Bankruptcy Litigation

Class Certification Continues to Gum up the Works in Bankruptcy

By: Ravi Vohra

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Motors Liquidation Co.,[1] the Bankruptcy Court for the Southern District of New York denied class certification and disallowed two claims set forth by the Botha and Balintulo claimants (the “Class Claimants”) in General Motors Corporation’s (“Old GM”) chapter 11 proceedings.[2] The claims were first raised prepetition by 26 named plaintiffs in two separate groups, (the “Botha Plaintiffs” and the “Balintulo Plaintiffs”), and Old GM filed its chapter 11 petition while those lawsuits were still pending. The Botha and Balintulo Plaintiffs then filed proofs of claims against the corporation.[3] More than twelve months after Old GM’s chapter 11 filing and eight months after the bar date, the Class Claimants moved for class treatment and Old GM then sought to disallow the class claims.[4] Among other things, the Class Claimants alleged that they were victims of the infamous system of apartheid in South Africa, and that Old GM aided and abetted the perpetrators of the apartheid system in causing the claimants’ injuries.[5]

Discrimination in Hiring Based on Past Bankruptcy Filing Allowed for Private Employers

By: Megan Quail

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in Myers v. Toojay’s Management Corp., the Court of Appeals for the Eleventh Circuit affirmed a grant of summary judgment in favor of a private business, Toojay’s, which refused to hire Myers, an individual, based on his prior bankruptcy filing.[1] Myers claimed that Toojay’s violated section 525(b) of the Bankruptcy Code (“the Code”) by declining to offer him employment after learning of his previously filed bankruptcy petition.[2] The court held that section 525(b) of the Code does not prohibit a private employer from declining to hire a person because of a prior bankruptcy despite prohibiting public employers from taking similar action.[3] As the third United States Court of Appeals ruling of its kind, Myers v. Toojay’s Management Corp. continues the trend of protecting the discriminatory hiring decisions of private employers.[4]

In re Lothian Oil Inc. Non-Insider Debt Claims May Be Recharacterized as Equity Under Section 502(b)(1)

 By: David N. Saponara

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Shifting the focus of the recharacterization analysis, the Fifth Circuit in Grossman v. Lothian Oil Inc. (In re Lothian Oil Inc.)[1] relied upon section 502(b)(1) and applicable state law, instead of the section 105(a) federal equitable power, to recharacterize non-insider debt claims as equity.[2] In doing so, the Fifth Circuit reversed the district court, which had found that recharacterization is only appropriate where the claimant is a corporate insider.[3]   

State Law Determines Alter Ego Liability for Federal Tax Liens

By: Edmund Witter
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently, in Old West Annuity and Life Ins. Co. v. Apollo Group,[1] the Eleventh Circuit held state law determined whether a court could pierce the corporate veil under an alter ego theory even though a federal tax lien was at issue.[2] In reaching its holding, the Eleventh Circuit had to decide whether the need for a uniform federal rule justified applying the federal common law standard for determining alter ego liability or if state law applied by virtue of a state’s right to define property interests of its taxpayers.[3]

Establishing Recognition of a Foreign Bankruptcy Proceeding Under Chapter 15

By: Jessica L. Macrina
St. John's Law Student
American Bankruptcy Institute Law Review Staff

In a case of first impression, Lavie v. Ran (In re Ran),[1] the Fifth Circuit denied a petition for recognition of an Israeli bankruptcy proceeding under chapter 15 for an individual debtor because it did not qualify as a foreign main or foreign nonmain proceeding.[2] The court found that neither the debtor’s “center of main interest” (“COMI”) nor his “establishment” were located in Israel at the time the petition for recognition was filed.[3] Relying on both the statute’s use of the present tense and chapter 15’s stated purpose of international uniformity, the Fifth Circuit explicitly rejected the argument that the debtor’s COMI and his establishment should be determined at the time the foreign bankruptcy was filed.[4] 

Attorney-Client Privilege Transfers to the Post-Bankruptcy Company

By: Melissa Schneer
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently, in Schleicher v. Wendt,[1] a magistrate judge in Indiana held that a post-bankruptcy corporation that acquired substantially all of the pre-bankruptcy corporation’s business operations also acquired the pre-bankruptcy corporation’s right to assert the attorney-client privilege.[2]  Schleicher involved a class action against four senior executives of a company, based on that company’s decline into bankruptcy.[3] The plaintiffs moved to compel the production of thousands of documents, which the defendants claimed were privileged.[4] The parties disputed whether control of the pre-bankruptcy corporation (the “Old Corporation”) — accompanied by the attorney-client privilege — passed through bankruptcy proceedings to the post-bankruptcy corporation (the “New Corporation”).[5] The court noted that the reorganized New Corporation did not obtain every aspect of the Old Corporation.[6] The New Corporation, however, did acquire all of the Old Corporation’s assets, sources of revenue and expense, and management as part of the reorganization.[7] As a result, the court opined that the New Corporation essentially gained control over the Old Corporation’s business operations.[8] Consequently, the court held that the New Corporation acquired the Old Corporation’s right to assert the attorney-client privilege.[9]

Limiting Creditors Rights SECs Authority to Prevent Involuntary Bankruptcy Petitions in SEC v. Byers

By: Mark Sicari
St. John's Law Student
American Bankruptcy Institute Law Review Staff

In S.E.C. v. Byers[1], the Second Circuit determined that the district court had the equitable authority to enter an anti-litigation injunction that prohibited creditors from filing an involuntary bankruptcy petition against a debtor that is in an SEC receivership.[2] Responding to a $250 million Ponzi scheme perpetrated by the debtor companies, the SEC requested immediate injunctive relief from the district court.[3] The court appointed a receiver and entered an anti-litigation injunction.[4] Specifically, the injunction prevented creditors from filing an involuntary bankruptcy petition.[5] The Second Circuit affirmed the injunction, explaining that the district court’s equitable powers enabled it to keep the receivership assets out of bankruptcy.[6]

Foreign Avoidance Action May Be Asserted in U.S. Chapter 15 Case

By: Shintaro Kitayama
St. John's Law Student
American Bankruptcy Institute Law Review Staff

In a case of first impression, the Fifth Circuit, in Condor Insurance Limited v. Petroquest Resources, Inc. (In re Condor Insurance Limited),[1]held that foreign representatives in a chapter 15 proceeding can assert an avoidance action under foreign law in a United States bankruptcy court.[2] The case was initiated when a foreign insurance company’s creditors filed a winding up petition, which is similar to a U.S. chapter 7 proceeding, in Nevis, [3] a small Caribbean island that is part of the Federation of Saint Kitts and Nevis. The Nevis liquidators filed a chapter 15 bankruptcy proceeding in Mississippi and sought to recover the assets under Nevis avoidance law. [4]  The Fifth Circuit held that section 1521(a)(7) allows a U.S. bankruptcy court to offer avoidance relief under foreign law.[5]

Definition of Partner in Bankruptcy Reorganization Plan Controls Subordination of Claims Not Definitions under State Law

By: Jason L. Gould
St. John's Law Student
American Bankruptcy Institute Law Review Staff

The Seventh Circuit, in In re Altheimer & Gray,[1] held that the meaning of “partner” in a bankruptcy proceeding would be determined in accordance with the terms of the plan of reorganization, not state partnership law.[2] Altheimer & Gray filed for bankruptcy in 2003.[3] According to his contract, Mark Berens was a “Non-Unit Partner,”[4] meaning he possessed no interest in the firm’s profit-share and held no voting power, unlike the “Unit Partners.”[5] Altheimer & Gray’s reorganization plan subordinated the claims of both “Non-Unit Partners” and “Unit Partners” to those of its other creditors.[6] Berens argued that he was not a partner under the statutory definition of Illinois’ Uniform Partnership Act, and therefore, should not have his $300,000 claim subordinated.[7] Without looking to state law, the court relied on 11 U.S.C. § 1141(a), which states, “the provisions of a confirmed plan bind the debtor [and any other such entity under the plan] . . . whether or not the claim . . . is impaired under the plan.”[8]

Objection Use it or Lose it after Final Fee Order

By: David Wohlstadter
St. John's Law Student
American Bankruptcy Institute Law Review Staff

In AASI Creditor Liquidating Trust v. Raymond James & Associates, Inc. (In re All American Semiconductor, Inc.),[1] a bankruptcy court held that res judicata barred creditors from objecting to a final fee order because the creditors had notice of the prior hearing regarding the fee application and should have objected to the specific fees then.  The liquidating trustee challenged pre-petition fees paid to a financial advisor for his efforts to sell various assets owned by the debtor.[2]  The bankruptcy court overruled the trustee’s objection because the creditor’s committee and United States Trustee had already objected unsuccessfully during the final fee hearing.[3]

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