U.S. COURT OF APPEALS FOR THE THIRD CIRCUIT
WHERE AN AGENCY RELATIONSHIP EXISTS, “ACTUAL NOTICE” UNDER FED. R. CIV. P. 15(c) IS SATISFIED AS TO THE PRINCIPAL IF THE AGENT RECEIVED NOTICE OF THE INSTITUTION OF THE ACTION
A COURT MAY RELY ON NON-TAX RELATED AUTHORITIES TO DETERMINE THE MEANING OF UNDEFINED TERMS IN A TAX STATUTE
THE ONE-YEAR EXTENSION OF THE STATUTE OF LIMITATIONS UNDER SECTION 546 OF THE BANKRUPTCY CODE IS NOT TRIGGERED UPON THE APPOINTMENT OF AN INTERIM TRUSTEE UNDER SECTION 701 OF THE BANKRUPTCY CODE
ALLOWANCE OF A CLAIM BARS A SUBSEQUENT RECHARACTERIZATION ACTION AND A RELEASE BARS AN EQUITABLE SUBORDINATION ACTION
THIRD CIRCUIT APPLIES ITS HOLDING IN IN RE MONTGOMERY WARD TO PERSONAL PROPERTY LEASES
MARKET CAPITALIZATION IS AN ACCEPTABLE METHOD OF VALUING A DEBTOR’S BUSINESS FOR PURPOSES OF DETERMINING WHETHER A TRANSACTION IS A FRAUDULENT CONVEYANCE
U.S. DISTRICT COURT FOR THE DISTRICT OF DELAWARE
WHERE A PLAN CLEARLY REQUIRES DISTRIBUTIONS OF SURPLUS AMOUNTS IN CLAIM RESERVES, FAILURE TO DISTRIBUTE THE SURPLUS CONSTITUTES AN IMPERMISSIBLE PLAN MODIFICATION UNDER SECTION 1127 OF THE CODE
AN ARBITRATION CLAUSE IN A REJECTED EXECUTORY CONTRACT SURVIVES REJECTION AND MAY BE ENFORCED
U.S. BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE
IN DETERMINING A DEBTOR’S ENTERPRISE VALUE, THE COURT HAS DISCRETION TO (I) ACCEPT THE EXPERTS’ OPINIONS, (II) MAKE ADJUSTMENTS BASED ON ERRORS OR INCONSISTENCIES WITH THE OPINIONS, (III) WEIGH THE OPINIONS BASED ON CREDIBILITY, AND (IV) MAKE ADJUSTMENTS FOR EVENTS OCCURRING AFTER THE OPINIONS WERE RENDERED
SECTION 546(c)(1) OF THE BANKRUPTCY CODE, AS AMENDED, LIMITS A SELLER’S RIGHT TO RECLAIM GOODS THAT ARE SUBJECT TO A SECURED LENDER’S LIEN ON THE SAME GOODS; AN UNSECURED CREDITOR LACKS THE ABILITY TO INVOKE THE DOCTRINE OF MARSHALLING
NON-PETITIONING CREDITORS ARE NOT ENTITLED TO ATTORNEY’S FEES UNDER SECTIONS 105(a) OR 303(i) OF THE BANKRUPTCY CODE
DOCTRINE OF IN PARI DELICTO BARRED CAUSES OF ACTION BROUGHT BY A CHAPTER 7 TRUSTEE
WHERE THERE IS A BONA FIDE DISPUTE WHETHER SOMETHING REPRESENTS PROPERTY OF THE ESTATE, A TURNOVER ACTION FAILS TO STATE A CLAIM UPON WHICH RELIEF MAY BE GRANTED AND SHOULD BE DISMISSED
U.S. COURT OF APPEALS FOR THE THIRD CIRCUIT
WHERE AN AGENCY RELATIONSHIP EXISTS, “ACTUAL NOTICE” UNDER FED. R. CIV. P. 15(c) IS SATISFIED AS TO THE PRINCIPAL IF THE AGENT RECEIVED NOTICE OF THE INSTITUTION OF THE ACTION
Buchanan v. Reliance Ins. Co. (In re Color Tile, Inc.), 475 F.3d 508 (3d Cir. Jan. 26, 2007) (Smith, J.)
In 1998, the committee commenced a fraudulent conveyance action against the Depository Trust Company (“DTC”), an agent of various “participating” or “depository” banks that act as conduits (or agents) for others (collectively, the “Principals”). DTC was properly served with the complaint. The committee’s successor later amended the complaint to add a Principal. The Principal moved to dismiss the amended complaint and argued that the complaint did not relate back because Federal Rule of Civil Procedure 15(c) (“Rule 15(c)”) was not satisfied, and the statute of limitations had expired. The District Court dismissed the amended complaint because the Principal never examined or physically received the complaint, i.e., never received “actual notice.”
The Third Circuit reversed, holding that the District Court’s interpretation of actual notice was too narrow because the relationship between DTC, the participating bank, and the Principal was governed by agency law. Under general principles of agency, knowledge of an agent imputes knowledge to the principal, regardless of whether the principal has actual knowledge. Moreover, if DTC (a sub-agent) had an obligation to notify the participating bank (the agent) of the complaint, the agent is deemed to have knowledge of it. Therefore, the Principal is also deemed to have knowledge of the complaint.
Because the question remained whether DTC had an obligation to forward the complaint to the participating bank, the Third Circuit remanded for further proceedings.
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A COURT MAY RELY ON NON-TAX RELATED AUTHORITIES TO DETERMINE THE MEANING OF UNDEFINED TERMS IN A TAX STATUTE
In re Valley Media, Inc., 2007 U.S. App. LEXIS 4189 (3d Cir. Feb. 23, 2007) (Barry, J.) (NOT PRECEDENTIAL)
Massachusetts filed a proof of claim in the debtor’s bankruptcy case based on unpaid sales tax allegedly due as a result of “deliveries” to Massachusetts customers from the debtor’s California location. The debtor objected to the claim and argued that because (i) the statute does not define “delivery,” (ii) the sales tax statute relates to the sale of goods and delivery is a term of art that is defined in Article 2 of the Uniform Commercial Code (“UCC”), and (iii) all deliveries were F.O.B. the debtor’s California location, the debtor did not deliver products to Massachusetts residents. Thus, the debtor argued that it was neither required to collect, nor liable for, sales tax. Massachusetts argued that, although “delivery” is not defined, the statute is not ambiguous and the court should defer to the State’s interpretation, rather than look to the UCC to interpret “delivery.”
The Third Circuit disagreed with Massachusetts and held that “delivery” is a term with a well-defined meaning and a common usage in the context of sales of goods. Therefore, the Bankruptcy Court did not err in relying on the UCC to determine the meaning of “delivery.” Because the goods where shipped F.O.B. the debtor’s location in California, under the UCC, the goods were “delivered” in California and no sales tax was due.
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THE ONE-YEAR EXTENSION OF THE STATUTE OF LIMITATIONS UNDER SECTION 546 OF THE BANKRUPTCY CODE IS NOT TRIGGERED UPON THE APPOINTMENT OF AN INTERIM TRUSTEE UNDER SECTION 701 OF THE BANKRUPTCY CODE
Singer v. Kimberly Clark Corp. (In re Am. Pad & Paper Co.), 2007 U.S. App. LEXIS 4792 (3d Cir. Mar. 2, 2007) (Sloviter, J.)
Shortly before the two-year anniversary of the order for relief, which was entered after the petition date because an involuntary petition was filed, the committee moved for the appointment of a chapter 7 trustee. Eleven days before the two-year anniversary of the order for relief, an interim trustee was appointed pursuant to section 701 of the Bankruptcy Code. Approximately one month after the two-year anniversary, a permanent chapter 7 trustee was elected pursuant to section 702 of the Bankruptcy Code.
Within one year after both the appointment of the interim trustee and the permanent trustee, the permanent trustee filed over 150 avoidance actions. Many of the defendants moved to dismiss the complaints as untimely, and argued that the one-year extension of the statute of limitations was not triggered because the election of the permanent trustee occurred after the two year anniversary of the order for relief. The trustee argued that, notwithstanding the omission of section 701 from the statutory language of section 546, the one-year extension of the statute of limitations was triggered upon appointment of the interim trustee.
The Bankruptcy Court dismissed the actions as time barred, and the District Court affirmed. In affirming the lower court decisions, the Third Circuit agreed with the defendants and held that the appointment of an interim trustee under section 701 of the Bankruptcy Code does not trigger the one-year extension. The Court found that the language of the statute clearly and unambiguously omitted a reference to section 701 of the Bankruptcy Code in the list of relevant statutory sections, and the Court declined to read a reference to section 701 into the text of section 546.
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ALLOWANCE OF A CLAIM BARS A SUBSEQUENT RECHARACTERIZATION ACTION AND A RELEASE BARS AN EQUITABLE SUBORDINATION ACTION
In re Insilco Techs., Inc., 2007 U.S. App. LEXIS 6409 (3d Cir. Mar. 6, 2007) (Ambro, J.)
Before a plan was filed, the debtor and various constituencies entered into and the Bankruptcy Court approved a settlement agreement. Among other things, the agreement allowed and fixed the secured lenders’ claim (the “Claim”) and released certain rights and causes of action “in respect of” the Claim.
After a plan was confirmed, the liquidation trustee filed an objection to the Claim, which sought to recharacterize or equitably subordinate the Claim. The lenders asserted that these actions were barred by the settlement agreement. However, the liquidation trustee argued that the plan expressly preserved the liquidation trustee’s right to object on the asserted bases.
At the outset, the Third Circuit noted that there was a conflict between the terms of the plan and the settlement agreement. However, the plan expressly deferred to the settlement agreement in the event of a conflict. Because the Claim was deemed an “allowed claim” by the settlement agreement, the Court found that, notwithstanding language to the contrary in the plan, the liquidation trustee was barred from seeking to recharacterize the Claim. In addition, the Court found that the Claim could not be equitably subordinated because such an action was released under the settlement agreement. In reaching this conclusion, the Court held that by releasing all claims and causes of action “in respect of” the Claim, all claims and causes of action “that relate to” the Claim were released. Because the Court held that an equitable subordination action “related to” the Claim, the action was released. Accordingly, the Bankruptcy Court’s decision was affirmed.
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THIRD CIRCUIT APPLIES ITS HOLDING IN IN RE MONTGOMERY WARD TO PERSONAL PROPERTY LEASES
In re Federal-Mogul Global, Inc., 2007 U.S. App. LEXIS 6120 (3d Cir. Mar. 15, 2007) (Ambro, J.) (NOT PRECEDENTIAL)
The Third Circuit reversed the Bankruptcy Court’s decision and held that prorating payments due under an equipment lease prior to rejection is impermissible, unless the lease can be and is modified consistent with the Bankruptcy Code. The debtor filed a motion to reject an equipment lease effective mid-month. Thereafter, the lessor filed an administrative claim, which requested payment of the obligations under the lease that came due as of the first of the month. The debtor sought to prorate the amount due based on the actual number of days of the month prior to the rejection date. The Bankruptcy and District Courts held that proration was implicit in the order approving the rejection of the leases, but the Third Circuit disagreed. Following In re Montgomery Ward, which addressed proration of obligations under non-residential real property leases, the Third Circuit held that, absent an explicit court approved modification of the lease pursuant to section 365(d)(5) of the Bankruptcy Code, amounts due pre-rejection under the terms of a lease of personal property cannot be prorated.
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MARKET CAPITALIZATION IS AN ACCEPTABLE METHOD OF VALUING A DEBTOR’S BUSINESS FOR PURPOSES OF DETERMINING WHETHER A TRANSACTION IS A FRAUDULENT CONVEYANCE
VFB, LLC v. Campbell Soup Co., 2007 U.S. App. LEXIS 7407 (3d Cir. Mar. 30, 2007) (Cudahy, J.)
A successor to the debtor (the plaintiff) sued Campbell Soup to recover an allegedly constructively fraudulent transfer. Prior to the debtor’s bankruptcy, Campbell Soup, the former parent of the debtor, created the debtor for the purpose of spinning off a struggling division through a “leveraged spin-off.” Under the leveraged spin-off, the debtor incurred approximately $500 million of debt, which the debtor transferred to the parent to purchase the division. At the time of the transfer, Campbell did not disclose certain harmful financial information about the division. This information was later disclosed through various public filings, and, notwithstanding this disclosure, the debtor’s stock was largely unaffected.
The plaintiff argued that the transaction constituted a fraudulent transfer because the division acquired was worth less than $500 million, and the transaction rendered the debtor insolvent. The Court held that the District Court correctly found that the division acquired was “worth well in excess” of $500 million, and that the debtor was solvent at the time of the purchase. In reaching this conclusion, the Court determined that reliance on the market capitalization value of the debtor, together with expert testimony offered by Campbell Soup’s expert, was not reversible error. Because the debtor’s stock was valued well in excess of the purchase price at and after the transaction took place, including after the harmful financial information was disclosed, the Third Circuit upheld the District Court’s ruling, which found that the debtor had received reasonably equivalent value for the purchase price paid.
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U.S. DISTRICT COURT FOR THE DISTRICT OF DELAWARE
WHERE A PLAN CLEARLY REQUIRES DISTRIBUTIONS OF SURPLUS AMOUNTS IN CLAIM RESERVES, FAILURE TO DISTRIBUTE THE SURPLUS CONSTITUTES AN IMPERMISSIBLE PLAN MODIFICATION UNDER SECTION 1127 OF THE CODE
Plan Comm. of NorthWestern Corp. v. NorthWestern Corp. (In re NorthWestern Corp.), 2007 U.S. Dist. LEXIS 15369 (D. Del. Mar. 2, 2007) (Farnan, J.)
After settlement of a disputed claim for less than the amount reserved, the plaintiff moved for distribution of the surplus, which represented the difference between the settlement amount and the amount reserved on account of the claim. Certain creditors whose claims remained disputed objected to the relief and argued that distribution of any amounts in reserve was improper under the plan, unless and until all disputed claims had been resolved or adjudicated. The Bankruptcy Court agreed and held that the plan prohibited a distribution of plan reserves until all disputed claims were resolved.
The District Court disagreed and held that the plan clearly mandated that surplus amounts, if any, be distributed every six months. Moreover, the plan did not condition distributions of surplus in a reserve on resolution of all disputed claims. To hold otherwise would result in an impermissible plan modification under section 1127 of the Bankruptcy Code because the plan had been substantially consummated. Therefore, the District Court reversed and remanded the matter to the Bankruptcy Court to (i) determine whether, in fact, there existed a surplus and, if so, (ii) authorize a distribution of the surplus consistent with the terms of the plan.
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AN ARBITRATION CLAUSE IN A REJECTED EXECUTORY CONTRACT SURVIVES REJECTION AND MAY BE ENFORCED
Fleming Cos. v. Selby's Mkts., Inc. (In re Fleming Cos.), 2007 U.S. Dist. LEXIS 18739 (D. Del. Mar. 16, 2007) (Robinson, J.)
During the bankruptcy case, the debtor rejected a contract with the defendant. Thereafter, the debtor filed for arbitration with the American Arbitration Association and sought to pursue a claim against the defendant for alleged defaults under the contract. In response, the defendant initiated state court proceedings to stay the arbitration. The debtor moved in the Bankruptcy Court for an order staying the state court proceedings and compelling arbitration, which the Bankruptcy Court approved.
On appeal, the District Court concluded that because the rejection of the contract amounted to a breach and not a cancellation, repudiation, rescission or any other type of termination, the arbitration clause survived rejection. Furthermore, because the claims at issue related only to traditional contract claims and not statutory rights or claims created by the Bankruptcy Code, the arbitration clause was enforceable. Accordingly, the Bankruptcy Court’s decision was affirmed.
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U.S. BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE
IN DETERMINING A DEBTOR’S ENTERPRISE VALUE, THE COURT HAS DISCRETION TO (I) ACCEPT THE EXPERTS’ OPINIONS, (II) MAKE ADJUSTMENTS BASED ON ERRORS OR INCONSISTENCIES WITH THE OPINIONS, (III) WEIGH THE OPINIONS BASED ON CREDIBILITY, AND (IV) MAKE ADJUSTMENTS FOR EVENTS OCCURRING AFTER THE OPINIONS WERE RENDERED
In re Nellson Nutraceutical, Inc., 2007 Bankr. LEXIS 99 (Bankr. D. Del. Jan. 18, 2007) (Sontchi, J.)
After a 23-day bench trial, the Bankruptcy Court determined that the debtor’s enterprise value, as of December 31, 2006, was $320 million. In reaching this determination, the Bankruptcy Court relied upon the testimony of three experts (having previously excluded a fourth expert’s testimony). However, the Bankruptcy Court concluded that, as the trier of fact, it was not bound to adopt one (or all) of the experts’ opinions. Rather, the Court was free to reject particular testimony in toto or adjust opinions based on, among other things, credibility, errors or inconsistencies, and changes in circumstances. Because the experts had relied upon a long range business plan created in May 2006, that had been manipulated by management and did not represent management’s best and most honest analysis of the debtor’s financial future, the Bankruptcy Court concluded that certain adjustments to the opinions were necessary. Once these adjustments were made, the Bankruptcy Court accepted a weighted average of the three experts’ opinions based upon the credibility of each expert’s testimony. Finally, the Bankruptcy Court adjusted the weighted average to account for the manipulated business plan and the debtor’s performance since the business plan was released to arrive at a valuation as of December 31, 2006.
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SECTION 546(c)(1) OF THE BANKRUPTCY CODE, AS AMENDED, LIMITS A SELLER’S RIGHT TO RECLAIM GOODS THAT ARE SUBJECT TO A SECURED LENDER’S LIEN ON THE SAME GOODS; AN UNSECURED CREDITOR LACKS THE ABILITY TO INVOKE THE DOCTRINE OF MARSHALLING
Simon & Schuster, Inc. v. Advanced Marketing Servs., Inc. (In re Advanced Marketing Servs., Inc.), 2007 Bankr. LEXIS 563 (Bankr. D. Del. Jan. 22, 2007) (Sontchi, J.)
The Bankruptcy Court denied the plaintiff’s motion for a temporary restraining order and held that a seller’s right to reclaim goods is subject to a secured creditor’s lien on the goods and that an unsecured creditor cannot invoke the doctrine of marshalling. The plaintiff commenced an adversary proceeding and sought, among other relief, to preclude the debtor from disposing of certain goods. The debtor’s pre- and post-petition lender had a lien on all of the debtor’s inventory, including the goods. Because of the lien and the express language of section 546(c)(1), which limits a seller’s right to reclaim goods that are subject to liens on the same goods, the Bankruptcy Court held that the plaintiff could not establish a likelihood of success on the merits. In so ruling, the Bankruptcy Court noted that, in essence, the plaintiff was requesting that the Court “marshal” the goods – relief not available to unsecured creditors.
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NON-PETITIONING CREDITORS ARE NOT ENTITLED TO ATTORNEY’S FEES UNDER SECTIONS 105(a) OR 303(i) OF THE BANKRUPTCY CODE
In re VII Holdings Co., 2007 Bankr. LEXIS 532 (Bankr. D. Del. Feb. 22, 2007) (Shannon, J.)
The Bankruptcy Court declined to award attorney’s fees and costs to certain non-petitioning creditors in the debtor’s involuntary bankruptcy. After the Bankruptcy Court dismissed the debtor’s involuntary bankruptcy petition because the petition was filed in bad faith, certain non-petitioning creditors requested payment of attorney’s fees and costs associated with the bankruptcy. The petitioning creditor opposed the relief and argued that neither section 303(i), nor section 105(a) of the Bankruptcy Code authorizes an award of attorney’s fees and costs to any party other than the debtor. The Bankruptcy Court concluded that the language of section 303(i)(1) of the Bankruptcy Code is clear and authorizes an award of attorney’s fees or costs only to the debtor. The Bankruptcy Court found that section 303(i)(2) was ambiguous, but, after analyzing the legislative history and the few reported decisions on the issue, determined that section 303(i)(2) does not authorize an award of attorney’s fees or costs to non-petitioning creditors. Finally, in light of the prohibition under section 303(i), the Bankruptcy Court declined to use its equitable powers under section 105(a) to achieve a result inconsistent with another section of the Bankruptcy Code.
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DOCTRINE OF IN PARI DELICTO BARRED CAUSES OF ACTION BROUGHT BY A CHAPTER 7 TRUSTEE
Claybrook v. Broad & Cassel, P.A. (In re Scott Acquisition Corp.), 2007 Bankr. LEXIS 643 (Bankr. D. Del. 2007) (Walsh, J.)
The Bankruptcy Court dismissed two counts of the chapter 7 trustee’s complaint and held that the doctrine of in pari delicto barred the legal malpractice and breach of fiduciary duty causes of action asserted by the trustee. The trustee filed a complaint against the debtor’s directors and former attorneys, alleging, among other things, that the directors breached their fiduciary duties by engaging in self-dealing. The complaint also alleged that the debtor’s former attorneys, by representing both the debtor and the directors in the self-dealing transactions, breached their fiduciary duties to the debtor. The defendants filed a motion to dismiss the complaint and asserted that the causes of action were barred by the doctrine of in pari delicto. The defendants asserted and the Court agreed that because the directors were the debtor’s agents, their wrongdoing was imputed to the debtor (the principal). Accordingly, the Court held that if the debtor brought the suit and would be barred by the defense, the chapter 7 trustee’s suit would also be barred.
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WHERE THERE IS A BONA FIDE DISPUTE WHETHER SOMETHING REPRESENTS PROPERTY OF THE ESTATE, A TURNOVER ACTION FAILS TO STATE A CLAIM UPON WHICH RELIEF MAY BE GRANTED AND SHOULD BE DISMISSED
Giuliano v. Fairfield Group Health Care Centers Limited Partnership (In re Lexington Healthcare Group, Inc.), Ch. 7 Case No. 03-11007, Adv. Pro. No. 06-50915 (Bankr. D. Del. Mar. 20, 2007) (Walrath, C.J.)
The Bankruptcy Court dismissed a turnover claim pursuant to Fed. R. Civ. P. 12(b)(6) because there was a bona fide dispute over ownership of the property the trustee sought to recover. The chapter 7 trustee brought a turnover action against the debtor’s landlord for return of a security deposit. The landlord sought to dismiss the cause of action. In support, the landlord alleged that the money was characterized as a security deposit at the request of the debtor’s predecessor to enhance its balance sheet, but was, in fact, used to pay rent. Thus, the landlord asserted that it had the exclusive right to the money and the debtor’s estate had no interest therein. The Bankruptcy Court found that the allegations by the landlord established that a bona fide dispute over ownership of the property existed. Further, the Court held that, to state a claim for turnover, ownership of the property sought to be turned over must not be in dispute.
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This update is intended for informational purposes only and should not be considered legal advice. Please consult an attorney regarding your specific situation. Receipt of this update does not constitute an attorney-client relationship.
© 2007 Young Conaway Stargatt & Taylor, LLP. All rights reserved. Contents reprinted with permission.
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