The following case summaries appear in the Collier Bankruptcy Case Update, which is published by Matthew Bender & Company Inc., one of the LEXIS Publishing Companies.

May 26, 2003

CASES IN THIS ISSUE
(scroll down to read the full summary)

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3d Cir.

§ 502(c) Case management order issued to allow orderly estimation of asbestos claims against debtor, including limiting estimation hearing to cancer claimants.
In re USG Corp. (Bankr. D. Del.)

Collier Bankruptcy Case Summaries

Statute of limitations was equitably tolled with respect to debtor’s action against golf equipment company and its supplier previously dismissed by bankruptcy court without prejudice. Bankr. S.D.N.Y. PROCEDURAL POSTURE: Plaintiff was one of a family of debtors under a chapter 11 bankruptcy. The debtor sued defendants, a golf equipment company and its subsidiary, pursuant to 11 U.S.C. § 546(a) to recover certain transfers. The defendants moved to dismiss alleging that the statute of limitations had expired. The debtor previously filed this action against the defendants, within the statute of limitations, which the bankruptcy court dismissed without prejudice. OVERVIEW: The bankruptcy court determined that equitable tolling applied. The debtor did not sit on its rights. In its first action, the debtor commenced a timely preference action against the defendants. The bankruptcy court dismissed the debtor’s first action because of improper joinder under Fed. R. Civ. P. 20(a). The defendants thus knew that the debtor intended to pursue the claims, and were not prejudiced by the need to defend the adversary proceeding instead of the first action. The defect in the debtor’s first complaint was not a fatal one. Dismissing the defendants from the first action without prejudice was effectively a severance under Fed. R. Civ. P. 21 that granted the debtor the right to file a new, separate action. Moreover, since the statute of limitations had already run after the first action was dismissed, the dismissal without prejudice implied that the new complaint would relate back to the date of the original complaint. Finally, the defendants did not contest the dismissal without prejudice, and even drafted and submitted the order to the bankruptcy court dismissing the claims without prejudice. Family Golf Ctrs., Inc. v. Acushnet Co. (In re Randall’s Island Family Golf Ctrs., Inc.), 2003 Bankr. LEXIS 64, 288 B.R. 701 (Bankr. S.D.N.Y. February 3, 2003) (Bernstein, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised: 5:546.02 [back to top]

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Insolvency of debtor prohibited payment of dividends to preferred stockholders and dividends paid were subject to recovery by trustee. Bankr. S.D.N.Y. PROCEDURAL POSTURE: Plaintiff chapter 7 trustee filed an adversary action against defendant debtor, seeking to avoid and recover actual and constructive fraudulent transfers allegedly made by defendant holding company. Defendant insurance company and financial company moved for judgment on the pleadings or for summary judgment. OVERVIEW: At issue was whether an insolvent corporation could pay dividends to its preferred stockholders. The trustee alleged that the holding company paid the dividends with the actual intent to hinder, delay, and defraud its creditors. The trustee’s claims based on actual fraud failed to pass muster; he pleaded only legal conclusions and did not, as Fed. R. Civ. P. 9(b) required, allege facts that gave rise to a strong inference of fraudulent intent. Thus, the insurance company and financial company were entitled to judgment on the pleadings as to those claims. Those companies defendant against the constructive fraud claim on grounds that they were contractually entitled to the payment of dividends under the holding company’s charter or by virtue of contract. The court, however, concluded that even if they were contractually entitled to such payment, the holding company’s insolvency would have prohibited it from performing that contract and rendered any dividends paid subject to recovery by the trustee. An insolvent holding company’s unlawful repurchase of stock or the payment of dividends did not trigger an enforceable obligation to pay additional unlawful dividends. Pereira v. Equitable Life Ins. Soc’y of the U.S. (In re Trace Int’l Holdings, Inc.), 2003 Bankr. LEXIS 63, 289 B.R. 548 (Bankr. S.D.N.Y. January 29, 2003) (Bernstein, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 5:548.01 [back to top]

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Law firm approved as counsel for committee of unsecured creditors made full disclosure and structured finance transactions that predated representation were not grounds for disqualification. S.D.N.Y. PROCEDURAL POSTURE: Debtors filed voluntary petitions for relief under chapter 11. The bankruptcy court approved appellee law firm as counsel for the committee of unsecured creditors. Appellant creditor later objected to the law firm’s monthly fee statement and moved to disqualify the law firm as counsel for the committee. The bankruptcy court denied the motion. The creditor appealed the decision. OVERVIEW: The creditor had standing to bring the appeal because as an unsecured creditor, it would have been directly and pecuniarily affected if the law firm’s interests were adverse to the committee’s interests and if the law firm had failed to disclose its relationships. The bankruptcy court’s order denying the disqualification motion was a final, appealable order as a footnote related to the law firm’s future involvement did not suggest that the bankruptcy court would have reconsidered its decision on the disqualification motion. Moreover, the creditor’s failure to name the committee as an appellee did not warrant dismissal as it had named itself as required under Fed. R. Bankr. P. 8001(a). On the merits, the law firm’s disclosures complied with Fed. R. Bankr. P. 2014 as they fully disclosed the relevant facts concerning its relationships and its relevant connections to potential parties. The law firm had not violated 11 U.S.C. § 1103(b) as its alleged adverse interests relating to structured finance transactions pre-dated the firm’s representation of the committee. The law firm also satisfied 11 U.S.C. § 101(14) because it was disinterested and did not hold an adverse interest. Exco Res., Inc. v. Milbank, Tweed, Hadley & McCloy, LLP (In re Enron Corp.), 2003 U.S. Dist. LEXIS 1442, — B.R. — (S.D.N.Y. January 28, 2003) (Jones, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1103.04 [back to top]

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State law breach of contract action purchased by plaintiff from creditor was subject to mandatory abstention. W.D.N.Y. PROCEDURAL POSTURE: Plaintiff filed a complaint in state court, alleging nine causes of action against defendant based primarily on allegations of breach of contract. In its complaint, plaintiff alleged that, through the bankruptcy court, it purchased all of another corporation’s surviving claims and causes of action. Plaintiff filed a motion to remand or abstain, and defendant filed a cross-motion to transfer venue to the Southern District of New York. OVERVIEW: The court held that it had jurisdiction under 28 U.S.C. § 1334(b) since a determination that plaintiff concealed assets, as defendant alleged, could have a “conceivable effect” on the bankruptcy proceeding. The court then held that remand was required pursuant to the mandatory abstention provision of 28 U.S.C. § 1334(c)(2). The court found that the plaintiff met all six criteria for remanding a case, including: (1) the fact that plaintiff filed the motion for remand and abstention as its first response to defendant’s notice of removal; (2) the suit was based on state law claims, primarily sounding in breach of contract; (3) the action did not arise under the Bankruptcy Code; (4) the sole basis of jurisdiction was section 1334; (5) the case had been commenced in state court; and (6) the state action was capable of being timely adjudicated. In addition to mandatory abstention, the court also found that it should abstain under section 1334(c)(1), as the sale of the assets to plaintiff was made free and clear of any lien from the bankruptcy. Furthermore, the only issues pending for adjudication by the state court involved state law contract issues. Technology Outsource Solutions, LLC v. ENI Tech., Inc., 2003 U.S. Dist. LEXIS 1475, — B.R. — (W.D.N.Y. January 23, 2003) (Siragusa, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 1:3.05[2] [back to top]

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Case management order issued to allow orderly estimation of asbestos claims against debtor, including limiting estimation hearing to cancer claimants. Bankr. D. Del. PROCEDURAL POSTURE: Debtors were various entities filing under chapter 11 entities and the cases were jointly administered. The debtors filed for certain case management initiatives related towards estimation hearings of the approximately 190,000 asbestos personal injury claims pending pursuant to 11 U.S.C. § 502(c). The debtors sought to challenge the validity of the claims in an estimation hearing. OVERVIEW: The debtors asserted that that they had substantive defenses to many of the current and future asbestos claims. The asbestos claimants’ committee rejected the debtors’ request for a merits-based estimation hearing for valid claimants only as unnecessary and unduly burdensome. The committee asserted that an estimation of the debtors’ present and future asbestos liability could be made on the basis of prepetition settlements and the litigation history of asbestos-related personal injury claims and lawsuits. The debtors argued that a large number of claimants were actual “unimpaired” claimants that had no valid claims. The court decided to excluded the unimpaired claimants and have a cancer-only bar date in order to process claims. The court intended to later conduct an estimation hearing under 11 U.S.C. § 502(c). The court established the medical criteria for cancer and the related claim form to be used. In re USG Corp., 2003 Bankr. LEXIS 420, 290 B.R. 223 (Bankr. D. Del. February 19, 2003) (Wolin, D.J.).

Collier on Bankruptcy, 15th Ed. Revised 4:502.04 [back to top]

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Retention of financial advisor approved, provided indemnification agreement modified to exclude contractual disputes with debtor and breaches of duty of loyalty. Bankr. D. Md. PROCEDURAL POSTURE: Debtors filed for bankruptcy under chapter 11. Debtors sought to retain a financial advisor to assist in its reorganization. The issue for the bankruptcy court was what, if any, indemnification provision was a reasonable term of employment. OVERVIEW: The financial advisor’s indemnification agreement provided for indemnification for bad faith. This constituted an unacceptable expansion of debtors’ indemnification obligation beyond that initially requested and beyond acceptable bounds of public policy. The indemnification agreement was worded so broadly as arguably to require indemnification for contractual disputes with debtors. Contractual disputes needed to be expressly excluded from the scope of the indemnification agreement. Further, the terms of the engagement agreement were unclear. The list of financial advisory services to be provided were followed by a disclaimer that seemed to undercut what the financial advisor agreed to do. The disclaimer provided that the financial advisor had no responsibility for designing any initiatives to improve debtors’ operating profitability, cash management, or liquidity. This was not an acceptable disclaimer. There was no affirmative recognition that the indemnity provision did not cover breaches by the financial advisor of its duties of loyalty, including the avoidance of conflicts of interest and its obligation to be disinterested, and of care. In re Baltimore Emergency Servs. II, LLC, 2003 Bankr. LEXIS 426, — B.R. — (Bankr. D. Md. March 6, 2003) (Derby, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 3:328.02 [back to top]

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Plan classifying claims arising from consigned goods separately from general unsecured claims confirmed due to sound business rationale. Bankr. N.D. Tex. PROCEDURAL POSTURE: The debtor filed a chapter 11 petition. The creditors obtained relief from the automatic stay and repossessed their remaining collateral. The creditors objected to the debtor’s chapter 11 plan of reorganization where the plan proposed to distinguish between the types of unsecured creditors. OVERVIEW: The debtor’s proposed plan separately classified creditors whose claims arose from consigned goods and general unsecured claims, to which the creditors objected, even where both classes of creditors were unsecured creditors. The court found that the debtor presented a good business reason for the separate classification and treatment of consignment creditors from the claims of the general unsecured creditors. The plan did not release any third parties. The court found that the debtor’s success or failure during reorganization depended on the efforts, reputation, and dedication of a third-party/guarantor. The debtor would survive and the creditors would receive payment under the plan only if the third party was allowed to conduct the debtor’s business without distraction. The court found that the debtor and the third party had an identity of interest such that the creditors’ prosecution of the claims or attempted collection of any judgments against the third party would be equal to prosecuting and/or seeking collection from the debtor. In re Bernhard Steiner Pianos USA, Inc., 2002 Bankr. LEXIS 1616, 292 B.R. 109 (Bankr. N.D. Tex. December 17, 2002) (Hale, B.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1123.02[6] [back to top]

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Bankruptcy court recommended that district court confirm plan including issuance of discharges, releases and injunctions protecting debtor, reorganized debtor and personal injury trust. Bankr. N.D. Tex. PROCEDURAL POSTURE: The district court referred to the bankruptcy court the matter of holding a confirmation hearing and directed the bankruptcy court to make a recommendation relative to the entry of a confirmation order and supplemental injunction under 11 U.S.C. § 524(g) in a chapter 11 case. OVERVIEW: This bankruptcy action involved asbestos claims against debtor. The court concluded that debtor satisfied its burden of producing evidence that the plan complied with 11 U.S.C. §§ 1129(a), (b), 524(g). The court concluded that the district court had inherent constitutional and statutory authority to issue and enter the discharges, releases, and injunctions contained in the plan and confirmation order. The releases, discharges, and injunctions were an integral part of the plan and were fair, equitable, reasonable, and in the best interests of debtor and its estate, the reorganized debtor, a bodily injury trust, and holders of claims, demands, and interests. The court concluded that 11 U.S.C. §§ 103(a), 524(g)(1)(A), (3)(A), (4)(B) justified the inclusion of debtor, the reorganized debtor, and the bodily injury trust within the protection of the supplemental injunction, explaining that a chapter 11 debtor was the primary beneficiary of a section 524(g) injunction. Further, the inclusion of certain related parties, including debtor’s representatives, subsidiaries, and affiliates, and the creditors’ committee was a logical extension of that protection. In re Asbestos Claims Mgmt. Corp., 2003 Bankr. LEXIS 429, — B.R. — (Bankr. N.D. Tex. May 6, 2003) (Felsenthal, C.B.J.).

Collier on Bankruptcy, 15th Ed. Revised 7:1129.03 [back to top]

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Suits claiming injuries from exposure to toxic chemicals in mattresses sold by debtor were appropriately stayed and referred to alternative dispute resolution by bankruptcy court. 6th Cir. PROCEDURAL POSTURE: Appellant individuals sought to lift a stay imposed by the bankruptcy court so that they could proceed directly in state court and argued that the stay should never have been imposed. The bankruptcy court denied this motion, and the District Court for the Southern District of Ohio affirmed. Appellants challenged the decision of the district court and appellee debtors opposed the appeal. OVERVIEW: Claiming that they had suffered injuries as a result of exposure to toxic chemicals in a mattress that they had obtained from debtors, the individuals filed suit against the department stores and the stores’ subsidiary companies in state court. The department stores – the debtors in the present case – filed for bankruptcy protection. Later that year, having determined that no global settlement of the claims against the debtors was imminent, the bankruptcy court lifted the automatic stay on all pending litigation. The individuals argued that the bankruptcy court had lacked the power to send their claims to alternative dispute resolution. However, the appellate court held that the restriction at issue was minimal, as it affected not the ability to enforce private rights, but only the timing of that enforcement. Granting bankruptcy courts this power protected the court’s ability to administer the estate efficiently and other creditors’ ability to satisfy their claims. Thus, the appellate court concluded that the power to stay other pending litigation involving the debtors or the estate was within the bankruptcy court’s constitutional jurisdiction. Spierer v. Federated Dep’t Stores, Inc. (In re Federated Dep’t Stores, Inc.), 2003 U.S. App. LEXIS 9194, — B.R. — (6th Cir. May 14, 2003) (Moore, C.J.).

Collier on Bankruptcy, 15t