Benchnotes Oct 2006

Benchnotes Oct 2006

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In In re U.S. Wireless Corp., 333 B.R. 688 (Bankr. D. Del. 2005), the liquidating trust asserted claims of unjust enrichment against an employee based on the failure to reimburse debtor's for payment of tax obligations arising from exercise of stock options. Bankruptcy Judge Peter J. Walsh refused to dismiss the action, finding that the complaint had set forth facts sufficient to support the claims and found it "worth noting that some of the disputed issues may arise from a misunderstanding as to when the taxable events occurred. Neither party addresses this tax law issue. The complaint takes the position that the taxable event occurred...when [the employee] exercised the options. In contrast, [the employee] implicitly takes the position that the taxable events occurred only when he sold the stock, and not at the time he exercised the options. A yet-to-be-presented analysis of the underlying tax laws may sharpen the issues."

Validity of Forum Selection Clauses in Bankruptcy

In In re Access Care Inc., 333 B.R. 706 (Bankr. E.D. Pa. 2005), the debtor brought an adversary proceeding seeking to recover on a breach of contract or quantum meruit theory for services it provided pre- and post-petition. The defendant sought to enforce a forum selection clause in the contract. The parties conceded that the general rule established in M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), for determining the validity and enforcement of forum-selection clauses applies in bankruptcy proceedings. The debtor, however, argued that enforcement would violate the "strong public policy" in favor of centralizing all proceedings in the bankruptcy court where the case is pending. Bankruptcy Judge Stephen Raslavich rejected this argument, finding that even if some of the claims were core, it "would be inefficient for this court to retain jurisdiction over the 'core' claims while transferring the 'related' claims" and transferred the case.

Secured Lender Fees and Expenses Denied

In In re Hedstrom Corp., 333 B.R. 815 (Bankr. N.D. Ill. 2005), Bankruptcy Judge Jack B. Schmetterer addressed an objection to a claim for reimbursement of fees and expenses of the financial advisor to an over-secured creditor. The agreement by the lender to pay the advisor a monthly fee of $125,000 was not approved by the committee, the debtor or the court. The loan agreement provided that the creditor could charge the debtors for all costs related to the liquidation of the debtors' obligations, including "costs and expenses of preserving and protecting" the collateral and "costs and expenses paid or incurred in connection with obtaining payment of the obligations, enforcing the security interests and liens of collateral agent, selling or otherwise realizing upon the collateral." The court found that it was "undisputed" that the lender was entitled to hire the financial advisor to perform certain specified services. At the hearing on the objection, the lender and the advisor offered only oral testimony outlining the work performed and a three-page "summary" describing the work. "Not a single piece of work product arising out of work pertaining to such services was offered in evidence, not any reports, not any analyses, not any compilations of data, not any recommendations. Nothing." The summary was found to be insufficient. The description of services was lumped and vague, which made it "impossible to ascertain the amount of time spent on specific tasks and which tasks were performed." Similarly, there was no evidence presented that compared the services provided in this case to other situations where similar work was performed and billed on a flat fee without accounting for personnel time worked or work product produced, and there was no evidence that the same number of employees was required, which might have allowed the court to determine whether the fees charged were competitive within the market. The court found that since "the flat-fee contract cannot support the application, the application must be entirely denied."

Chapter 15 Mandates Protection of Creditor Interests

While In re Artimm, S.R.L., 335 B.R. 149 (Bankr. C.D. Cal. 2005), was filed as an ancillary proceeding under former §304, the court's decisions regarding approval of a proposed settlement and prosecution of a claim by a U.S. creditor were "informed" by the provisions of new chapter 15. Bankruptcy Judge Samuel L. Bufford noted that under chapter 15, a bankruptcy court would not be required to issue an order recognizing a foreign proceeding as a foreign main proceeding unless the foreign proceeding was pending in the country where the center of the debtor's main interests is located. The consequences of an order recognizing a foreign main proceeding "are substantial," including the application of the automatic stay "in all its details" without the necessity of a court order. Similarly, chapter 15 §§363, 549 and 552 apply to any transfer of an interest of the debtor in property within the territorial jurisdiction of the United States to the same extent that those sections would apply to property of a domestic bankruptcy case. Chapter 15 also requires turnover of U.S. assets to the foreign representative, "provided that the court is satisfied that the interests of creditors in the United States are sufficiently protected." Judge Bufford held that the "provided that" language in §1521(b) is more demanding than the language of §304(c), as §1521(b) appears to make the protection of the interests of creditors in the United States a mandatory condition on the turnover of U.S. assets to a foreign representative. In United States v. J.A. Jones Construction Group LLC, 333 B.R. 637 (E.D.N.Y. 2005), the failure to commence a proceeding for recognition of foreign insolvency under chapter 15 was held to have deprived the district court of the authority to consider a request for stay filed by the Canadian interim receiver.


In re Sabol, 337 B.R. 195 (Bankr. C.D. Ill. 2006) (even under revised UCC and after applying composite document rule, which allows debtor's intent to grant a security interest to be demonstrated by reference to various loan documents, a description of the alleged collateral, absent words actually granting a security interest, fails to meet the minimum requirements of a security interest);

In re Brink, 333 B.R. 560 (Bankr. D. Mass. 2005) (deliberate trespass to intentionally cut down trees that overhung the debtor's property constituted a nondischargeable willful and malicious injury);

In re Casiello, 333 B.R. 571 (Bankr. D. Mass. 2005) (bankruptcy court has jurisdiction to impose sanctions under 28 U.S.C.A. §1927 against any attorney who "unreasonably and vexatiously" multiplies proceedings);

In re Adley, 333 B.R. 587 (Bankr. D. Mass. 2005) (in the context of a motion to approve a settlement between a chapter 7 trustee of bankrupt officer and insurance company, bankruptcy court does not have jurisdiction to enjoin claims by other nondebtor-covered officers and directors against D&O insurance policy);

In re Godios, 333 B.R. 644 (Bankr. W.D.N.Y. 2005) (chapter 7 dismissed as substantial abuse where "hard-working upper-middle class parents" of two high school seniors sought to discharge nearly $60,000 of credit card debt for "the sole and stated purpose of better positioning the family finances in preparation for large, anticipated, discretionary expenditures in providing a college education for the children");

A & L Laboratories Inc. v. Bou-Matic LLC, 429 F.3d 775 (8th Cir. 2005) (purchaser of assets "free and clear" was bound by post-petition trademark license granted by debtor absent specific bankruptcy court order altering or extinguishing such license);

In re Great Point Intermodal LLC, 334 B.R. 359 (Bankr. E.D. Pa. 2005) (pre-judgment interest is recoverable on avoided preferential transfer from the date that the return of the transfer is demanded);

In re Trusted Net Media Holdings LLC, 334 B.R. 470 (Bankr. N.D. Ga. 2005) (efficient administration of the estate mandates that only a chapter 7 trustee may file objections to proofs of claim);

In re Neely, 334 B.R. 863 (S.D. Tex. 2005) ("extreme circumstances" that support denial of motion to convert chapter 7 to chapter 13 must, at a minimum, involve a finding of bad faith);

In re National Century Financial Enterprises Inc., 334 B.R. 907 (Bankr. S.D. Ohio 2005) (bankruptcy court has authority to resolve dispute over contents of record on appeal);

In re Metromedia Fiber Network Inc., 335 B.R. 41 (Bankr. S.D.N.Y. 2005) ("default" in the context of a demand for adequate assurance of future performance context means a failure by the debtor-lessor to perform a legal or contractual duty required of it by the contract, and it is irrelevant whether the lessee had either given notice of default and opportunity to cure or sought damages for pecuniary losses); and

In re Netfax Inc., 335 B.R. 85 (D. Md. 2005) (once appeal was filed to circuit court, district court lost jurisdiction to consider motion for stay pending appeal).

Journal Date: 
Sunday, October 1, 2006