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Benchnotes Sep 2001

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In the last 10 years, the Supreme Court has issued three decisions relating to the admission of expert testimony under Rule 702—Daubert v. Merrell Dow Pharmaceuticals Inc., 509 U.S. 579 (1993); General Electric Co. v. Joiner, 522 U.S. 136 (1997) and Kuhmo Tire Co. v. Carmichael, 526 U.S. 137 (1999). In In re Canvas Specialty Inc., 261 B.R. 12 (Bankr. C.D. Cal. 2001), Bankruptcy Judge Samuel L. Bufford takes the standards set forth in that trio of decisions and applies them in a bankruptcy adversary proceeding context. This opinion provides a good outline for preparing and tendering expert testimony. Initially, advocates must provide evidence for the court to determine (1) the area of expertise of the proposed expert and (2) whether the testimony will assist the trier of fact to understand or determine the facts in issue. In order for the profferred expert testimony to be admitted, evidence must then be presented on the purported expert's qualifications. In addition, there must be a recognized body of knowledge, learning or expertise upon which the witness relies. The court noted that where there is no field of expertise (as with astrology), nobody would qualify as an expert witness. Further, that expertise must be relevant to the determination of facts in issue. Even if these standards are met, the testimony will not be admitted unless the advocate shows that the testimony satisfies three criteria: (1) the testimony must be based on sufficient facts or data; (2) the testimony must be the product of reliable principles and methods; and (3) the proposed expert witness must have applied these principles and methods reliably to the facts of the case. Objections to expert testimony can be based on the allegations that (1) there was not a quantum of facts or data relied upon sufficient to support the expert opinions expressed; (2) the expert was operating under gross misunderstanding of relevant facts; or (3) the expert might not have obtained the right kind of data to support the conclusions. In addition, the expert must use reliable principles and methods and must explain the principles and methods used so that the parties and the court can examine the reliability.

Indemnification Policy Proceeds Are Deemed Property of Estate

In re Equinox Oil Co. Inc., Civil Action No. 00-3502 (E.D. La. June 11, 2001), involved the appeal of a bankruptcy court decision that was the subject of de novo review on the legal question of whether the proceeds of an indemnification policy designed to reimburse for losses owed to third parties were property of the estate. Noting that the Fifth Circuit's earlier decisions offered "guidance," albeit not a definitive answer, District Judge Helen G. Berrigan reviewed and summarized Louisiana World Exposition Inc. v. Federal Insurance Co., 832 F.2d 1391 (5th Cir. 1987) (LWE); In re Edgeworth, 993 F.2d 51 (5th Cir. 1993) and In re Vitek, 51 F.3d 530 (5th Cir. 1995). According to Judge Berrigan, LWE stands for the proposition that where proceeds of liability coverage were directed to officers and directors personally and where LWE's rights limited the indemnification, the insurance proceeds belonged to the officers and directors and were not an asset of the LWE bankruptcy estate. In Edgeworth, since the proceeds of the policy were for the benefit of victims of alleged malpractice and could not be payable to the debtor, the proceeds were not an asset of the estate. In Vitek, the liability policy named directors, officers and Vitek as co-insurers. As both the debtor/corporation and officers/directors had direct coverage, the Fifth Circuit approved a settlement between the estate and carrier without specifically deciding whether all or part of the insurance proceeds belonged to the estate. As it arose in chapter 7, the Vitek court noted that the decision should be of "little or no" value in a chapter 11. While questioning the continuing viability, Judge Berrigan held that even under Edgeworth the proceeds in Equinox would still be an asset of the bankruptcy estate since the policy is clear that proceeds are to be paid to the debtor, as this is an indemnification policy and not a liability policy for the benefit of third parties.

Standing to Pursue Preference Action

In re Together Development Corp., 262 B.R. 586 (Bankr. D. Mass. 2001), involved a preference action brought by an unsecured creditors' committee against principals of the chapter 11 corporate debtor in which the principals sought to dismiss for lack of standing. Prior to the filing of the complaint, the debtor and the committee had entered into a stipulation, the purpose of which was to effectuate permission for the committee to initiate all causes of action on behalf of the debtor prior to the expiration of limitations. No objections were filed, and the bankruptcy court approved that stipulation. There was apparently a "scrivener's error" in that the stipulation omitted a specific grant of authority for the committee to bring avoidance actions. The parties then filed an amended stipulation. The bankruptcy court approved the amended stipulation over the timely objections of the principals. The committee then commenced the adversary proceeding naming the debtor as plaintiff, but signed by committee counsel on the debtor's behalf. The court characterized the complaint as a complaint to avoid and recover preferential transfers. However, the complaint also contained state law claims for breach of fiduciary duty. The bankruptcy court denied the motion to dismiss, holding that the principals were barred from challenging the committee's standing because (1) the defendants failed to object to the original stipulation; (2) the Supreme Court decision of Hartford Underwriter's Insurance Co. v. Union Planters Bank N.A., 530 U.S. 1 (2000), was factually and legally distinguishable; (3) §1109(b) authorized the committee to file the adversary proceeding; and (4) §105(a) and established bankruptcy law supported the committee's actions. The defendants appealed. On remand, Bankruptcy Judge Joel B. Rosenthal noted that the First Circuit had held that objections to a party's standing cannot be waived and that the court must consider a challenged party's standing whenever raised, regardless of whether the challenger failed to make an earlier challenge or the court itself sees standing problems. As a result, the court held that the defendants did not waive their challenge by failing to object to the original stipulation because such an objection cannot be dispositively waived. The court then noted that the central issue on remand was to decide what impact, if any, the Supreme Court's decision in Hartford Underwriters—more commonly known as Hen House—has on the proposition that explicit statutory language confers standing only on "the trustee" to pursue alleged preferential transfers to the debtor's property. After reviewing the cases, the court reached the conclusion that Hen House is not controlling and that the committee was authorized to prosecute such actions pursuant to §§1103(c)(5) and 1109(b), particularly where the committee acts on behalf of and as agents of the debtor and seeks recovery for the debtor's entire estate, not simply the unsecured creditors.

Terminable-at-will Provisions

In In re National Hydro-Vac, 262 B.R. 781 (Bankr. E.D. Ark. 2001), Bankruptcy Judge James G. Mixon addressed issues relating to a bankcard merchant agreement, pursuant to which the debtor was able to charge its customer credit card for services and to obtain immediate payment from the bank. The parties agreed that the agreement was an executory contract, and the bank conceded that the agreement was not a contract to make a loan or extend other accommodations to a debtor. Upon the filing of the bankruptcy petition, the bank had unilaterally exercised its right to terminate as allowed in the agreement, asserting concern over the debtor's financial condition. Since that termination, the debtor had been unable to enter into a new bankcard merchant agreement on the same terms with any other bank or entity offering such a service. Subsequent to the termination, the bank filed a motion for relief from stay and for abandonment so it could exercise its right to terminate under the agreement. The bank argued that the agreement was a personal services contract, which the debtor could not assume. The bank also argued that assumption of the agreement by the debtor would be futile because immediately upon assumption, the bank would exercise its unilateral right to terminate the agreement. Relying on Arkansas law, the court found that the relationship between the two parties was commercial and not based on the provision of personal services rendered by the bank, noting there was no specific individual with whom the debtor contracted to supply this service and that the bank's service was not unique. The bank was equally unsuccessful in arguing that the specific contract provision providing that the agreement was neither transferable nor assignable was sufficient to convert it into a personal services contract. With regard to the futility argument, the court noted that in a common-law context, terminable-at-will provisions do not confer "an unrestricted right to cancel" a contract that is commercial rather than personal in nature. In a commercial contractual relationship, terminable-at-will provisions must be exercised in good faith. In this case, as the debtor was not in default and had no history of chargebacks when the bank terminated the agreement, canceling a contract when the debtor filed bankruptcy at least "raises the inference of bad faith" on the part of the bank. The court denied the motion.

HMO-asserted Administrative Claim Denied

In In re Right Time Food Inc., 262 B.R. 882 (Bankr. M.D. Fla. 2001), Bankruptcy Judge Jerry A. Funk addressed an administrative claim asserted by the health maintenance corporation (HMO) through which a chapter 11 debtor provided health insurance benefits to employees. The HMO agreement provided that the debtor was required to give 45 day's notice prior to terminating. During that notice period, the debtor had no employees. However, the HMO asserted an administrative claim for premiums that came due before the contract had been rejected. The court denied the request for an administrative claim, finding that the bankruptcy estate did not obtain "any concrete benefit" from the expenses relating to the post-petition premiums under the facts of this case.


Journal Date: 
Saturday, September 1, 2001

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