed the issue of whether a member of a creditors' committee has a fiduciary obligation to other committee members "in connection with a transaction involving property that falls outside of the debtor's bankruptcy estate." The debtor and Westmoreland were both nonprofit corporations operating various community and social services programs. Due to the debtor's financial difficulties, it entered into an agreement with Westmoreland to provide management services to the debtor. While serving in this capacity, Westmoreland "learned the intimate details" of the debtor's operations, including the specifics of a grant agreement with HUD. For reasons that were not clear, the relationship between Westmoreland and the debtor was short-lived, and Westmoreland was left with a general unsecured claim. Westmoreland was appointed to the committee, but withdrew amid accusations of a conflict of interest when it became apparent that Westmoreland was sharing confidential information with third parties that had interests adverse to the debtor's other unsecured creditors. Through various machinations, Westmoreland was designated as the successor to the HUD grant without the knowledge of the committee. In earlier proceedings, it was held that the HUD grant was not an asset of the estate. "To self-deal with assets of the debtor that are not part of the bankruptcy estate, the status of which can affect the amount of recovery of unsecured creditors because of the potential of adding members to the class of unsecured creditors as well as having the potential to prevent an increase of the assets of the estate, clearly affects the estate and the interests of unsecured creditors." Relying on Krafsur v. UOP, 196 B.R. 58 (Bankr. W.D. Tex. 1996), District Judge Gibson rejected the lower court's adoption "of a fiduciary duty entirely identical to the fiduciary duty required of a corporate director and officer" the requirements "of notice and opportunity to object must be given by a committee member to all of its fellow committee members when it seeks to deal with nonestate property of the debtor where the dealings with such property could impact in any manner, negatively or positively, upon the recovery of the creditors in bankruptcy... Should dealings with the non-estate property clearly have no potentiality to affect the recovery of creditors, approval of the committee and the court may be unnecessary while notice to the committee would appear to still be required in order for the disinterested committee members to conduct their own analysis of the effect of the interested member's actions."

Class Proofs of Claim Filed Too Late

In re Ephedra Products Liability Litigation, 329 B.R. 1 (S.D.N.Y. 2005), involved a determination of the allowance of a class proof of claim. For a variety of reasons, the issue of whether the pre-petition class actions should be "allowed" to be asserted pursuant to a class proof of claim was not presented until after the disclosure statement had been approved and the plan sent out for voting. The district court expunged the claims, finding that allowing the claims at that juncture of the case would "wholly disrupt and undercut the expeditious execution" of the plan. The district court, while noting that the Supreme Court has not addressed the issue, elected to follow the approach taken in In re American Reserve Corp., 840 F.2d 487 (7th Cir. 1988), which gives discretion to allow class claims after the bankruptcy court first decides under Rule 9014 whether to apply Fed. R. Civ. P. Rule 23. "Although the Bankruptcy Code and Rules give no express guidance for the court's exercise of this discretion, a pervasive theme is avoiding undue delay in the administration of the case...since class litigation is inherently more time-consuming than the expedited bankruptcy procedure for resolving contested matters, class litigation would have to be commenced at the earliest possible time to have a chance of being completed in the same time frame as the other matters that must be resolved before distributing the estate." District Judge Rakoff rejected the argument that there is no need to seek a determination under Rule 9014 until an objection to the claim is filed. "If—and only if—the court decides to apply Rule 23 does it then determine whether the requirements of Rule 23 are satisfied." In the alternative, the district court held that even if the class claimants had made a prompt Rule 9014 motion or were somehow excused from doing so, and even if the court applied the requirements of Rule 23, the class claims failed to meet those requirements.

Attorney's Fees Not Properly Charged to Co-Owner

In re Flynn, 418 F.3d 1005 (9th Cir. 2005), involved a sale by a chapter 7 trustee of property that was owned jointly and severally by the debtor and his nondebtor mother. The trustee sought to require the co-owner to pay a pro rata share of attorney's fees incurred by the trustee in connection with the sale. Section 363(j) provides that the trustee shall distribute "the proceeds of such sale, less the costs and expenses, not including any compensation of the trustee, of such sale...." The court found that the attorney's fees were incurred for preservation and disposition of property of the estate, which is a "matter squarely within the duties of a chapter 7 bankruptcy trustee," and thus, unlike attorney's fees that could be charged under state law, such fees would not be charged to a co-owner under §363(j).


  • In re Worldcom Inc., 325 B.R. 511 (Bankr. S.D.N.Y. 2005) (preference actions filed against debtor were void as filed in violation of the automatic stay and cause did not exist to retroactively lift or annul the stay);
  • In re Big O Movers and Storage Inc., 326 B.R. 434 (Bankr. N.D. Ill. 2005) (claim was not discharged by confirmation order, since creditor, whose claim was known by the debtor, was not scheduled by the debtor and did not receive notice of claim bar date);
  • In re Waccamaw's Homeplace, 325 B.R. 524 (Bankr. D. Del. 2005) (internally prepared operating reports and financial disclosure statement filed with SEC were insufficient to rebut statutory presumption of insolvency in preference action);
  • In re Consolidated FGH Liquidating Trust, 325 B.R. 564 (Bankr. S.D. Miss. 2005) (Rule 12(b)(6) motion filed by the IRS asserting a failure to state a claim was granted where the consolidated tax returns for the years in question were filed by the nondebtor parent corporation—the proper party to seek refunds—and not the debtors or their successors, which were merely former affiliates of the parent);
  • In re Holman, 325 B.R. 569 (E.D. Ky. 2005) (allegation that debtor was fiduciary of ERISA-qualified plan did not establish mandatory withdrawal of the reference in a proceeding to deny a discharge for "fraud or defalcation while acting in a fiduciary capacity");
  • Government of Rwanda v. Johnson, 409 F.3d 368 (D.C. Cir. 2005) (attorney who agreed to lobby for government also became that government's agent and, as attorney and agent, owed the nation a fiduciary duty);
  • In re ELRS Loss Mitigation LLC, 325 B.R. 604 (Bankr. N.D. Okla. 2005) (de minimus creditor who joins involuntary petition after filing may be jointly and severally liable for debtor's attorney fees and costs if petition is dismissed);
  • In re Moltech Power Systems Inc., 326 B.R. 179 (Bankr. N.D. Fla. 2005) (manufacture of unshipped specialty goods did not constitute "new value," as the mere production, without delivery, of the goods did not confer a benefit on the debtor, nor enhance or replenish the estate);
  • In re Ramba Inc., 416 F.3d 394 (5th Cir. 2005) (dismissal of involuntary petition in exchange for payment on antecedent debt did not constitute "new value");
  • In re American Bridge Products Inc., 328 B.R. 274 (Bankr. D. Mass. 2005) (under Massachusetts law, chapter 7 trustee can assert claims against state court receiver for gross negligence and breach of fiduciary duty arising out of alleged wasting and abandonment of valuable assets and in failing to take control of other assets);
  • Rahl v. Bande, 328 B.R. 387 (S.D.N.Y. 2005) (plan that transferred to litigation trust all claims "against the debtors' current or former directors and officers" did not give trustee standing to assert claims against third parties, who allegedly aided and abetted current or former officers or directors in breaching their fiduciary duties);
  • In re Brown, 328 B.R. 556 (Bankr. N.D. Cal. 2005) (attorney that electronically filed amended chapter 13 plan with debtor's permission, but without obtaining a "fresh" signature, violated Rule 9011, as the local rule deemed an electronic filing to be a certification that the document in question bearing the debtor's signature was in counsel's possession, if such a signature was required prior to the advent of electronic filing); and
  • In re Hopkins, 328 B.R. 575 (Bankr. D. Utah 2005) (an officer of a secured lender is qualified to render an opinion, following foreclosure, as to value of the real property collateral without reference to appraisals).
  • Journal Date: 
    Wednesday, March 1, 2006

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