Benchnotes Sep 2006

Benchnotes Sep 2006

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Equitable Remand of Core Proceedings under 28 U.S.C. §1452(b)

In Patterson v. Morris, 337 B.R. 82 (E.D. La. 2006), a putative class action was filed inter alia by debtors and subsequently removed by the defendants. The action alleged fraud, misrepresentation, conversion and unjust enrichment by overstating court costs, sheriff's fees, attorneys' fees and other expenses in collection and foreclosure proceedings instituted by defendants. Conceding subject-matter jurisdiction under title 11, the plaintiffs sought remand, and District Judge Duval reviewed the applicable standards for removal, noting that the court could mandatorily abstain pursuant 28 U.S.C. §1334(c)(2), exercise discretionary abstention under 28 U.S.C. §1334(c)(1) and/or equitably remand under 28 U.S.C. §1452(b), depending on whether the claims were "related to," "arising in" or "arising under." After a review of the factors that shape such a determination, the court held that the removed action was a core proceeding. As such, mandatory abstention did not apply. However, after applying the factors set out in Browning v. Navarro, 743 F.2d 1069 (5th Cir. 1984), the court held that the matter should be equitably remanded pursuant to §1452(b).

Negative Notice Effective

In In re Pierce, 435 F.3d 891 (8th Cir. 2006), the debtor filed an objection to a claim, and attached a "negative notice" advising the claimants that if they did not respond to the objection and request a hearing within 30 days, the bankruptcy court could enter an order without further hearing. The claimants failed to timely respond, and the bankruptcy court entered an order disallowing part of the claim. The claimant appealed, arguing that the bankruptcy court was required to hold an evidentiary hearing. The ruling was affirmed by the district court. The court of appeals also held that §102(1)(B)(i) permits negative notice to satisfy the requirement of "notice and hearing" contained in §502(b): "Negative notices shift the burden to an interested party to evaluate his claim and the debtor's objections, and then make his own decision whether an evidentiary hearing would be helpful, and request a hearing, if desired."

"Corporate Waste" Claims OK'd as Theory for Officer Liability

Bankruptcy Judge S. Martin Teel addressed the usual claims asserted by post-confirmation liquidation or litigation trusts against the debtor's former officers, directors and professionals in In re Greater Southeast Community Hospital Corp., 333 B.R. 506 (Bankr. D. D.C. 2005). Applying District of Columbia law, Judge Teel refused to recognize a separate cause of action for "deepening insolvency." He also held that the strong-arm provisions of §544(6) do not prevent applications of defenses against claims that were "inherited" from the debtor. Applying Delaware law, Judge Teel then addressed the "corporate waste" theory of fiduciary breach, noting that it refers to an exchange of corporate assets for consideration so disproportionately small as to lie beyond the range at which any reasonable person might be willing to trade. Such claims are extremely difficult to prove "because if it can be said that ordinary businessmen might differ on the sufficiency of the terms, then the court must validate the transaction." Further, any substantial consideration received by the corporation "suffices to defeat a claim [of corporate waste]." The trustee alleged that the chapter 11 debtor and/or its subsidiaries approved lending agreements with high interest rates, used charter flight services instead of commercial airlines, overpaid the debtor's president and vice president, and generally spent too much on corporate overhead. Judge Teel held that the lack of allegations that the debtor received little consideration, that the counterparties failed to perform or that the transactions were made solely to benefit the individual directors and officers mandated dismissal for failure to state a claim. However, allegations that the debtor forgave millions of dollars of loans to executives without any consideration and that "at least some of these loans were made to finance highly personal interests such as a divorce settlement, the purchase of a house and a car," and a gift to a university did state a claim for corporate waste under Delaware law. The court then applied the test to claims against specific officers. In determining whether a corporate officer breached his or her fiduciary duty under Delaware law, unless a specific officer had the power to control the specific complained-of activity, "that officer could not be held responsible for those actions. Simply being an officer of the company was not enough." As a result, allegations that the CEO failed to follow proper business practices in good faith by using charter planes provided by businesses in which he was a majority owner, instead of traveling on commercial carriers, even though he knew commercial flights were cheaper, and without obtaining approval from debtor's board of directors, stated a claim for breach of an officer's fiduciary duties of care and loyalty. Finally, applying District of Columbia malpractice and Arizona fraudulent-transfer laws, the court held that a claim that the debtors' law firms engaged in practices, including preparation of negligent or fraudulent opinion letters, that benefited only debtors' lenders and, indirectly, the law firms, that the debtors paid the law firms for these services, and that the debtors did not receive reasonably equivalent value for these payments, stated a claim for avoidance of the allegedly fraudulent transfers.


In re UAL Corp., 428 F.3d 677 (7th Cir. 2005) (possibility that future collective bargaining agreement might provide for new pension plan was not grounds for denial of approval of agreement with PBGC, which created moratorium on establishment of "follow on" plan);

In re Carroll's Wine Co., 332 B.R. 874 (Bankr. N.D. Iowa 2005) (Rooker-Feldman doctrine was cause to lift stay to allow continuance of post-judgment litigation as it was inappropriate for bankruptcy court to revisit issues that would have effect of undermining state court judgment);

In re National Audit Defense Network, 332 B.R. 896 (Bankr. D. Nev. 2005) (avoidance of transfer to immediate transferee is not a pre-requisite to pursuit of an avoidance action against mediate transferee, adopting the holding of In re International Admin. Serv. Inc., 408 F.3d 689 (11th Cir. 2005));

In re Gillis, 333 B.R. 1 (Bankr. D. Mass. 2005) ("regular income" requirement does not mandate that debtor's income, by itself, must be sufficient to fully fund chapter 13 plan);

In re Smith, 333 B.R. 94 (Bankr. M.D.N.C. 2005) (plan that depended on increased cost-based reimbursements from Medicare was not feasible where projections were not consistent with either pre-petition or post-petition operations);

Savoy IBP 8 Ltd. v. Nucentrix Broadband Networks, 333 B.R. 114 (N.D. Tex. 2005) (admission of post-petition settlement negotiations as evidence to support claim of estoppel was not abuse of discretion or violation of Fed. R. Evid. 408);

In re Premiere Network Services Inc., 333 B.R. 126 (Bankr. N.D. Tex. 2005) (pre-petition attorney was not an "insider");

In re Premiere Network Services Inc., 333 B.R. 130 (Bankr. N.D. Tex. 2005) (possible setoff rights and status as competitor of debtor constituted "good business reasons" for separate classification);

In re Cahill, 428 F.3d 536 (5th Cir. 2005) (bankruptcy court's reliance upon lodestar amount for typical chapter 13 contained in a General Order in calculating reasonable fee award was not abuse of discretion);

In re Thomas, 428 F.3d 735 (8th Cir. 2005) (§362(b)(11) exception applied where state law authorized post-petition presentment of pre-petition checks);

In re Royal, 137 Fed. Appx. 537 (4th Cir. 2005) (proposed eminent domain taking was not enforcement of governmental unit's police or regulatory power where there was no allegation that debtor had violated any statute or regulation);

In re Flag Telecom Holdings Ltd., 337 B.R. 15 (S.D.N.Y. 2005) (doctrine of legal impossibility is an affirmative defense that may not be raised by court sua sponte);

In re Hayes Lemmerz Intern. Inc., 337 B.R. 49 (Bankr. D. Del. 2006) (weekly transfers made after supplier sent letter requiring debtor to make future payments in advance and by wire transfer and to bring overdue invoices current in order to receive further shipments were not made in the ordinary course of business, although prior practice was to make weekly payments);

Skiba v. Gould, 337 B.R. 71 (W.D. Pa. 2005) (§541(c)(2) only applies to a debtor's beneficial interest in a trust and does not encompass pension plans other than trusts);

Mirant Corp. v. The Southern Co., 337 B.R. 107 (N.D. Tex. 2006) (presumption in favor of maintaining venue of adversary proceeding in forum where bankruptcy case is pending is "significantly weakened, if not entirely destroyed, once debtor's reorganization plan is confirmed."); and

In re N.C.P. Marketing Group Inc., 337 B.R. 230 (D. Nev. 2005) (as trademarks are personal and non-assignable without consent of the licensor, trademarks cannot be assumed).

Bankruptcy Code: 
Journal Date: 
Friday, September 1, 2006