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Business Reorganization

Section 365 of the Bankruptcy Code Preempts Florida Dealer Statutes

By: Andrew Ziemianski

St. Johns Law Student

American Bankruptcy Institute Staff

 

In In re American Suzuki Motor Corp., the United States Bankruptcy Court for the Central District of California recently held that Florida’s dealer statute’s provisions providing a method for measuring damages after the rejection of a car dealership agreement, passed to protect local car dealerships, were impliedly preempted by section 365 of the Bankruptcy Code.[1] The debtor, a wholesaler of Suzuki cars, filed for chapter 11 bankruptcy in order to restructure its automotive division.[2] During the course of the bankruptcy case, the debtor rejected a dealership agreement it had with a Florida dealership.[3] The dealership then filed a rejection damages claim alleging damages that were calculated under the Florida Motor Vehicle Licenses Act,[4] which provided for statutory damages that were greater than the dealership’s damages would have been under common law contract damages principles, as well as treble damages and attorney’s fees.[5] The debtor objected to the dealership’s claim, arguing, among other things, that the Florida law was preempted by the Bankruptcy Code.[6] The court opined that the assessment of damages provided for in the Florida Motor Vehicle Licenses Act ran contrary to the policy of section 365, which allows debtors to reject a burdensome executory contract.[7] As such, the court held that Florida law was preempted.  Therefore, the court refused to calculate the dealership’s damages under the Florida law and instead applied common law contract damage principles when determining the amount of the dealership’s claim.[8]

Ongoing Civil Litigation Does Not Defeat Chapter 11 Plan Feasibility

By: Kaitlin Fitzgibbon

St. John’s Law Student
 
American Bankruptcy Institute Law Review Staff
 
 
In In re RCS Capital Development,[1] the Bankruptcy Appellate Panel of the Ninth Circuit Court of Appeals affirmed the bankruptcy court’s finding that the debtor’s, RCS Capital Development (“RCS”), chapter 11 plan was feasible notwithstanding ongoing civil litigation between RCS and potential creditor ABC Learning (“ABC”).[2]  RCS filed its chapter 11 case, while it was simultaneously involved in two lawsuits[3] against ABC.  Ultimately, as a result of these actions, RCS had an enforceable claim against ABC for $57 million, and ABC had an enforceable claim against RCS for $41 million.[4]  In its proposed chapter 11 plan, RCS explained that it intended to use the $57 million as a setoff to pay ABC the full amount of its claim.[5]  However, the plan did not include a provision that accounted for the possibility that an appeal of the Nevada civil suit might result in ABC obtaining a judgment against RCS, thereby negating RCS’s right to setoff.[6]  Nevertheless, the BAP found that RCS’s plan was feasible, even though it did not factor in the possibility of an unfavorable appeal.

Article III Standing to Object to a Companys Bankruptcy Reorganization Plan

By: James Scahill

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

Adhering to the constitutional limits on a particular party’s standing to object, the Third Circuit in In re W.R. Grace & Co. affirmed the district court’s ruling and held that Garlock Sealing Technologies, LLC, (“Garlock”), did not have standing to object to W.R. Grace & Co.’s (“Grace”) proposed chapter 11 plan of reorganization.[1] Grace filed for chapter 11 bankruptcy protection after being threatened by numerous asbestos-related personal injury lawsuits.[2]  Since Garlock often purchased materials from Grace, the two companies were named as co-defendants in thousands of personal injury lawsuits.[3]  Garlock objected to Grace’s reorganization plan, alleging that as a former, current, and potential co-defendant, it had suffered injury because its contribution rights would be denied under the plan.[4]  But, the Third Circuit ruled that those future claims were insufficient to establish Article III standing because they were entirely speculative.  In particular, the court found that Garlock failed to introduce any evidence that it ever sought contribution from Grace, implied Grace in any claim, or suffered any judgment that would have entitled Garlock to assert contribution or setoff rights.[5]  Moreover, the court noted that Garlock had not even filed a claim in Grace’s bankruptcy case.[6]  The Third Circuit opined that for Garlock to have standing to assert contribution claims, the plaintiffs must either win or settle their cases, thereby giving rise to a contribution claim against Grace. Instead, the court noted that Garlock’s alleged injury was contingent on plaintiff verdicts or settlements, which made it more conjectural or hypothetical than actual or imminent, especially given that no such contribution claims had ever been asserted notwithstanding the thousands of ongoing cases involving Grace and Garlock.[7]

Establishing the Requirements Necessary in order to Enforce Setoff in Bankruptcy Proceedings

By:  Maria Ehlinger

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

Affirming the ruling in the Unites States Bankruptcy Court for the District of Arizona, The United States Bankruptcy Appellate Panel of the Ninth Circuit, in In re RCS Capital Development, LLC, held that a debtor may setoff pre-petition claims against post-petition obligations that it owes because section 558 of the Bankruptcy Code does not contain any restrictive language confining setoffs to pre-petition obligation.[1] The court found that the setoff was valid because all of the requirements of section 558 were met. Specifically, the court found that it was a valid setoff under Nevada law because there was mutuality of claims, debts, and parties, and each party had an enforceable debt against the other.[2] The issue arose after ABC Developmental Learning Centers (U.S.A.), Inc. (“ABC”) filed a proof of claim in the jointly administered chapter 11 bankruptcy cases of RCS Capital Development, LLC (“RCS”) and ACCP LLC (“ACCP”). ABC’s claim was based on an ongoing Nevada lawsuit against ACCP and RCS.[3] RCS objected to ABC’s proof of claim and then moved for summary judgment, arguing that RCS was entitled to set off the post-petition debt it owed to ABC, arising out of the Nevada action, against a debt ABC owed to RCS arising from a separate pre-petition Arizona judgment for breach of contract.[4]  The bankruptcy court granted RCS’s motion, finding that the requirements for setoff were met.[5] On appeal, the BAP affirmed the bankruptcy court and held that the setoff was valid.[6]

In re Vitro Fifth Circuit Declines to Enforce Mexican Plan of Reorganization and Crafts New Framework for Foreign Debtor Relief

By: Maurizio Anglani

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In a matter of first impression, the Court of Appeals for the Fifth Circuit refused to enforce a foreign debtor’s plan of reorganization because it discharged debts of the debtor’s non-debtor subsidiaries.[1] In 2003, Vitro S.A.B. de CV (“Vitro”), a Mexican corporation, issued various notes totaling more than $1 billion. Most of Vitro’s direct and indirect subsidiaries, including its U.S. subsidiaries, guaranteed the notes.[2] Before the notes became due, Vitro initiated an insolvency proceeding in Mexico.[3] However, many of Vitro’s U.S. subsidiaries did not participate in the insolvency proceedings.[4] In February 2012, the Mexican court approved Vitro’s reorganization plan.[5] The Mexican plan purported to extinguish the guarantees of Vitro’s debt by Vitro’s U.S. subsidiaries.[6] Vitro’s representatives then sought to recognize and enforce releases granted in the foreign case, but the Bankruptcy Court for the Northern District of Texas denied relief, holding that non-consensual, non-debtor releases are “manifestly contrary” to U.S. public policy.[7]  

Creditor Committees Concurrent Investigation Did Not Vitiate Need for Independent Examiner

By: Brendan A. Bertoli

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

The Bankruptcy Court for the Southern District of New York held that courts have discretion to appoint an independent examiner in cases where the debtor’s fixed debts exceed five million dollars, but the facts of In re Residential Capital, LLC[1] warranted appointment.[2] Berkshire Hathaway (“Berkshire”), joined by the Trustee, sought the appointment of an independent examiner to investigate certain pre-petition transactions between the debtor, GMAC, Ally and Cerebus Capital.[3] Berkshire claimed that appointment was mandatory pursuant to section 1104(c)(2) of the Bankruptcy Code.[4] The Official Committee of Unsecured Creditors (“the Committee”) objected to appointment, arguing that its own investigation obviated the need for an independent examiner.[5] The court held that appointment was not mandatory because section 1104(c)’s mandatory language is qualified by the phrase “as is appropriate.”[6] However, the court held that the Committee’s concurrent investigation, by itself, was not enough to render an independent examiner’s appointment inappropriate.[7]

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