Benchnotes Oct 1999

Journal Issue:

Oct 1999

Column Name:

Journal Article:

Good Faith Filing

In In re SGL Carbon Corp., 233 B.R. 285 (D. Del. 1999), Chief Judge Joseph J. Farnan Jr. addressed the issue as to whether a chapter 11 case may be dismissed based on the debtor's alleged lack of good faith in filing for bankruptcy solely as a litigation tactic to impede antitrust litigation. The bankruptcy court had denied the motion to dismiss, and on appeal, Chief Justice Farnan held that there was no legal support for the position that the debtor must be insolvent to invoke, in good faith, the protection of the Bankruptcy Code. Further, without finding that actual financial difficulty is a requirement, the court rejected the argument that a chapter 11 filing is only in good faith if the debtor is experiencing financial difficulty. The court addressed the factors that had been enumerated in In re Johns-Manville Corp., 36 B.R. 727 (Bankr. S.D.N.Y. 1984), including 1) whether the debtor was formed for the sole purpose of filing, 2) whether there was there a change in legal form of the debtor in order to file bankruptcy and avoid a foreclosure, 3) whether the debtor had a history of operating in business or of making a profit and 4) whether the debtor had any hope of reorganization. Under the facts of the SGL case, the court found that the debtor was a viable and legitimate company with complex and substantial operations and that it had numerous employees who depend on it for their livelihood and real creditors, all of whom are threatened by the distractions of potential liability of the looming lending. Further, the debtor was not formed as a sham and the court found that the debtor had a legitimate chance of reorganizing successfully. Thus, the court found that there was not grounds for dismissal of the bankruptcy case due to a lack of good faith.

Personal Injury Claims Allowance

In In re Metzner, 233 B.R. 919 (E.D. La. 1999), the court was "confronted with an issue that remains unresolved in wake of the Supreme Court's holding in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d. 598 (1982): what are the limits of bankruptcy court jurisdiction over state law personal injury claims in a bankruptcy proceeding?" A doctor filed for voluntary relief under chapter 7 after allegedly committing medical malpractice. On the motion of the trustee, the bankruptcy court entered an order modifying the stay to allow the alleged malpractice claim to proceed. That court order specifically retained jurisdiction to determine the allowance or disallowance of the personal injury claim against the bankruptcy estate. Subsequently, the trustee filed an objection in bankruptcy court to the claim. The bankruptcy court sustained the objection and "disallowed the claim as prescribed" (barred by limitations). On appeal, the district court noted that no consensus had been reached regarding the effect of the provision in 28 U.S.C. §157(b)(2), which excepts personal injury torts or wrongful death claims from the core jurisdiction of the court. Some courts have construed the statute to mean that while the bankruptcy judges are precluded from hearing proceedings to liquidate or estimate personal injury or wrongful death claims for purposes of determining the distribution attributable to such claimants, the bankruptcy courts may entertain objections to personal injury claims based on state law defenses such as limitations. Other courts have held that because the effect of sustaining an objection based upon a state law limitations or similar defense would effectively liquidate the claim for purposes of distribution, such a proceeding is non-core under the plain language of §157(b)(2)(B). After analyzing the impact of Marathon and finding that the bankruptcy court lacked core jurisdiction of the personal injury claim and the objection to such claim, the court found that the bankruptcy court also lacks non-core "related-to" jurisdiction over the claim and could not disallow the claim based upon state law defenses. The court also rejected the argument that the claimant had consented to bankruptcy court jurisdiction by the filing of a claim, noting that it "is beyond cavil that parties may not consent to the subject matter jurisdiction of federal courts where it is otherwise lacking."

Modifying Discharge Injunction

In In re W.G. Wade Shows Inc., 234 B.R. 185 (Bankr. M.D. Fla. 1999), a pre-petition personal injury claimant moved to reopen a closed chapter 11 case seeking an order modifying the discharge injunction to permit that claimant to establish the debtor's liability solely for purposes of recovering from the insurance carrier. Chief Bankruptcy Judge Alexander L. Paskay entered the order modifying the discharge injunction, and the liability insurer moved for reconsideration. The insurer alleged that it was not given notice of the hearing on the personal injury claimant's motion and not given an opportunity to be heard at the motion, its rights were directly affected by the hearing and thus, it was denied due process of law. Further, the insurance company contended that had it been notified of the hearing, it could have presented evidence showing that the debtor would have incurred expenses if the claimants went forward with their suit. The additional expenses would have been incurred because the debtor was contractually liable to defend itself in the suit and if there was a failure to do so, the insurance contract would be deemed breached and the claim would not be covered. Further, the insurance company claimed that it had a contractual right to have its rights adjudicated. In addition, the insurance company claimed that if the personal injury claimants were permitted to go forward, the discharge injunction would have to be modified to permit the insurance company to seek a declaratory judgment to determine whether the policy covered the debtor for such a claim. The insurance company also contended that the debtor would be a necessary party to such an action and would be required to pay money in defense of the declaratory judgment action. Finally, the insurance company contended that, in any event, the debtor would necessarily incur additional costs because it would have to pay its self-insured retention relating to the claim and also would likely face the increased costs of its premium. In response, the personal injury claimants asserted that 1) the insurance company had no standing to appear at the hearing, and therefore its due process rights were not violated; 2) that the insurance company was attempting to secure a windfall from the debtor's discharge by arguing that its rights to assert coverage defenses necessitates the expenditure of money to defend itself; and 3) permitting the personal injury claimants to continue the personal injury suit would neither prejudice nor cost the debtor anything solely as a result of such litigation going forward. Judge Paskay noted that it is generally agreed that the scope of §524(a) does not affect the liability of an insurer and does not prohibit proceeding against the debtor for the limited purpose of enabling the tort plaintiff to establish liability. Further, the fresh start policy of the Bankruptcy Code is not intended to furnish a shield to third parties such as the insurance company; as such, a result would be "fundamentally and patently unfair and wrong." Finally, the court noted that in Matter of Edgeworth, 993 F.2d 51, 54 (5th Cir. 1993), the Fifth Circuit had flatly rejected the argument that higher insurance premiums would be the result of the plaintiff's recovery from the insurance company but instead noted that any increase in premiums would be the result of the debtor's actions (pre-petition) that made the debtor a greater risk. As a result, Judge Paskay found that there was no denial of due process to the insurance company because it had no due process rights in the motion it was seeking to reconsider, and therefore litigation would go forward. A similar result was reached in In re Doar, 234 B.R. 203 (Bankr. N.D. Ga. 1999) where Bankruptcy Judge Armand David Kahn reopened a bankruptcy case to establish the discharge injunction found in §524 should not prevent creditors from proceeding in state court against the debtor's liability insurance carrier for damages allegedly caused by the debtor in a pre-petition automobile accident, including conducting discovery against the debtor to establish the debtor's liability, which would be a pre-requisite to establishing liability on the part of the liability insurer.

Miscellaneous

In re Nenonen, 232 B.R. 803 (M.D. Fla. 1998) (the Supreme Court has authoritatively construed the phrase "under the plan" to mean "over the life of the plan" for which dicta cannot be ignored, and thus plan payments cannot exceed the life of a chapter 13 plan);
In re Clamp-All Corp., 233 B.R. 198 (Bankr. D. Mass. 1999) (solicitation of a plan is in violation of the Bankruptcy Code and rules resulted in sua sponte equitable subordination of the claims of the soliciting creditors to the claims of all non-insider creditors and a requirement to reimburse the estate for related attorney's fees incurred by the estate in connection with such solicitation);
In re McKibben, 233 B.R. 378 (Bankr. E.D. Tex. 1999) (County Tax Appraisal District and individual board members found personally liable for wrongfully terminating employee as a result of her bankruptcy filing and for depriving her of her rights in violation of 42 U.S.C. §1983, and were jointly and severally liable for $89,812 in damages);
In re Haines, 233 B.R. 480 (Bankr. D. Mont. 1999) (Section 505 affords the debtors an opportunity to seek resolution of tax liabilities allegedly owed to a federally recognized tribe without compliance with the "exhaustion rule," which would mandate that tribal courts be allowed to initially respond to an invocation of their justice prior to any claimant seeking relief in the federal courts);
In re Hurt, 234 B.R. 1 (Bankr. D. N.H. 1999) (chapter 7 could be commenced by an attorney in fact under power of attorney with broad authority over the debtor's financial affairs, including the power to commence and prosecute, defend or settle all actions or proceedings in which the debtor had or might have had any interest or concern);
In re Graves, 234 B.R. 149 (Bankr. M.D. Fla. 1999) (insurance company's attempt to recover by deducting benefit overpayments from remaining payments owing to the debtor was the nature of exercise of right of recoupment and not subject to the automatic stay);
First Union National Bank of Florida v. Harmon, 234 B.R. 667 (D. Md. 1998) (complaint to except debt from discharge for fraud or defalcation while acting in a fiduciary capacity with respect to depository institution could be filed any time, and the court can reopen the chapter 7 case to permit the bank to file its complaint);
In re Technologies International Holdings Inc., 234 B.R. 699 (Bankr. E.D. Ky. 1999) (sovereign immunity is not waived by the filing of a motion to dismiss a chapter 11 debtor's adversary proceeding; as such, a motion is not the functional equivalent of filing a proof of claim);
In re Pryor, 234 B.R. 716 (Bankr. W.D. Tenn. 1999) (Section 523(a)(8) exception to discharge for student loan does not bar discharge of a student loan against a co-maker of the loan);
In re Main Street A/C Inc., 234 B.R. 771 (Bankr. N.D. Cal. 1999) (where the principal purpose of plan was avoidance of securities registration laws, the plan could not be confirmed and the approval of disclosure statement was denied); and
In re Burgess, 234 B.R. 793 (D. Nev. 1999) (county's action seeking to revoke brothel license was an act to "exercise control over" the license and was thus a violation of the automatic stay).

Journal Date:

Friday, October 1, 1999