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Business Law Today

April 2023

Recent Developments in Bankruptcy Litigation 2023

Dustin Phillip Smith, Michael D Rubenstein, and Aaron Hollis Stulman

Recent Developments in Bankruptcy Litigation 2023

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§ 1.1 Supreme Court

Siegel v. Fitzgerald, 142 S. Ct. 1770 (2022). The Supreme Court was called on to address the Bankruptcy Clause found in Article I, Section 8, Clause 4 of the Constitution, which authorizes Congress to establish “uniform laws on the subject of Bankruptcies” throughout the United States. The issue in question was the nonuniform nature of Congress’ enactment of a significant fee increase that exempted debtors in two states and whether that variation violated the uniformity requirement of the Constitution.

The Court began by noting that “[b]ankruptcy cases involve both traditional judicial responsibilities and extensive administrative rules.” While prior law vested bankruptcy judges with the responsibility to handle both the judicial and administrative responsibilities, Congress created the United States Trustee Program (the “Trustee Program”) to separate these judicial and administrative functions. Ultimately, Congress made the Trustee Program permanent and expanded it nationwide. However, stakeholders in North Carolina and Alabama resisted. Thus, Congress expanded the U.S. Trustee Program to all federal judicial districts except for those in North Carolina and Alabama. In those districts, the prior system (the “Administrator Program”) continued. The Trustee Program, which covers 48 states, is funded by user fees paid to the United States Trustee System Fund, with the bulk of those funds being paid by chapter 11 debtors who pay a fee in each quarter of the year that their case remains pending. The Bankruptcy Administrator Program that exists in North Carolina and Alabama is not funded by user fees but instead is funded by the Judiciary’s annual budget. In 1994, the Ninth Circuit held it unconstitutional that the Administrator Program states did not have to pay user fees. Accordingly, Congress enacted a law authorizing the Judicial Conference to require Administrator Program districts to pay fees equal to those imposed in Trustee Program districts. Thereafter, the Judicial Conference adopted a standing order for such fees to be paid.

Eventually, Congress faced a shortfall in the United States Trustee System Fund and enacted a temporary, but significant, increase in the fees paid in large chapter 11 cases (the “2017 Act”). When that additional fee was triggered, the fee increased from $30,000 to $250,000 per quarter. The North Carolina and Alabama districts did not immediately adopt this increase. A year later, the Judicial Conference ordered those districts to implement the amended fee schedule. Even then, substantial differences remained between the fees faced by debtors in the Trustee Program and those in the Administrator Program. First, the date on which the new fees took affect differed by approximately six months and, in the Administrator Program districts, the fee increase only applied to newly filed cases, while in Trustee Program districts the increased fee applied to pending cases.

In 2008, Circuit City Stores, Inc. sought chapter 11 protection in the Eastern District of Virginia and was subjected to the Trustee Program. When its plan was confirmed, the maximum quarterly fee was $30,000. However, the bankruptcy case was still pending when Congress raised the fees for chapter 11 debtors in Trustee Program districts. This resulted in an increase of almost $600,000 in fees that the petitioner had to pay for three quarters. The petitioner objected to the fee increase in the bankruptcy court as a violation of the Constitution’s Bankruptcy Clause. The bankruptcy court agreed and imposed the lower fees. The Fourth Circuit reversed. It interpreted the Bankruptcy Clause as forbidding “only ‘arbitrary’ geographic differences” and found that distinction between Trustee Program districts and Administrator Program districts to not be arbitrary. The Supreme Court granted certiorari to resolve a circuit split.

The first question before the Court was “whether the 2017 Act is subject to the Bankruptcy Clause’s uniformity requirement at all.” 142 S. Ct. at 1778. The respondent argued that there was a distinction between substantive bankruptcy laws and administrative acts. The Supreme Court disagreed. The Court noted the language of the clause is broad and that the Court had never before distinguished between substantive and administrative bankruptcy laws or suggested that the uniformity requirement would not apply in both cases. The Court further stated that the courts that had considered this question to date, regardless of the ultimate outcome, had accepted that the statute is subject to the Clause’s uniformity requirement.

The Court then turned to the question of whether the 2017 Act was a permissible exercise of congressional power. The Court began by noting that, while the Bankruptcy Clause confers broad authority on Congress, the Clause also imposes a limitation on that authority. Namely, the laws enacted must be uniform. The Court’s prior opinions addressing this uniformity requirement made it clear that they “stand for the proposition that the Bankruptcy Clause offers Congress flexibility, but does not permit arbitrary geographically disparate treatment of debtors.” Id. at 1780. With that in mind, the Court found that there was no dispute that the fee increase was not geographically uniform. “The only remaining question [was] whether Congress permissibly imposed nonuniform fees because it was responding a funding deficit limited to the Trustee Program districts.” Id. at 1781. The Court found that this shortfall “existed only because Congress itself had arbitrarily separated the districts into two different systems with different cost funding mechanisms, requiring Trustee Program districts to fund the Program through user fees while enabling Administrator Program districts to draw on taxpayer funds by way of the Judiciary’s general budget.” Id. at 1782. The Court held that “[t]he Clause does not allow Congress to accomplish in two steps what it forbids in one.” Id. The Court concluded by stating that it was not addressing the constitutionality of the dual scheme of the bankruptcy system itself but only the decision to impose different fee arrangements in those two systems. The Court took pains to note that nothing in the opinion should be “understood to impair Congress’ authority to structure relief differently for different classes of debtors or to respond to geographically isolated problems. The Court holds only that the uniformity requirement of the Bankruptcy Clause prohibits Congress from arbitrarily burdening only one set of debtors with a more onerous funding mechanism than that which applies to debtors in other States.” Id. at 1782-83. Accordingly, the Court of Appeals for the Fourth Circuit was reversed, and the case was remanded for further proceedings.

§ 1.2 First Circuit

Coughlin v. LAC Du Flambeau Band of Lake Superior Chippewa Indians (In re Coughlin), 33 F.4th 600 (1st Cir. 2022). In a split decision, the First Circuit held that the Bankruptcy Code abrogates tribal sovereign immunity, agreeing with the Ninth Circuit and deepening the split with the Sixth Circuit. Compare Krystal Energy Co. v. Navajo Nation, 357 F.3d 1055, 1061 (9th Cir. 2004) (holding that the Bankruptcy Code abrogates sovereign immunity for tribes), with Buchwald Cap. Advisors, LLC v. Sault Ste. Marie Tribe of Chippewa Indians (In re Greektown Holdings), 917 F.3d 451, 460-61 (6th Cir. 2019) (holding that the Code does not abrogate immunity).

After voluntarily filing for protection under chapter 13 of the Bankruptcy Code, the debtor moved to enforce the automatic stay to prohibit further collection efforts by creditor Lendgreen, a subsidiary of the Lac Du Flambeau Band of Lake Superior Chippewa Indians (the “Band”), which had engaged in aggressive collection tactics despite the commencement of the debtor’s bankruptcy. In opposition, Lendgreen and its corporate parents asserted sovereign immunity and moved to dismiss the enforcement proceeding. The bankruptcy court agreed with the Band and granted dismissal. But in a 2-1 decision, the First Circuit reversed.

Relying on Supreme Court precedent established in Michigan v. Bay Mills Indian Community, 572 U.S. 782 (2014), which requires that Congress must have “unequivocally express[ed]” its intent to abrogate sovereign immunity, id. at 790 (internal quotation marks omitted), the majority concluded that Congress had been clear in its intention. First, the majority examined the language of section 106(a), which provides that “[n]otwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to . . . Section[] 362. . . .” 11 U.S.C. § 106(a)(1). From this, the majority concluded that Congress was clear in its intention to abrogate sovereign immunity as to governmental units. The majority next examined whether native tribes fall within the Bankruptcy Code’s definition of “governmental units.” See 11 U.S.C. § 101(27) (defining “governmental unit”). Noting that the definition encompasses “essentially all forms of government,” Coughlin, 33 F.4th at 605, and that Congress has long considered tribes to be “domestic dependent nations,” id. at 606-07, the majority found that tribes are domestic governments, and therefore within the meaning of “governmental unit” as defined by the Bankruptcy Code.

The majority rejected the Band’s, the Sixth Circuit’s, and the dissent’s argument that Congress cannot abrogate tribal sovereign immunity unless it expressly discusses tribes somewhere in the statute. The majority termed it an impermissible “magic-words requirement,” contrary to controlling Supreme Court precedent established in FAA v. Cooper, 566 U.S. 284 (2012). See id. at 291 (“Congress need not state its intent in any particular way. We have never required that Congress use magic words.”).

The dissent, on the other hand, posited that a court must have “perfect confidence” in its interpretation that Indian tribes were included in the definition of “governmental unit” as an “other . . . domestic government.” Coughlin, 33 F.4th at 614 (Barron, C.J. dissenting) (quoting Dellmuth v. Muth, 491 U.S. 223, 231 (1989)). While the dissent noted that it was certainly possible that the term “governmental unit” includes Native tribes, it is not “clearly and unequivocally” evident that Congress intended to abrogate tribal sovereign immunity. See id. at 622.

Fin. Oversight & Mgmt. Bd. for P.R. v. Cooperativa de Ahorro y Credito Abraham Rosa (In re Fin. Oversight & Mgmt. Bd. for P.R.), 41 F.4th 29 (1st Cir. 2022). Splitting from the Ninth Circuit’s decision in Cobb v. City of Stockton (In re City of Stockton, Cal.), 909 F.3d 1256 (9th Cir. 2018), the First Circuit recently affirmed the decision of the court overseeing the proceedings under Title III of the Puerto Rico Oversight Management and Economic Stability Act (“PROMESA”) that claims for just compensation arising from takings under the Fifth Amendment takings claims cannot be discharged or impaired by bankruptcy plans.

This case arises from objections lodged by former property owners (the “Takings Claimants”) filed in opposition to a version of the plan of adjustment proposed by the Financial Oversight and Management Board for Puerto Rico (the “Board”) based on the treatment the plan afforded the Takings Claimants’ proofs of claim. The proofs of claim at issue (the “Takings Claims”) sought just compensation for prepetition takings of their private property by the Commonwealth of Puerto Rico (the “Commonwealth”). The Taking Claims were comprised of two different varieties: the first were claims for just compensation pursuant to the Commonwealth’s “quick take” eminent domain statute, which requires the Commonwealth to hold an estimated compensation amount in escrow; and the second variety—so-called “inverse condemnation claims”—arose when the Commonwealth curtailed an owner’s property right without tendering a deposit. The plan of adjustment sought to pay the Takings Claimants (i) the full amount of any eminent domain claims for which there was a deposit and (ii) a pro rata amount for (a) any eminent domain claim amounts in excess of the deposit and (b) all inverse condemnation claims. The Takings Claimants argued before the lower court that the Fifth Amendment prohibits the impairment of the Takings Claims on account of which the Takings Claimants were constitutionally entitled to “just compensation.” As such, they argued that the plan could not be confirmed unless their claims were paid in full. The lower court agreed with the Takings Claimants and directed the Board to modify the plan accordingly. The Board made the adjustments, but included language in the modified plan that preserved the Board’s right to appeal the lower court’s ruling that the Takings Claims were required to be paid in full. This appeal followed.

Before reaching the question on appeal—whether the Fifth Amendment foreclosed confirmation of a plan which impairs or discharges claims for just compensation resulting from a prepetition taking—the First Circuit first considered whether it needed to reach the constitutional question at all. The United States had intervened to argue that the First Circuit should avoid the constitutional question, and instead hold that the lower court was justified in its holding pursuant to the court’s equitable powers under section 944(c)(1) of the Bankruptcy Code. Because the First Circuit found the record clear that the lower court had not relied on its discretionary powers, it found the constitutional question unavoidable.

The First Circuit then turned to the Board’s arguments as to why the Fifth Amendment did not preclude it from impairing the Takings Claims. First, the Board argued that the Fifth Amendment’s Takings Clause no longer applied to the Takings Claims because the Takings Claimants did not have rights in the confiscated property at the time the petitions for relief under PROMESA were filed. Because Supreme Court precedent under Knick v. Township of Scott, 139 S. Ct. 2162 (2019) determined that the “right to full compensation arises at the time of taking,” id. at 2170, the Board argued that the plan could not violate the Fifth Amendment where the property had already been taken. The First Circuit disagreed, holding that Knick did not stand for the proposition that a subsequent denial of just compensation did not invoke Fifth Amendment concerns. To do so would be to treat the Fifth Amendment right to receive just compensation as “a mere monetary obligation that may be dispensed with by statute.” Fin. Oversight & Mgmt. Bd. for P.R., 41 F.4th at 43.

The Board’s second argument was premised on the notion that claims for just compensation under the Fifth Amendment were in the nature of ordinary money damages, which are routinely adjusted in bankruptcy. Again, the First Circuit rejected this argument. Noting that the Fifth Amendment does not prohibit the taking of private property, but rather prohibits the taking of such property without just compensation, the appellate court found that just compensation “serves also as a structural limitation on the government’s very authority to take private property for public use.” Id. at 44. As such, just compensation constituted a “constitutional obligation” which the government cannot alter. See id. (quoting First English Evangelical Luther Church of Glendale v. Los Angeles Cnty., 482 U.S. 304, 315 (1987)). The Board’s reliance on the majority holding in City of Stockton did not persuade the First Circuit, which sided instead with the Stockton dissent and the Bankruptcy Court for the Eastern District of Michigan. See In re City of Detroit, 524 B.R. 147, 269-70 (Bankr. E.D. Mich. 2014).

The First Circuit then summarily disposed of additional arguments by the Board in reaching its conclusion that lower court properly found that the Board’s original treatment of the Takings Claims was prohibited by the Constitution.

Fin. Oversight & Mgmt. Bd. for P.R. v. Federacion de Maestros de P.R., Inc. (In re Fin. Oversight & Mgmt. Bd. for P.R.), 32 F.4th 67 (1st Cir. 2022). In this decision arising from the proceedings under Title III of the Puerto Rico Oversight Management and Economic Stability Act (“PROMESA”), the First Circuit held that adjustments to the statutory pension plans for certain public school teachers provided for under the confirmed Title III Plan of Adjustment (the “Plan”) were valid modifications of the Commonwealth’s obligations and that PROMESA preempted Commonwealth laws to the extent that they were inconsistent with the Commonwealth’s adjusted pension liabilities.

In 2013, the Puerto Rico Legislative Assembly enacted a statute which sought to end the Teachers Retirement System’s prior defined benefit pension plan. The defined benefit pension plan, enacted by Commonwealth statute, provided for a specified monthly benefit amount upon retirement. The monthly benefit amount varied based on, among other things, age and years of service of the participant. It also included cost-of-living adjustments. The new legislation proposed to freeze accruals under the existing defined benefit pension plan and to transfer active and future participants to a defined contribution plan, funded by employee and employer contributions. The Puerto Rico Supreme Court ultimately overturned the aspect of the legislation that required teachers hired before August 2014 to transfer to the defined contribution plan.

The Plan proposed by the Financial Oversight and Management Board (the “Board”)—the body designated under PROMESA to address the Commonwealth’s debt restructuring—provided that (i) future accruals under the defined benefit plan, held by teachers hired prior to August 2014, would be frozen, and (ii) cost-of-living adjustments going forward would be eliminated. Various organizations representing the teachers (the “Teachers’ Associations”) objected to confirmation of the Plan before the court overseeing the Title III proceedings (the “Title III Court”), but the Title III Court confirmed the Plan over such objections. The Teachers’ Associations appealed the confirmation.

On appeal, the Teachers’ Associations presented three arguments as to why the Plan could not be confirmed, all of which the First Circuit ultimately rejected. First, the Teachers’ Associations argued that neither the Plan nor the Title III Court’s order could render the Commonwealth statutes providing for the continued payment of pension benefits ineffective. Second, they argued that enabling legislation was required to implement changes to the Commonwealth’s pension obligations. Finally, they argued that the pension modifications contravened legislation establishing prerequisites for the issuance of new debt, such that the Plan could not be consummated.

The First Circuit dismissed the Teachers’ Associations’ first challenge, which objected to the Plan provisions eliminating the continued accrual of defined pension benefits with cost-of-living adjustments, on two grounds. First, the circuit court held that the Commonwealth’s pension obligations, although statutory, were in the nature of contractual obligations, and could therefore be rejected under section 365 of the Bankruptcy Code, as incorporated by PROMESA. The First Circuit found that PROMESA expressly preempted the Commonwealth laws not only directly, see 28 U.S.C. § 2103 (“The provisions of this chapter shall prevail over any general or specific provisions of territory law, State law, or regulation that is inconsistent with this chapter.”), but also by incorporating section 1123(a)(3) and (5) of the Bankruptcy Code, see 48 U.S.C. § 2161(a). Section 1123(a)(3) and (5) provide that, “Notwithstanding any otherwise applicable nonbankruptcy law, a plan shall . . . (3) specify the treatment of any class of claims or interests that is impaired under the plan; . . . [and] (5) provide adequate means for the plan’s implementation . . . .” 11 U.S.C. § 1123(a)(3), (5). Because the Commonwealth laws codifying the defined benefit plan accruals and the cost-of-living adjustments directly conflicted with the Plan’s treatment of the pension participants’ claims, the circuit court found that the Plan, by virtue of PROMESA, preempted the Commonwealth laws. Second, the First Circuit found that the Commonwealth laws were preempted by PROMESA as a matter of conflict preemption because the Commonwealth laws posed an obstacle to the purpose of PROMESA, namely the successful restructuring of the Commonwealth’s financial obligations.

The First Circuit then quickly rejected the Teachers’ Associations’ second contention—that enabling legislation was required to modify the Commonwealth’s pension obligations. Pointing to the text of PROMESA section 314(b)(5), which conditions plan confirmation on obtaining “any legislative, regulatory, or electoral approval necessary under applicable law,” the court found that there was no law requiring legislative approval to modify the Commonwealth’s pension obligations.

Finally, the First Circuit rejected the Teachers’ Associations’ third argument that the Commonwealth law titled Act 53-2021 required that the Plan contain “zero cuts to pensions of current retirees and current accrued benefits,” including the defined benefit plan accruals and the cost-of-living adjustments. The court was unconvinced that freezing further accruals or cost-of-living eliminations were the type of “cuts” referred to in the statute. By contrast, the statute specified that the Plan not include a provision from a previous version of Plan which would reduce pension payments in excess of $1,500 by up to 8.5 percent. The court found that the confirmed Plan satisfied the statute’s requirements by eliminating such provision.

§ 1.3 Second Circuit

Gunsalus v. Cnty. of Ontario, 37 F.4th 859 (2d Cir. 2022). The Second Circuit joined the Third, Sixth, and Seventh Circuits in holding that the Supreme Court precedent established in BFP v. Resolution Trust Corp., 511 U.S. 531 (1994)—that a foreclosure sale conducted in accordance with state law was entitled to a presumption that the debtor received “reasonably equivalent value” under section 548 of the Bankruptcy Code—was limited to mortgage foreclosures of real estate. The Fifth, Ninth, and Tenth Circuits, in contrast, hold that the Supreme Court’s decision in BFP extends to protecting tax foreclosures from fraudulent conveyance actions.

When a married couple accrued approximately $1,300 in unpaid real estate taxes, a tax lien attached to their family home. The county subsequently instituted proceedings to foreclose on the property pursuant to the “strict foreclosure” procedures pursuant to New York’s Real Property Tax Law (“RPTL”). In June 2016, the state trial court entered a final judgment in favor of the county, awarding the county possession of, and title to, the home. In May 2017, the county scheduled an auction. The married couple then filed a chapter 13 petition. Notwithstanding the filing, the county subsequently sold the home for $22,000. Pursuant to the RPTL, the county retained the proceeds in excess of the lien (here, roughly $20,700).

The debtors commenced an adversary proceeding to set aside the 2016 transfer of their home to the county as a fraudulent conveyance under section 548 of the Bankruptcy Code. After the bankruptcy court initially dismissed the complaint, relying on BFP, the district court reversed and remanded back to the bankruptcy court. On remand, the bankruptcy court found that the debtors did not receive “reasonably equivalent value” when their home (which was worth at least $22,000) was seized in payment of a $1,300 tax bill. The county appealed.

The Second Circuit affirmed, holding that BFP’s presumption of reasonably equivalent value —by its own terms—applied only to mortgage foreclosures of real estate. The Supreme Court expressly left open the question of whether other foreclosures, such as tax lien foreclosures, would be entitled to the same presumption. In so holding, the Second Circuit found that it was essential to the holding in BFP that the underlying foreclosure action include some sort of auction or sale “which would permit some degree of market forces to set the value of the property even in distressed circumstances.” 37 F.4th at 865 (citing BFP, 511 U.S. at 545-49). Here, the auction that was ultimately conducted by the county was almost a year after the transfer that the debtors sought to avoid (i.e., when the county took title to their home). Other procedural safeguards present in BFP were likewise absent under the RPTL. Therefore, the presumption that the foreclosure was a transfer for “reasonably equivalent value” did not apply.

MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.), Nos. 20-1846-bk, 20-1953-bk, 2021 BL 481940, 2021 US App Lexis 37358, 2021 WL 5986997 (2d Cir. Dec. 17, 2021). In a summary order, the Second Circuit held that the failure to obtain a stay of a sale approval order creates a jurisdictional bar for appellate review under section 363(m) of the Bankruptcy Code. Due to the split amongst the circuits as to the effect of section 363(m)—with the Second and Fifth holding that it creates a jurisdictional bar to appellate review, and the Third, Sixth, Seventh, Ninth, and Tenth holding that it only limits the relief an appellate court may grant—the Supreme Court granted certiorari. MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.), Nos. 20-1846-bk, 20-1953-bk, 2021 BL 481940, 2021 US App Lexis 37358, 2021 WL 5986997 (2d Cir. Dec. 17, 2021), cert. granted, 142 S. Ct. 2867 (2022) (No. 21-1270).

This case arises from the chapter 11 proceedings of Sears Holding Corporation (“Sears”) and its subsequent asset sale to Transform Holdco LLC (“Transform”) pursuant to section 363(b). The sale to Transform, approved by the bankruptcy court by order dated February 8, 2019 (the “Sale Order”), included the right to designate which assignee would assume Sears’s lease with MOAC Mall Holdings LLC (“MOAC”). On September 5, 2019, the bankruptcy court entered a subsequent order (the “Assignment Order”) authorizing Transform to assign the lease to its wholly-owned subsidiary, Transform Leaseco LLC (“LeaseCo”). MOAC moved to stay the assignment of the lease, but the bankruptcy court denied the motion. MOAC nonetheless appealed the Assignment Order to the district court. The district court, however, declined to review the case, holding that it lacked jurisdiction to review the Assignment Order under section 363(m), since the assignment was integral to the Sale Order.

According to the Second Circuit’s interpretation, section 363(m) provides that, in the absence of a stay, appellate review of a final sale under subsections (b) or (c) of section 363 is limited to challenges as to the “good faith” nature of the sale. See 11 U.S.C. § 363(m). In prior precedent, the Second Circuit had also extended the limitations of section 363(m) to any transactions “integral to a sale authorized under § 363(b).” 2021 WL 5986997, at *2 (citing Contrarian Funds LLC v. Aretex LLC (In re WestPoint Stevens, Inc.), 600 F.3d 231, 250 (2d Cir. 2010)).

The Second Circuit agreed with the district court, holding that the district court did not have jurisdiction to review the Assignment Order. The assignment was integral to the sale since both the Sale Order and the Assignment Order explicitly stated that the assignment (and others similarly categorized) were integral to the sale. Thus, section 363(m) placed the Assignment Order beyond the district court’s appellate review. Although MOAC argued before the Second Circuit that section 363(m) does not create a jurisdictional bar to appellate review of a section 363 sale, the Second Circuit was unpersuaded.

Springfield Hosp., Inc. v. Guzman, 28 F.4th 403 (2d Cir. 2022). Becoming the first federal circuit court of appeals to address a question on which lower courts were divided, the Second Circuit ruled that the federal government could deny a Paycheck Protection Program (“PPP”) loan to a debtor in bankruptcy solely due to the applicant’s bankruptcy status.

In the early days of the COVID-19 pandemic in 2020, Congress enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which, among other things, (i) established the PPP to provide small businesses with potentially forgivable loans to keep their workers employed during COVID-related shutdowns and (ii) delegated responsibility for administering the program to the Small Business Administration (the “SBA”). As a matter of policy, the SBA decided to automatically deny PPP loans to any applicant who was in bankruptcy proceedings. Chapter 11 debtors Springfield Hospital, Inc. and Springfield Medical Care Systems, Inc. (together, the “Debtors”) were denied PPP funds solely due to their status as debtors. They commenced an adversary proceeding, seeking an injunction to restrain the SBA from denying PPP loans to applicants solely based on bankruptcy status. Specifically, they argued that section 525(a) of the Bankruptcy Code prevented discrimination based on bankruptcy status in reviewing PPP loan applications. The bankruptcy court agreed, finding that PPP loans were “other similar grant[s]” within the scope of section 525(a). Following the SBA’s appeal, the bankruptcy court certified the matter for direct appeal to the Second Circuit.

The Second Circuit reversed, determining that the PPP was a loan guaranty program that did not fall within the ambit of section 525(a)’s “other similar grant” language. In reaching its conclusion, the Second Circuit considered the plain text of section 525(a), prior precedent interpreting section 525(a), and congressional actions subsequent to the CARES Act. The Second Circuit determined that the plain text of section 525(a), which provides that “a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to . . . a bankrupt or debtor under the Bankruptcy Act . . . solely because such bankrupt or debtor is or has been . . . a bankrupt or debtor under the Bankruptcy Act.” 11 U.S.C. § 525(a). Relying on the ordinary meaning of the term “grant” and the canon of construction noscitur a sociis, the court concluded that loans did not fall within the “other similar grant[s]” catchall within section 525(a).

Next, the Second Circuit looked to its section 525(a) precedent: Goldrich v. New York State Higher Education Services Corp. (In re Goldrich, 771 F.2d 28, 30 (2d Cir. 1985) (holding that a student loan guarantee is not an “other similar grant”), and Stoltz v. Brattleboro Housing Authority (In re Stoltz), 315 F.3d 80, 90 (2d Cir. 2002) (holding that a public housing lease is an “other similar grant”). Notwithstanding the Debtors’ argument that Goldrich was either abrogated by subsequent amendment to section 525 or superseded by Stoltz, the appellate court found that Goldrich was still binding, and established that section 525(a) does not cover loan programs.

Finding Goldrich to be good law, the Second Circuit then considered whether the PPP constituted a loan program of the sort that Goldrich determined to be outside of section 525(a). The court took particular note of Congress’ choice to characterize the PPP loans as a “loan” in the CARES Act, rather than as a “grant.” The court then found that the substance of the PPP conclusively demonstrated that it was a loan guaranty program. First, PPP loans shared several other common loan features, including set interest rates, maturation dates, refinancing terms, and deferral mechanisms. Second, the forgiveness mechanism did not automatically convert PPP funds from loans into grants because forgiveness was neither automatic nor guaranteed. Finally, the Second Circuit noted that the PPP loans were distinguishable from the public housing leases in Stoltz because a debtor could still seek traditional loans from a bank or receive other governmental support grants even if the debtor was denied a PPP loan, unlike the public housing leases in Stoltz, which were essential to the debtor’s fresh start.

Finally, the Second Circuit cautiously considered subsequent legislation. Congress had amended section 525(a) to expressly bar discrimination in connection with certain other categories of CARES Act benefits—but not the PPP—through the Consolidated Appropriations Act, 2021. The exclusion of the PPP from the amendment bolstered the Second Circuit’s conclusion that the PPP did not fall within section 525(a)’s protection.

§ 1.4 Third Circuit

In re Boy Scouts of Am., 35 F.4th 149 (3d Cir. 2022). The Third Circuit affirmed the lower courts’ rulings that no conflict existed concerning Sidley Austin LLP’s (“Sidley”) representation of Boy Scouts of America and Delaware BSA, LLC (together, the “Debtors”) and Century Indemnity Co. (with its affiliates, “Century”), and that the courts did not abuse their discretion in approving Sidley’s retention under section 327 of the Bankruptcy Code.

Prior to the bankruptcy filing, Century issued insurance to the Debtors, and hired Sidley to assist with certain reinsurance issues related to the Debtors’ insurance. The Debtors also retained Sidley to act as restructuring counsel, but in its engagement letter, Sidley specified that it would not advise on insurance issues and the Debtors engaged a separate law firm to handle those issues. Sidley established a formal ethics screen between its restructuring and reinsurance teams, and eventually formally withdrew from the representation of Century in February 2020. Sidley also filed the Debtors’ bankruptcy petitions in February 2020 and filed its retention application to represent the Debtors under section 327 of the Bankruptcy Code in March 2020. In September 2020, the Sidley attorneys working on the Debtors’ restructuring switched law firms, taking the matter with them, and thus, the Debtors were no longer a client of Sidley.

The bankruptcy court found that no privileged or confidential information was shared between the two legal teams at Sidley and further found that the representation under section 327 was proper because “Sidley’s representation of Century did not render it unable to represent BSA effectively.” 35 F.4th at 155. The bankruptcy court further considered the relevant Rules of Professional Conduct and noted that any perceived harmful effects were nullified by the Debtors’ separate insurance counsel and the ethical wall in place at Sidley. The district court affirmed, finding no actual conflict and that the bankruptcy court exercised proper discretion in not disqualifying Sidley over perceived violations of the ethical rules. Century appealed to the Third Circuit.

First, the Third Circuit briefly discussed standing and mootness, finding in favor of Century on both counts. With respect to standing in bankruptcy appeals, the appellant must be a “person aggrieved” by an order of the bankruptcy court—that is, “the order of the bankruptcy court ‘diminishes their property, increases their burdens, or impairs their rights.’” Id. at 157 (quoting In re Combustion Eng’g, Inc., 391 F.3d 190, 214 (3d Cir. 2004)). The Third Circuit found that retention of counsel “implicate[s] the integrity of the bankruptcy court proceeding as a whole,” Id. (quoting In re Congoleum Corp., 426 F.3d 675, 685 (3d Cir. 2005)), and thus, Sidley’s retention sufficiently affected the interests of Century. On the mootness issue, notwithstanding Sidley’s withdrawal as counsel to the Debtors, “the possibility remains that we could order the disgorgement of its fees” and thus, the appeal was not moot. Id.

On the merits, the Third Circuit explained that Sidley’s retention was proper because it did not hold or represent an interest adverse to the estate and it was disinterested. When there are actual conflicts of interest, attorneys face per se disqualification, but where the conflicts are only potential, the bankruptcy court retains considerable discretion. Whether an actual conflict arises boils down to whether “it is likely that a professional will be placed in a position permitting it to favor one interest over an impermissibly conflicting interest.” Id. at 158 (quoting In re Pillowtex, Inc., 304 F.3d 246, 251 (3d Cir. 2002)). Said differently, the issue is “whether a possible conflict implicates the economic interests of the estate and might lessen its value.” Id. In this regard, the bankruptcy court had explained that it was “in no way convinced that Sidley generally cannot effectively represent BSA” and found no actual conflict existed. Id. at 159.

However, Century argued that in addition to satisfying section 327 of the Bankruptcy Code, professionals must also abide by, and not violate, the Model Rules of Professional Conduct—here, Rules 1.7 and 1.9. While the Third Circuit stated that “a court’s decision on retention may be informed by counsel’s conduct implicating the Rules of Professional Conduct,” there was no requirement to do so. Id. at 161.

Even evaluating the asserted Model Rule violations, the Third Circuit found no abuse of discretion by the lower courts. The Third Circuit again stressed the court’s power to fashion appropriate remedies in the face of asserted ethical violations and noted that disqualification can sometimes be more disruptive than helpful. Even if the asserted violations were well-founded (and none of the courts found that to be true), the Third Circuit confirmed that Century was not adversely affected because no confidential or privileged information was shared with Sidley’s bankruptcy team. On balance, however, if Sidley were disqualified, the Debtors would have been adversely affected. The Third Circuit concluded that the bankruptcy court properly focused on section 327 and there was no abuse of discretion in approving Sidley’s retention.

ESML Holdings, Inc. v. B. Riley FBR, Inc. (In re Essar Steel Minnesota, LLC), 47 F.4th 193 (3d Cir. 2022). The Third Circuit confirmed that where a post-confirmation adversary proceeding is “core,” the “close nexus test” does not apply. The court also enforced the Supreme Court’s decision in Travelers Indem. Co. v. Bailey, 557 U.S. 137, 151 (2009), holding that the bankruptcy court plainly had authority to interpret and enforce its own prior orders.

During ESML Holdings Inc. and Essar Steel Minnesota LLC’s (together, the “Debtors”) bankruptcy cases, Chippewa Capital Partners, LLC (“Chippewa”) emerged as the plan sponsor, agreeing to acquire the Debtors and provide exit financing. Chippewa’s affiliate engaged B. Riley & Co., LLC (“B. Riley”) as its financial advisor and agreed to pay B. Riley a restructuring fee if it was successful in acquiring the Debtors. However, one day prior to the effective date of the plan, B. Riley and Chippewa amended its engagement to bind the reorganized debtors. B. Riley then sought its success fee of $16 million from the reorganized debtors. When the reorganized debtors refused to pay, B. Riley filed a complaint in Minnesota. In response, the reorganized debtors filed an adversary proceeding in the Delaware bankruptcy court. B. Riley moved to dismiss the adversary complaint, arguing that its claim was not pre-effective date and therefore was not enjoined by the plan. The reorganized debtors argued that the amendment was not binding on the reorganized debtors and, in any event, any claim arising from the amendment was enjoined by the plan and confirmation order. After oral argument, the bankruptcy court ruled that it lacked subject-matter jurisdiction and dismissed the adversary proceeding. The reorganized debtors appealed, and the district court certified the issue directly to the Third Circuit.

After performing an in-depth analysis of statutory bankruptcy jurisdiction, the Third Circuit found that the bankruptcy court had jurisdiction. First, the Third Circuit foreclosed B. Riley’s argument that the “close nexus test” applied, holding that it does not apply to “core proceedings.” “Core proceedings” include determinations as to the dischargeability of particular debts, objections to discharge, and confirmations of plans, and are conferred to the jurisdiction of the bankruptcy court under 28 U.S.C. § 157(b). Because this action involved core proceedings, the bankruptcy court clearly had jurisdiction. In addition, the Third Circuit noted that the bankruptcy court had jurisdiction to redress a possible contempt of its plan and confirmation order. Finally, the Third Circuit confirmed that the bankruptcy court had jurisdiction to interpret and enforce its own prior order—here, the discharge and injunction provisions of the plan and confirmation order—under the Supreme Court’s decision in Travelers. Accordingly, the Third Circuit reversed and remanded to the bankruptcy court.

In re Szczyporski, 34 F.4th 179 (3d Cir. 2022). In a case arising out of a couple’s chapter 13 case, the Third Circuit followed the Fifth Circuit in determining that a shared responsibility payment for failing to maintain health insurance in accordance with the Affordable Care Act (“ACA”) is a tax for bankruptcy purposes that is entitled to priority under the Bankruptcy Code.

The facts of this case are straightforward. In July 2019, Robert and Bonnie Szczyporski (together, the “Debtors”) filed a chapter 13 petition. The IRS filed a proof of claim that included $927 for a shared responsibility payment owed by the Debtors for failing to maintain health insurance in 2018 in accordance with the ACA. In February 2020, the bankruptcy court confirmed the Debtors’ plan, but reserved on the Debtors’ objection to the IRS’s proof of claim. The bankruptcy court later held that the shared responsibility payment was a tax (not a penalty) for bankruptcy purposes, entitled to priority under section 507(a)(8) of the Bankruptcy Code. The district court affirmed, and the Debtors timely filed an appeal to the Third Circuit.

The Bankruptcy Code does not define “tax,” and the Supreme Court teaches that courts should look at the actual effects instead of the label when determining whether an exaction is a tax. In making its determination, the Third Circuit considered the six Lorber-Suburban factors that ask whether the exaction is: (i) an involuntary pecuniary burden laid upon individuals or property; (ii) imposed by, or under authority of the legislature; (iii) for public purposes; (iv) under the police or taxing power of the state; (v) universally applicable to similarly situated entities; and (vi) whether granting priority status to the government will disadvantage private creditors. 34 F.4th at 185 (quoting In re United Healthcare Sys., Inc., 396 F.3d 247, 253 (3d Cir. 2005)). The court also considered “any relevant factor,” calling its examination of the exaction “flexible.” Id. (quoting United Healthcare Sys., 396 F.3d at 255, 256)).

The Third Circuit found that all six Lorber-Suburban factors indicated that the exaction is a tax. Even if the fifth and sixth factors were not satisfied, as argued by the Debtors, the court concluded that other relevant factors weighed in favor of finding that the exaction is a tax. First, the payment is not “exchanged for a government benefit not shared by others,” 34 F.4th at 187 (quoting United Healthcare Sys., 396 F.3d at 260), and the government can “’manipulate the [payment] to encourage or discourage’ health insurance purchases,” id. (quoting United Healthcare System, 396 F.3d at 254). Second, the payment is calculated and administered like a tax—paid in connection with taxpayers’ tax returns, does not apply to individuals who do not pay federal income taxes because their household income is too low, calculated using factors familiar to the tax context, enforced by the IRS, and assessed and collected in the same manner as taxes. Finally, notwithstanding its statutory label as a “penalty,” the payment does not share any typical penal characteristics. Therefore, the Third Circuit found that the exaction was a tax for bankruptcy purposes.

The Third Circuit also found that the tax was entitled to priority under section 507(a)(8) because the tax was based on the taxpayer’s income. The court posited that the plain language of the statute “grants priority not only to traditional income taxes, but also to taxes, like the shared responsibility payment, whose amounts are calculated based on the taxpayer’s income.” Id. at 188. The court then demonstrated how a taxpayer’s income played an essential role in determining the amount of the shared responsibility payment owed by using examples from the IRS’s payment estimator. Finally, the court brushed aside arguments that the IRS labeled the payment an “excise” tax because such labels or titles have no legal effect. In affirming the lower courts on these issues, the Third Circuit joined the Fifth Circuit in holding that the shared responsibility payment is a tax entitled to priority under the Bankruptcy Code. Cf. United States v. Chesteen (In re Chesteen), 799 F. App’x 236, 240-41 (5th Cir. 2020).

§ 1.5 Fourth Circuit

Beckhart v. Newrez LLC, 31 F.4th 274 (4th Cir. 2022). The Fourth Circuit held that the bankruptcy court’s ability to hold creditors in contempt for violating a chapter 7 discharge order, as articulated by Taggart v. Lorenzen, 139 S. Ct. 1795 (2019), applies equally to a confirmation order arising out of a chapter 11 case.

This case arises from the chapter 11 filing of a married couple who, at the time of their filing, owned several properties, including a house in Kure Beach, North Carolina, for which the mortgage payments were ten months in arrears at the time of filing. The bankruptcy court confirmed the debtors’ plan of reorganization, which provided that the debtors would retain possession of the house and the creditor would retain a secured claim for the outstanding mortgage balance, payable according to the original terms of the loan. Several years later, a new loan servicer, Shellpoint, took over the debtors’ mortgage. Notwithstanding that the debtors paid the mortgage timely following the bankruptcy, Shellpoint sent notices to the debtors regarding a past due balance for the payments missed prior to bankruptcy. Although the debtors explained that they had gone through a bankruptcy, Shellpoint continued sending notices. After approximately five years, Shellpoint instituted foreclosure proceedings against the debtors. The debtors then filed an emergency motion for contempt in the bankruptcy court. The bankruptcy court granted the debtors’ motion, finding Shellpoint in contempt for violating the confirmation order and ordering Shellpoint to pay the debtors over $114,000 in sanctions. On appeal, the district court reversed, finding that the bankruptcy court had failed to apply the Taggart standard and that Shellpoint had not acted willfully in violating the confirmation order because it had relied on the advice of outside counsel. The debtors appealed to reinstate the bankruptcy court’s contempt order, arguing that Taggart does not extend beyond violations of discharge orders in chapter 7 cases.

The Fourth Circuit rejected the debtors’ limited interpretation of the Supreme Court’s ruling in Taggart. Looking to the Supreme Court’s rationale in Taggart, the Fourth Circuit found that the Supreme Court used general principles of equity and provisions of the Bankruptcy Code applicable to all chapters to reach its conclusion. In so doing, however, the Court noted that, while bankruptcy courts are capable of holding creditors in civil contempt, they should not do so when “there is a fair ground of doubt as to the wrongfulness of the defendant’s conduct.” 31 F.4th at 277 (citing Taggart, 139 S. Ct. at 1801-02).

The Fourth Circuit then looked to the bankruptcy court’s decision. Agreeing with the district court, the Fourth Circuit found that the bankruptcy court had not applied the Taggart standard. However, it found error with the district court’s decision as well, finding that the district court had erred in giving controlling weight to the fact that Shellpoint had relied on legal advice from outside counsel. Therefore, the Fourth Circuit vacated the district court’s order, with instructions to the district court to vacate the bankruptcy court’s order as well and remand for further proceedings consistent with Taggart.

Cook v. United States (In re Yahweh Ctr., Inc.), 27 F.4th 960 (4th Cir. 2022). The IRS is not immune from avoidance actions under section 544(b)(1), according to the Fourth Circuit. Nonetheless the Fourth Circuit upheld dismissal of the avoidance actions, brought under the North Carolina Uniform Voidable Transactions Act (the “North Carolina UVTA”), holding that the IRS tax penalty obligations sought to be avoided were not the types of transactions that the statute was designed to avoid.

In 2016, Yahweh Center, a not-for-profit corporation, sought relief under chapter 11 of the Bankruptcy Code. The IRS filed a proof of claim against Yahweh Center for certain unpaid taxes, including penalties and interest. After the bankruptcy court confirmed Yahweh Center’s plan of reorganization, Richard P. Cook was appointed to serve as plan trustee. As plan trustee, Cook then sued the United States to avoid certain tax penalties Yahweh Center had incurred and to recover certain payments for tax penalties that Yahweh had made prepetition under the North Carolina UVTA. Cook argued that Yahweh Center did not receive “reasonably equivalent value” in exchange for the penalties and the penalty payments. The bankruptcy court granted the government’s motion to dismiss the avoidance action, in spite of first rejecting the government’s argument that it was immune from suit. The district court affirmed on grounds similar to the bankruptcy court. This appeal followed.

The Fourth Circuit first considered the government’s sovereign immunity argument. The government argued that it should be immune from suit because there was no unsecured creditor who could sue the government in whose shoes the plan trustee could stand, under section 544(b)(1) of the Code. However, the Fourth Circuit rejected this argument, holding that section 106(a) explicitly abrogated sovereign immunity as to section 544(b)(1). 11 U.S.C. § 106(a)(1). In addition, the court found that the government had waived sovereign immunity by filing its proof of claim under section 106(b).

Turning to the substance of the claims, the Fourth Circuit considered followed the Sixth Circuit’s decision in Southeast Waffles, LLC v. U.S. Dep’t of Treasury/I.R.S. (In re Southeast Waffles, LLC), 702 F.3d 850 (6th Cir. 2012). In Southeast Waffles, the Sixth Circuit held that tax penalty obligations were not avoidable under the Bankruptcy Code’s fraudulent transfer provision or the Tennessee Uniform Fraudulent Transfer Act. In so holding, the Sixth Circuit found that tax penalties were not “within the ambit of the ‘exchanges’ targeted in the fraudulent-transfer laws.” See id. at 858-59. The Fourth Circuit similarly found that the North Carolina UVTA presumes a voluntary exchange between the debtor and the creditor pursuant to an oral or written agreement. Because no such agreement took place with respect to the IRS tax penalties, the Fourth Circuit held that such tax penalties were not the types of obligations contemplated by the North Carolina UVTA. Therefore, the North Carolina UVTA could not be the “applicable law” grounding the plan trustee’s section 544(b)(1) claim. Accordingly, the plan trustee’s fraudulent conveyance claims were properly dismissed.

§ 1.6 Fifth Circuit

Fed. Energy Regul. Comm’n v. Ultra Res., Inc. (In re Ultra Petroleum Corp.), 28 F.4th 629 (5th Cir. 2022). In this case, the Fifth Circuit was asked to determine whether a debtor’s rejection of a filed-rate contract in bankruptcy relieved it of its obligation to continue performance without first seeking the approval the Federal Energy Regulatory Commission (“FERC” or the “Commission”). Secondly, the court was asked whether section 1129(a)(6) of the Bankruptcy Code required the bankruptcy court to obtain FERC’s approval before confirming the plan.

The debtor was an energy company whose primary business was the production of natural gas. The debtor entered into a contract with a pipeline to reserve space for transportation of its gas. Under that contract, the debtor was to pay a monthly reservation charge, regardless of how much gas it actually shipped. When it entered bankruptcy proceedings, the debtor sought permission to reject its natural gas shipping contract. The pipeline company objected and asked the bankruptcy court to refrain from issuing a decision until proceedings could be had before FERC, arguing that FERC had exclusive authority to decide whether the debtor should be relieved of its obligations under the filed-rate contract. The bankruptcy court denied that request but asked that FERC participate as a party-in-interest and comment on any harm to the public interest. FERC responded by filing a motion for reconsideration, arguing that formal proceedings before the Commission were required because it could only speak to such matters through its orders and could not comment on the public interest through counsel. The bankruptcy court denied that motion. Following an evidentiary hearing, in which FERC participated, the bankruptcy court granted the motion to reject. The bankruptcy court held that it had the authority to approve rejection of the contract under prior Fifth Circuit precedent and, even given the rejection question heightened scrutiny considering the effect on the public interest, rejection was still appropriate as it would not harm the supply of natural gas and would simply benefit the debtor’s estate. The bankruptcy court emphasized that rejection neither modified nor abrogated the underlying contract and did not amount to a rate change requiring approval under section 1129(a).

In resolving the underlying questions, the Fifth Circuit noted that they concern “a clash of two congressionally constructed titans, FERC and the bankruptcy courts.” 28 F.4th at 635. But a prior Fifth Circuit decision had conclusively resolved this contest. See Mirant Corp. v. Potomac Elec. Power Co. (In re Mirant Corp.), 378 F.3d 511 (5th Cir. 2004). In that case, the Fifth Circuit held that FERC had the exclusive authority to determine rates and that any attempt to modify rates would need to go through the Commission. Mirant, 378 F.3d at 519. But it distinguished the action of the bankruptcy court because rejection is a breach of the contract and FERC does not have exclusive authority over a breach of contract claim. Id. The Fifth Circuit also held that the Bankruptcy Code has no exception to the rejection power for wholesale electric contracts at issue in Mirant. Id. at 521. “This lack of an exception signaled a congressional intent to permit rejection since other areas featured ‘specific limitations and exceptions to the [section] 365(a) general rejection authority.” Id. Mirant thus recognized that a more rigorous standard than the simple business judgment rule would apply where the public interest was concerned:

First, ‘the power of the [bankruptcy] court to authorize rejection of a [filed-rate contract] does not conflict with the authority given to FERC to regulate rates.’ . . . Second and related, rejection ‘is not a collateral attack upon [the] contract’s filed-rate because that rate is given full effect when determining the breach of contract damage resulting from the rejection.’ . . . Third, in ruling on a rejection motion, bankruptcy courts must consider whether the rejection harms the public interest or disrupts the supply of energy, and must weigh those effects against the contract’s burden on the bankruptcy estate.

Ultra Res., 28 F.4th at 638-39 (quoting Mirant, 378 F.3d at 518, 522, 525) (citations omitted) (alterations in original). Given that prior decision, the Fifth Circuit held that “what FERC casts as a pitched battle is actually a settled truce.” 28 F.4th at 639. And the result was straight forward. The bankruptcy court had the “‘power . . . to authorize rejection of’ a filed-rate contract and such rejection ‘[did] not conflict with the authority given to FERC to regulate rates.’” 28 F.4th at 641 (quoting Mirant, 378 F.3d at 518). The Fifth Circuit found that the bankruptcy court complied with its obligations to consider the public interest.

The Fifth Circuit also considered and rejected FERC’s argument that FERC was required to conduct the full proceedings before the bankruptcy court could rule. The Fifth Circuit noted that nothing in Mirant could be read “as requiring a bankruptcy court to allow FERC to conduct a hearing before the court can decide on rejection.” Id. at 642. The court then clarified, holding that the bankruptcy court “must invite FERC to participate in the bankruptcy proceedings as a party-in-interest. Whether FERC ultimately decides to participate is up to it, but the court must at least extend the invitation.” Id. at 642-43. In this case, because the bankruptcy court did so, its ruling was affirmed.

Gulfport Energy Corp. v. Fed. Energy Regul. Comm’n, 41 F.4th 667 (5th Cir. 2022). In another Federal Energy Regulatory Commission (“FERC”) case, the Fifth Circuit reaffirmed its position that bankruptcy courts can reject filed-rate contracts without FERC’s consent.

In this case, FERC anticipated the Gulfport Energy Corporation’s insolvency and issued orders, before Gulfport sought bankruptcy relief, purporting to (i) require Gulfport to obtain FERC’s approval before it could reject its natural gas transportation service agreements (the “TSAs”) in bankruptcy and (ii) bind Gulfport to continue performing under the TSAs, even if it rejected them during bankruptcy. After Gulfport filed for bankruptcy, it asked the Fifth Circuit to vacate FERC’s orders.

Before getting to the facts of the case, the Fifth Circuit opened its opinion by noting that the Bankruptcy Code “allows debtors to breach and cease performing executory contracts if the bankruptcy court approves.” 41 F.4th at 671. It then cited Mirant Corp. v. Potomac Electric Power Co. (In re Mirant Corp.), 378 F.3d 511 (5th Cir. 2004), Federal Energy Regulatory Commission v. FirstEnergy Solutions Corp. (In re FirstEnergy Solutions, Corp.), 945 F.3d 431, 446 (6th Cir. 2019), and Federal Energy Regulatory Commission v. Ultra Resources, Inc. (In re Ultra Petroleum Corp.), 28 F.4th 629 (5th Cir. 2022) as cases holding that debtors may reject regulated energy contracts, even if FERC would prefer that they not.

The Fifth Circuit then noted that there were two federal statutes at issue. The first was the Bankruptcy Code and its rejection provisions in section 365. The second was the Natural Gas Act, which regulates firms that move and sell natural gas in interstate commerce. Under the Natural Gas Act, rates are filed with FERC and any changes must also be approved by FERC. The Federal Power Act imposes material identical requirements on electric power companies. Examining a prior clash of these statutes, the Fifth Circuit discussed its holding in Mirant. Approximately two decades ago, FERC attempted to utilize its rate-setting authority to block a bankrupt power company from rejecting filed-rate contracts. The Fifth Circuit disagreed, noting that rejection does not change or cancel a contract, but rather constitutes a breach. Mirant, 378 F.3d at 515, 519. Thus, it did not implicate FERC’s authority because neither the contract nor the filed rate thereunder were altered. Id. at 519. Accordingly, under Mirant, the debtor did not need FERC’s consent to reject its filed-rate contracts and FERC could not negate such a rejection by requiring continued performance. Id. at 523. The Fifth Circuit noted that, while, initially, FERC appeared to acknowledge Mirant, more recently, FERC had decided that Mirant did not need to be followed. FERC’s rulings pressed forward the rationale that was specifically rejected in Mirant, “namely. that rejection ‘modif[ies] or abrogate[s]’ a filed-rate contract.” Gulfport, 41 F.4th at 673 (quoting ETC Tiger Pipeline, LLC, 171 FERC ¶ 61,248, at ¶ 20, reh’g denied, 172 FERC ¶ 61,155 (2020)).

Turning to the substance of the appeal, the Fifth Circuit first addressed FERC’s position that Gulfport’s petition to review its orders was nonjusticiable and that FERC’s orders were binding on Gulfport. In discussing its jurisdiction to review FERC’s orders, the court focused on the legal effects of FERC’s orders as a justiciable injury. “FERC’s orders left no doubt that Gulfport could not reject the TSAs or cease performing them without [FERC’s] approval—no matter what the bankruptcy court decided.” 41 F.4th at 678. Because FERC orders have legal force and it can enforce its orders with civil penalties, Gulfport had standing to challenge the orders. Gulfport was thus injured and had standing. The Fifth Circuit also found that FERC’s order were ripe for review and had not been mooted by Ultra Resources. Therefore, the court found that Gulfport’s challenge was justiciable over which the Fifth Circuit had jurisdiction.

The court then turned to the merits of the dispute. It held, contrary to Gulfport’s argument, that FERC did not abuse its discretion in issuing the orders because it articulated a rational reason for its orders—to remove uncertainty in the event Gulfport filed for bankruptcy. Accordingly, FERC had authority to issue the orders. Notwithstanding that determination, the Fifth Circuit held that the orders were unlawful. “Each rests on the premise that rejecting a filed-rate contract in bankruptcy is something more than a breach of contract. That premise is wrong, so we must vacate the orders.” 41. F4th at 682. In so holding, the court rejected the pipeline company’s argument that the Supreme Court’s decision in Mission Products Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652 (2019) somehow overruled Mirant and Ultra Resources. To the contrary, the court noted that Mission Products buttressed those decisions by making clear that rejection cannot be treated as something more than a breach of contract. Thus, FERC cannot prevent rejection. It cannot bind a debtor to continue to pay the filed-rate after rejection. And it cannot usurp the bankruptcy court’s authority to decide the rejection issue. Accordingly, the petitions for review were granted and the challenged orders were vacated.

Keystone Gas Gathering, L.L.C. v. Ad Hoc Comm. of OPCO Unsecured Creditors (In re Ultra Petroleum Corp.), 51 F.4th 138 (5th Cir. 2022). In this case, the Fifth Circuit faced the unusual situation of an insolvent debtor regaining solvency (due to soaring natural gas prices) during the course of the bankruptcy case.

Here, two groups of creditors complained that the plan proposed by the debtor fell short. They contended that, pursuant to their prepetition Master Note Purchase Agreement (the “MNPA”), they were entitled to a “make-whole amount,” which was a lump-sum calculated to give them the present value of the interest payments they would have received but for the bankruptcy. They also claimed they were owed postpetition interest at the rates specified under the MNPA and the Revolving Credit Facility (the “RCF”), respectively, which were both materially higher than the federal judgment rate provided under the plan. The creditors thus objected to their classification as “unimpaired” under the plan. Initially, the bankruptcy court held that the creditors were impaired unless they were paid the full amount permitted under applicable non-bankruptcy law. The debtors appealed and, in 2019, the Fifth Circuit reversed the bankruptcy court, holding that “[w]here a plan refuses to pay funds disallowed by the Code, the Code—not the plan—is doing the impairing.” Keystone Gas Gathering L.L.C. v. Ad Hoc Comm. of Unsecured Creditors of Ultra Res., Inc. (In re Ultra Petroleum Corp.), 943 F.3d 758, 765 (5th Cir. 2019). The Fifth Circuit remanded the case to the bankruptcy court to determine whether the creditors’ disputed claims were indeed disallowed under the Bankruptcy Code. Id. at 765-66. On remand, the bankruptcy court held that the Code did not bar either the make-whole amount or postpetition interest (for a solvent debtor), and thus the creditors were entitled to the those amounts under the plan. In re Ultra Petroleum Corp., 624 B.R. 178, 191-204 (Bankr. S.D. Tex. 2020). The debtors appealed a second time.

The Fifth Circuit first began by questioning whether the make-whole amount constituted unmatured interest, disallowed under section 502(b)(2) of the Code. The court concluded that it does. It then addressed the question of whether the “solvent-debtor exception” survived the enactment of the Code in 1978 and still applies to suspend the Code’s disallowance of unmatured interest in the event the debtor proves solvent. The court held that the exception did, indeed, survive intact. The court’s decision was buttressed by its historical analysis. It noted that, “For some three centuries of bankruptcy law, courts have held that an equitable exception to the usual rules applies in an unusual case of a solvent debtor.” 51 F.4th at 150. That is, bankruptcy’s ordinary suspension of post-petition interest is itself suspended when the debtor is solvent, the legitimate bankruptcy interest of equitably distributing a limited pie no longer being viable. The debtors responded by noting that section 502(b)(2) does not distinguish between solvent and insolvent debtors. And the debtors cited to a number of bankruptcy court opinions and circuit court cases from the First and Seventh Circuits for the proposition that section 502(b)(2) applies regardless of solvency. Citing Supreme Court precedent, the court held it must defer to prior bankruptcy practice unless expressly abrogated by the Code. “The Court has endorsed a substantive cannon of interpretation regarding the Bankruptcy Code vis-à-vis preexisting bankruptcy doctrine. Namely, abrogation of a prior bankruptcy practice generally requires an ‘unmistakably clear’ statement on the part Congress; any ambiguity will be construed in favor prior practice.” Id. at 153-54. The provisions of the Code simply did not clear this high hurdle. Accordingly, the solvent-debtor exception applied and the debtors were required to pay the make-whole amount. The debtors then argued that otherwise applicable non-bankruptcy law would prohibit enforcement of the make-whole amount as a penalty. The court concluded, however, that the provision was enforceable under New York law, which was applicable.

Finally, turning to the question of the applicable postpetition interest rate, the Fifth Circuit was required to decide whether the federal rate specified under 28 U.S.C. § 1961(a) or the higher contractual default rate applied. The court concluded that the cram-down provisions of the Code did not preclude unimpaired creditors from receiving default rate postpetition interest in excess of the federal judgment rate. It concluded that the statute’s reference to the legal rate merely set a floor, but that equity allows for the parties’ contractual rate in the solvent debtor context.

NexPoint Advisors, L.P. v. Highland Cap. Mgmt., L.P. (In re Highland Cap. Mgmt., L.P.), 48 F.4th 419 (5th Cir. 2022). The Fifth Circuit reaffirmed its narrow interpretation of the doctrine of equitable mootness, reversing the bankruptcy court’s approval of an exculpation clause contained in the debtor’s plan to the extent it pertained to non-debtors, notwithstanding that the plan had been substantially consummated.

Highland Capital Management, LP managed billion-dollar, publicly-traded investment portfolios for almost three decades. However, in 2019, unpaid judgments and liabilities forced Highland Capital to seek chapter 11 bankruptcy protection. A “nasty breakup” between Highland Capital and its co-founder ensued. The bankruptcy court was able to mediate with the largest creditors and ultimately confirm a plan of reorganization amenable to most. But objecting creditors filed over a dozen objections to the plan. Certain parties, including the co-founder and the United States Trustee, objected to the plan’s exculpation of certain non-debtors as unlawful. Given the co-founder’s “continued litigiousness,” the plan purported to shield Highland Capital and various bankruptcy participants from lawsuits through an exculpation provision, which was to be enforced by an injunction and a gatekeeper provision (collectively, the “Protection Provisions”). Among other things, the Protective Provisions essentially excluded the protected parties, which encompassed nearly all bankruptcy participants, from any claims based on conduct in connection with the case or the plan; barred anyone from interfering with the implementation or consummation of the plan; and required anyone intending to pursue a claim against a protected party to first seek a bankruptcy court determination that the claim was colorable. The bankruptcy court approved the plan as proposed. After confirmation and the occurrence of several conditions precedent, the plan took effect. The co-founder and other objecting parties timely appealed directly to the Fifth Circuit.

Highland Capital moved to dismiss the appeal as equitably moot, as the plan had been substantially consummated. The Fifth Circuit disagreed and denied the motion. The court noted that, in the Fifth Circuit, equitable mootness is to be applied on a claim-by-claim basis, instead of appeal-by-appeal basis. Although no stay had been issued and it was undisputed that the plan had been substantially consummated, the court held that those factors alone were not sufficient to trigger equitable mootness. Instead, the court would consider whether it could craft relief for each claim that would not have significant adverse consequences to the reorganization. After first dispatching with Highland Capital’s argument that the court could not afford the appellants any relief without unravelling the entire plan, the court addressed the two claims for which Highland Capital had articulated a basis for equitable mootness: the challenges to the Protection Provisions and a challenge that the plan violated the absolute priority rule (which the court noted was “nearly forfeited for inadequate brief”). The court concluded that neither provided a basis for equitable mootness. With regard to the Protection Provisions, Highland Capital argued that, without them, its officers, employees, trustees, and oversight board members would all resign rather than be exposed to the co-founder’s litigation. The court rejected this argument, stating that “the goal of finality sought in equitable mootness analysis does not outweigh a court’s duty to protect the integrity of the process.” 48 F.4th at 431 (quoting In re Pac. Lumber Co., 584 F.3d 229, 252 (5th Cir. 2009)). Because “the legality of a reorganization plan’s non-consensual non-debtor release is consequential to the Chapter 11 process,” it “should not escape appellate review in the name of equity.” Id. at 431-32 (citing Pac. Lumber, 584 F.3d at 252). As for the absolute-priority-rule challenge, the debtor failed to identify a single case in which the Fifth Circuit had declined to review treatment of a class of creditors plan’s resulting from a cramdown. There was no evidence that junior classes had received any distributions. The relief requested would, thus, not affect third parties and, therefore, the appeal was not equitably moot.

Turning to the merits of the appeal, the Fifth Circuit noted that the appellants “fire[d] a bankruptcy-law blunderbuss.” Id. at 432. The court affirmed the bankruptcy court on the merits as to Appellants’ challenges to the plan’s classification, compliance with the absolute priority rule, compliance with Bankruptcy Rule 2015.3, and sufficiency of the evidence. But the Fifth Circuit reversed the bankruptcy court with respect to Appellants’ challenge of the exculpation of certain non-debtors, which the court held exceeded the statutory authority granted by section 524(e) of the Bankruptcy Code. Section 524(e) of the Code provides that “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any entity for such debt” in a chapter 11 proceeding. 11 U.S.C. § 524(e). The court found that the exculpation ran afoul of that statutory bar by extending the exculpation beyond the debtor, the unsecured creditors committee, and the independent directors. Accordingly, it reversed and struck the unlawful parts.

The court recognized the existence of a circuit split concerning the reach of section 524(e). The Fifth Circuit and the Tenth Circuit hold that the Code “categorically bars third-party exculpations absent express authority in another provision of the Bankruptcy Code.” Id. at 436 (collecting cases). But the Second, Third, Fourth, Sixth, Seventh, Ninth, and Eleventh Circuits allow—to varying degrees—limited third-party exculpations. Id. (collecting cases). The panel was bound to apply Fifth Circuit precedent established in Pacific Lumber, which only identified two bases to exculpate non-debtors: (i) section 524(g), regarding asbestos injunctions, and (ii) section 1103(c), providing limited qualified immunity to creditors’ committee members for actions within the scope of their statutory duties. The court noted that the Fifth Circuit had also recognized a limited qualified immunity for bankruptcy trustees unless they act with gross negligence. Highland Capital failed to identify any other sources, so the court could not find a basis for the full extent of the exculpations provided for under the approved plan. As a result, the Fifth Circuit struck the non-debtor exculpations for all non-debtors other than the members of the unsecured creditors’ committee and the independent directors (who were entitled to all the rights and powers of a trustee under section 1107(a), and therefore entitled to exculpation).

Notwithstanding the unlawful exculpation provisions, the court found that the injunction and gatekeeper provisions were perfectly lawful. The plan was sufficiently specific as to what would constitute interference with the implementation and consummation of the plan such that the injunction was neither overbroad nor vague. With regard to the gatekeeping function, the Fifth Circuit found that bankruptcy courts customarily performed that function. However, the court noted that the bankruptcy courts would have to determine whether they had subject-matter jurisdiction to pre-approve such claims. Accordingly, the court left the gatekeeping provision intact.

§ 1.7 Sixth Circuit

I.R.S. v. Juntoff (In re Juntoff), 636 B.R. 612 (B.A.P. 6th Cir. 2022). In a 2-1 decision, the Bankruptcy Appellate Panel for the Sixth Circuit joined the Fifth Circuit to hold that the “shared-responsibility payment” (the “SRP”) assessed under the Affordable Care Act (the “ACA”) for failure to purchase health insurance was a “tax . . . measured by income or gross receipts” within the meaning of section 507(a)(8)(A). Accordingly, claims by the IRS against individual debtors for amounts due for SRP-related liabilities were properly entitled to priority treatment.

The ACA requires non-exempt individuals either to maintain a minimum level of health insurance or to pay a penalty. 26 U.S.C. § 5000A. For the tax years 2017 and 2018, the ACA provided that those individuals who did not maintain a “minimum level of health insurance” would have to make a SRP with their annual federal tax payment. 26 U.S.C. § 5000A(b)(1). The SRP amount was the greater of a flat amount or 2.5 percent of a taxpayer’s taxable income. 26 U.S.C. § 5000A(c)(2)(A), (B)(iii). The debtors in these consolidated appeals neither maintained the required health insurance minimums nor paid the assessed SRP in 2017 and 2018, respectively. When the debtors subsequently commenced proceedings under chapter 13 of the Bankruptcy Code, the IRS filed proofs of claims against the debtors for their respective unpaid SRPs and asserted that its claims were entitled to priority treatment under section 507(a)(8). The debtors each objected, asserting that the SRP liability was not entitled to priority treatment. The bankruptcy court agreed, issuing a consolidated memorandum opinion sustaining the debtors’ objections. This appeal followed.

The majority first addressed the preliminary question of whether the SRP was a tax—eligible for priority treatment under the Bankruptcy Code—or an ineligible penalty, which question the bankruptcy court had failed to address. The IRS argued that the Supreme Court’s decision in National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012) that the SRP was a tax was determinative. The debtors argued that, to the contrary, Sebelius was not binding as to the question of whether the SRP is a tax for the purposes of the Bankruptcy Code’s priority scheme. The majority found that Sebelius was not dispositive because the opinion differentiated its treatment of the SRP as a tax versus a penalty depending on the purpose for which it was reviewed. For instance, when considering whether the Anti-Injunction Act barred review of the SRP because it was a tax, the Court concluded that the SRP was a penalty, and therefore not beyond the Court’s review. But when considering whether the SRP was constitutional, the Court deemed the SRP a tax and examined whether it was a valid exercise of Congress’ taxing power. Accordingly, the majority considered the context in which the SRP was being reviewed significant. Since Sebelius did not address the SRP in the context of the Bankruptcy Code’s priority scheme, it was not binding precedent.

The majority then looked to Sixth Circuit precedent to examine whether the SRP was a “tax” or a “penalty.” The parties agreed that the SRP satisfied all but one of the six factors laid out in the Sixth Circuit’s “functional examination” framework: whether the SRP was a pecuniary obligation universally applicable to similarly situated entities. The debtors asserted that the SRP was not universally applicable (and therefore not a tax) based on the discretion afforded to the Secretary of Health and Human Services to grant hardship exemptions from the SRP. The majority held that universal applicability is determined at the point at which the exaction is levied, and does not take into account whether an exemption might apply. As such, the SRP was universally applicable and constituted a “tax” under governing Sixth Circuit caselaw.

Finally, the majority considered whether the SRP was a “tax . . . measured by income or gross receipts” within the meaning of section 507(a)(8)(A). The bankruptcy court had concluded that the SRP was not measured by income because of the availability of a flat rate. Because income did not factor into every taxpayer’s assessment, the bankruptcy court held that the SRP was outside of the scope of section 507(a)(8)(A). The majority disagreed, holding that the SRP was “measured by” income because the SRP was determined by reference to income, even if it was just one of several factors. Accordingly, the majority reversed, and found that the SRP was entitled to priority under section 507(a)(8)(A).

The dissent, however, was not persuaded that the SRP constituted a tax. Among its considerations, the dissent posited that construing the SRP as a tax defeated fundamental bankruptcy policies by affording the IRS a higher priority than other creditors. The dissent also argued that the SRP could only be framed as a tax because of its placement within the Internal Revenue Code, which was insufficient to justify priority treatment under the Bankruptcy Code. And finally, the dissent disagreed with the majority’s application of the “functional examination.” The dissent was persuaded that the SRP was not “universally applicable” because it only applied to individuals who did not maintain a minimum level of health insurance. While the individual insurance mandate was universally applicable, the dissent noted, the SRP was not, and could be avoided by simply complying with the individual mandate.

§ 1.8 Seventh Circuit

Archer-Daniels-Midland Co. v. Country Visions Coop., 29 F.4th 956 (7th Cir. 2022). The Seventh Circuit found that a purchaser’s failure to ensure that a known creditor had notice of a bankruptcy sale affecting the creditor’s rights constituted bad faith, which negated the purchaser’s entitlement to section 363(m) protection.

In 2007, Olsen Brothers Enterprises granted a right of first refusal (the “ROFR”) on a parcel of land (the “Parcel”) to Country Visions Cooperative (“Country Visions”). Soon after, Olsen Brothers dissolved and distributed its assets to its partners; Country Vision’s ROFR survived the dissolution. Three years later, the former partners of Olsen Brothers filed for bankruptcy. They did not provide any form of notice to Country Visions and did not inform the bankruptcy judge about the ROFR. In 2011, the bankruptcy court approved the debtors’ plan, pursuant to which the Parcel was sold, free and clear of all other interests, to Archer-Daniels-Midland (“ADM”). Country Visions did not receive an opportunity to match ADM’s offer.

In 2015, ADM arranged to resell the Parcel, again without first offering it to Country Visions. Country Visions sued ADM in Wisconsin state court for, alleging that the sale violated its ROFR. In response, ADM moved the bankruptcy court to enjoin Country Visions’ suit in state court, arguing that, because the sale was free and clear, ADM was protected as a good faith purchaser pursuant to section 363(m) of the Bankruptcy Code. The bankruptcy court declined to grant ADM’s motion, instead finding that ADM knew of Country Visions’ ROFR and failed to raise it with the bankruptcy court at the time of the 2011 sale. The bankruptcy concluded that such actions did not comport with those of a good faith purchaser, and so ADM was not entitled to section 363(m) protection. The district court affirmed.

On appeal, the Seventh Circuit affirmed the rulings of the lower courts. In so doing, the court bypassed the due process issues revolving around notice to Country Visions, holding that the statutory question mooted the constitutional issue. The court noted that it could only reach the due process question if ADM could demonstrate that it was a good faith purchaser entitled to section 363(m) protection. On the question of good faith, the court agreed with the lower courts that “someone who has both actual and constructive knowledge of a competing interest, yet permits the sale to proceed without seeking the judge’s assurance that the competing interest-holder may be excluded from the proceedings, is not acting in good faith.” Id. at 959. Therefore, the court found that ADM was not protected by section 363(m) and would have to defend Country Visions’ state court suit.

Sheehan v. Breccia Unlimited Co. (In re Sheehan), 48 F.4th 513 (7th Cir. 2022). This holding from the Seventh Circuit notes a significant limitation on the ability of bankruptcy courts to enforce the automatic stay. Although bankruptcy courts are afforded in rem jurisdiction over all property in a debtor’s estate—“wherever located,” 28 U.S.C. § 1334(e)(1); see also 11 U.S.C. § 541(a)—the bankruptcy courts cannot enforce such jurisdiction if they do not have personal jurisdiction over the party holding the property.

In this case, an Irish national living in Illinois sought protection under chapter 11 of the Bankruptcy Code in an attempt to prevent an Irish receiver from foreclosing on and selling certain property that the debtor had, located in Ireland. Shortly after commencing the bankruptcy proceedings, the debtor brought an adversary proceeding seeking to enforce the automatic stay against not only the receiver, but also the foreclosing creditor, the receiver’s employer, and the potential purchaser of certain of the foreclosed property, all of whom were Irish. All defendants moved to dismiss for lack of personal jurisdiction and insufficient service of process. In response to the motions to dismiss, the debtor requested discovery relating to testimony in declarations submitted in support of the motion to dismiss. The bankruptcy court for the Northern District of Illinois granted the motions to dismiss for lack of personal jurisdiction and lack of sufficient service, but did not specifically address the debtor’s request for discovery. The district court affirmed, noting that the bankruptcy court had not abused its discretion in denying the debtor’s discovery requests sub silentio. The debtor then appealed to the Seventh Circuit.

The Seventh Circuit affirmed the lower courts’ rulings. On appeal, the debtor had argued that, due to the bankruptcy court’s in rem jurisdiction over the subject property, the property was legally located in Illinois (notwithstanding its actual location in Ireland). As a result, so the argument went, the defendants’ actions to seize and sell the property must have also occurred in Illinois, thereby constituting minimum contacts with the forum. The Seventh Circuit held that the debtor could not “bootstrap” personal jurisdiction in such a circular manner.

The circuit court then proceeded to examine whether the bankruptcy court had specific personal jurisdiction, in accordance with precedent established by the Supreme Court and the Seventh Circuit. Here, the Irish defendants had litigated the foreclosure in Irish courts and the property had already been placed into a receivership for liquidation in Ireland. The fact that the actions taken in Ireland had affected the debtor in Illinois was insufficient to confer personal jurisdiction, where the defendants had not intentionally “taken aim” at Illinois in its actions.

The circuit court also affirmed the lower courts’ denial of the debtor’s request for discovery, likening the request to a fishing expedition.

§ 1.9 Eighth Circuit

Kelley. v. Safe Harbor Managed Account 101, Ltd., 31 F.4th 1058 (8th Cir. 2022). In a recent examination of the section 546(e) safe harbor provision, the Eighth Circuit followed the Second Circuit in holding that a customer of a financial institution can qualify as a financial institution for the purpose of excluding a transfer from avoidance. The Circuit Court upheld the district court’s determination that the initial transferee constituted a financial institution by virtue of its customer status notwithstanding a lack of clarity as to the transfer in which the initial transferee was functioning as customer. This interpretation potentially expands the section 546(e) safe harbor to encompass any transaction involving the customer of a commercial or savings bank when the bank is acting as agent or custodian for the customer in connection with a securities contract.

The underlying avoidance action arises from the liquidation of the Petters Company, Inc. (“PCI”) and its affiliates, after the Ponzi scheme perpetrated by Thomas Petters was uncovered in September 2008. The plaintiff, the trustee of the Petters Company, Inc. Liquidating Trust, filed hundreds of lawsuits seeking to recover payments made by the companies to early investors, including an avoidance action against the initial transferee, a feeder fund named Arrowhead Capital Partners II, L.P. (“Arrowhead”). The scheme, insofar as Arrowhead was involved, was structured as follows: (i) on July 18, 2011, a special purpose subsidiary of PCI entered into a Credit Agreement with a special purpose subsidiary of Arrowhead; and (ii) on the same day, Arrowhead entered into a Note Purchase Agreement with its SPE to purchase the notes evidencing the loans under the Credit Agreement. Investors would invest in Arrowhead by putting money into a “custodial” account at Wells Fargo Bank in Arrowhead’s name. Arrowhead would then use the funds to buy the PCI notes from its own SPE. When the PCI entity made payments on the notes, Arrowhead would flow the funds back its investors. After obtaining a default judgment against Arrowhead in the amount of $942 million, the trustee sought to avoid a $6.9 million payment that Arrowhead had passed along to one of its investors, Safe Harbor Managed Account 101, Ltd. (“Safe Harbor”). In 2002, Safe Harbor had entered into a Limited Partnership Agreement and Subscription Agreement with Arrowhead, investing a total of $6 million. In 2003, Safe Harbor redeemed its investment for a total of $6.9 million.

After the bankruptcy court ruled that section 546(e) did not immunize Safe Harbor from the trustee’s avoidance action on a motion to dismiss, the case was subsequently sent to the district court for a jury trial. There, Safe Harbor sought summary judgment, again on the grounds that section 546(e) immunized the transfers from PCI to Arrowhead. Section 546(e) provides that “the trustee may not avoid a transfer . . . that is a transfer made by or to (or for the benefit of) a . . . financial institution . . . in connection with a securities contract, as defined in section 741(7), . . . that is made before the commencement of the case. . . .” 11 U.S.C. § 546(e). In other words, in order to be exempt from avoidance, a transaction must involve a transfer (i) by, to, or for the benefit of a “financial institution,” and (ii) that is made “in connection with a securities contract.” The district court granted summary judgment, finding that section 546(e) applied to the initial transfer as between PCI and Arrowhead (and therefore excluded the subsequent transfer from Arrowhead to Safe Harbor) because (i) Arrowhead was a “financial institution,” (ii) the Note Purchase Agreement was a “securities contract,” and (iii) the transfers were made “in connection with” the Note Purchase Agreement. On appeal, the trustee argued that the district court erred in finding that Arrowhead was a financial institution and that the Note Purchase Agreement was a securities contract.

First, the court examined whether Arrowhead qualified as a “financial institution.” The Bankruptcy Code defines “financial institution” as including the customer of “an entity that is a commercial or savings bank” when that “entity is acting as agent or custodian for [the] customer . . . in connection with a securities contract (as defined in section 741).” 11 U.S.C. § 101(22)(A). The parties did not dispute that Wells Fargo is commercial bank or that Arrowhead was its customer, but did dispute whether Wells Fargo was acting as Arrowhead’s custodian. The trustee attempted to argue that the Supreme Court’s holding in Merit Management Group, LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018) was controlling, rather than the Second Circuit’s later decision in Deutsche Bank Trust Co. Americas v. Large Private Beneficial Owners (In re Tribune Co. Fraudulent Conveyance Litigation), 946 F.3d 66 (2d Cir. 2019). Merit provided that “the relevant transfer for purposes of the § 546(e) safe-harbor inquiry is the overarching transfer that the trustee seeks to avoid under one of the substantive avoidance provisions,” id. at 893, but left open the question of whether a party to the overarching transfer may qualify “as a ‘financial institution’ by virtue of its status as a ‘customer’ under § 101(22)(A),” id. at 890 n.2. In Tribune, the Second Circuit held that a party to the transaction could qualify as a “financial institution” by virtue of its “customer” status, and therefore fall within the section 546(e) safe harbor. 946 F.3d at 80-81. The Eighth Circuit found no error in the district court’s reliance on the precedent established in Tribune, and agreed that Arrowhead qualified as a “financial institution” by virtue of its status as a customer of Wells Fargo. The court also dismissed the trustee’s arguments that Wells Fargo only functioned as a custodian on behalf of Arrowhead with respect to the transfers between Arrowhead and its investors (as opposed to the transfers between Arrowhead and PCI subject to avoidance), because the trustee failed to articulate why the distinction mattered.

The court next examined whether the transfers were made “in connection with a securities contract, as defined in section 741(7).” Section 741(7) defines “securities contract” to include “a contract for the purchase, sale, or loan of a security. . . .” 11 U.S.C. § 741(7)(A)(i). The Bankruptcy Code definition of a “security” encompasses a note. See 11 U.S.C. § 101(49)(A)(i). The district court held, and the Eighth Circuit affirmed, that the Note Purchase Agreement fell squarely within the definition of a securities contract. However, when considering whether the subject transfers were made “in connection with” the Note Purchase Agreement, the Eighth Circuit remanded the matter back to the district court for further factual findings.

Lariat Co. v. Wigley (In re Wigley), 15 F. 4th 1208 (8th Cir. 2021). The Eighth Circuit held that the cap on landlord claims found in section 502(a)(6) of the Bankruptcy Code does not preclude a finding of nondischargeability due to actual fraud under section 523(a)(2)(A).

Landlord Lariat Companies, Inc. was awarded more than $2 million in damages after suing Michael Wigley in state court for past due and future accruing rent resulting from a restaurant lease termination, which Mr. Wigley had personally guaranteed. But while the state court action had been pending, Mr. Wigley transferred certain assets to his wife, Barbara Wigley. Lariat then sued Mrs. Wigley (and later joined Mr. Wigley) in state court under the Minnesota Uniform Fraudulent Transfer Act, seeking to avoid the transfers between husband and wife. The state court entered judgment in favor of the landlord, holding Mr. and Mrs. Wigley jointly and severally liable for more than $780,000. Mr. Wigley thereafter filed for chapter 11 bankruptcy and Lariat filed a claim, which the bankruptcy court capped pursuant to section 502(a)(6), to the extent the claim involved the restaurant lease termination. After Mr. Wigley satisfied the capped claim of approximately $637,000, Mrs. Wigley moved to vacate the fraudulent transfer judgment against her, which the state court denied. Mrs. Wigley then filed for bankruptcy and Lariat filed a claim for more than $1 million, representing the fraudulent transfer judgment plus accrued interest, to which Mrs. Wigley objected. The bankruptcy court determined that Lariat’s discharged claim in Mr. Wigley’s bankruptcy case did not extinguish Mrs. Wigley’s liability to Lariat, but also held that, because Lariat’s claim in Mrs. Wigley’s proceeding arose from a lease termination, the landlord cap under section 502(a)(6) should apply. Lariat’s claim against Mrs. Wigley was allowed in the amount of approximately $331,000, which Mrs. Wigley satisfied. While Mrs. Wigley’s objection to Lariat’s claim was pending, however, Lariat filed a complaint in the bankruptcy court seeking to except its claim from discharge pursuant to section 523(a)(2)(A) because the debt was obtained by “actual fraud.” The bankruptcy court entered judgment in favor of Lariat after a two-day trial. The bankruptcy appellate panel affirmed, and Mrs. Wigley appealed.

On appeal before the Eighth Circuit, Mrs. Wigley contended that the bankruptcy court incorrectly excepted Lariat’s claim from discharge because doing so invalidated any relief that she had been granted by the landlord-cap and undermined the purpose of section 502(b)(6). The circuit court disagreed, holding that the application of section 502(b)(6) and the subsequent satisfaction of the allowed section 502(b)(6) claim did not preclude the balance of the fraudulent transfer claim from being excepted from discharge pursuant to section 523(a)(2)(A).

Mrs. Wigley also argued on appeal that the bankruptcy court erred in concluding that she committed “actual fraud.” The Eighth Circuit found that the bankruptcy court did not clearly err in finding that Mrs. Wigley had received a fraudulent transfer from Mr. Wigley and that the record supported the bankruptcy court’s finding that Mrs. Wigley participated with the requisite wrongful intent. Specifically, the Eighth Circuit noted that Mrs. Wigley wrongful intent was established by evidence showing, among other things, that the family was in financial distress at the time of the transfer, that the Wigleys “regularly discussed their financial situation and reviewed their accounts together,” and that Mrs. Wigley was aware that Mr. Wigley had been sued.

§ 1.10 Ninth Circuit

Ad Hoc Comm. of Holders of Trade Claims v. Pac. Gas & Elec. Co. (In re PG&E Corp.), 46 F.4th 1047 (9th Cir. 2022). In a 2-1 decision, the Ninth Circuit became the first circuit to address the question of what postpetition interest rate a solvent debtor must pay creditors whose claims are designated as unimpaired pursuant to section 1124(1) of the Bankruptcy Code, overturning both the bankruptcy and district courts. Prior to this decision, bankruptcy courts were split as to whether the federal judgment rate or the contractual rate should apply. Compare In re Ultra Petroleum Corp., 624 B.R. 178, 203-04 (Bankr. S.D. Tex. 2020) (holding that unimpaired creditors must receive postpetition interest at the contract rate), with In re Hertz Corp., 637 B.R. 781, 800-01 (Bankr. D. Del. 2021) (holding that unimpaired creditors are entitled to receive interest at the federal judgment rate).

PG&E filed its chapter 11 petition in January 2019 to help address its potential liabilities stemming from a series of wildfires that occurred from 2015-2018. At the time of its filing, PG&E was solvent, reporting $71.4 billion in assets and $51.7 billion in known liabilities. Due to its solvency, PG&E proposed in its chapter 11 plan to pay non-wildfire-related trade claims in full, and to pay postpetition interest at the federal judgment rate of 2.59 percent, accruing from the date of PG&E’s bankruptcy filing through the date of distribution. Based on this treatment, PG&E categorized such claims “unimpaired,” pursuant to section 1124, with the result that holders of such claims were not entitled to vote on the plan (see 11 U.S.C. § 1126(f) (providing that a class that is not impaired is “conclusively presumed to have accepted the plan”)) nor entitle to the benefits of the “best interests” test under section 1129(a)(7) (see id. § 1129(a)(7) (applying only to “each impaired class of claims or interests”)). The plaintiffs objected to the proposed treatment, arguing that, because PG&E was solvent, they were required to receive postpetition interest at the contractual or default state law rates to be considered unimpaired. The bankruptcy court disagreed, finding that it was bound by the Ninth Circuit’s decision in Onink v. Cardelucci (In re Cardelucci), 285 F.3d 1231 (9th Cir. 2002), which entitled all unsecured creditors of a solvent-debtor only to postpetition interest at the federal judgment rate. The bankruptcy court further held, in the alternative, that if Cardelucci did not control, the Bankruptcy Code limited unsecured creditors of a solvent debtor to postpetition interest at the federal interest rate. The district court affirmed, on the grounds that Cardelucci controlled.

The majority reversed both the bankruptcy court and the district court. After first considering the origins of the so-called “solvent debtor” exception and the nature of impairment, as defined under the Bankruptcy Code, the majority turned to the application of Cardelucci, as the primary support on which the lower court decisions were based. The majority clarified that Cardelucci only held that the phrase “interest at the legal rate,” as used in section 726(a)(5) referred to the federal judgment rate as defined by 28 U.S.C. § 1961(a). Because section 726(a)(5) is only applicable in chapter 11 vis-à-vis the best interests test, which itself is only applicable to impaired claims, the majority concluded that Cardelucci did not dictate the postpetition interest rate applicable to unimpaired claims.

The majority then addressed the bankruptcy court’s alternative holding that the plaintiffs’ claims were still unimpaired, despite only receiving postpetition interest at the federal judgment rate, because the plaintiffs had received what they were entitled to under the Code—that is to say, all “legal, equitable, and contractual rights” related to their claims. In the majority’s view, the only way in which to arrive at such a conclusion was by determining that the Bankruptcy Code had displaced the solvent debtor exception, which, by its terms, requires application of the contractual or state law rate for postpetition interest. After finding that neither section 502(b)(2) nor section 726(a)(5) unambiguously abrogated the plaintiffs’ entitlement to their equitable right in postpetition interest, the majority then turned to the statutory history of section 1124. Section 1124(3) provided that a creditor was unimpaired if it was paid “the allowed amount of [its] claim.” After the court in In re New Valley Corp., 168 B.R. 73, 79-80 (Bankr. D.N.J. 1994) held that a creditor was unimpaired under section 1124(3) if it received the full principal of its claim—without any postpetition interest, the provision was repealed to prevent New Valley’s “unfair result” from happening again. See H.R. Rep. No. 103-835, § 214 at 48 (1994). The majority interpreted this Congressional action to confirm its finding that creditors of a solvent debtor who are impaired must receive postpetition interest on their claim and remanded the matter back to the bankruptcy court for a determination on the equitable rates that should apply.

In contrast, the dissent, written by Circuit Judge Ikuta, argued that an unimpaired creditor of a solvent debtor is not entitled to any postpetition interest, essentially abandoning the solvent debtor exception. The dissent premised its position on section 502(b)(2) of the Code, which provides that claims for “unmatured interest” are not allowed. 11 U.S.C. § 502(b)(2). Such a provision, the dissent position, was a clear abrogation of the solvent debtor exception. Furthermore, the dissent rejected the majority’s position that section 502(b)(2) prohibited including unmatured interest as part of a claim, but permitted earning postpetition interest on a claim. As such, the failure to include postpetition interest on a claim against a solvent debtor could not render that claim impaired.

Cnty. of San Mateo v. Chevron Corp., 32 F.4th 733 (9th Cir. 2022). The Ninth Circuit held that global-warming-related state tort claims asserted by government municipalities against energy companies as producers and promoters of fossil fuels did not have a sufficiently close nexus to the energy companies’ bankruptcy cases such that they were “related to” those companies’ bankruptcies, as required for removal of claims to federal court pursuant to 28 U.S.C. § 1452(a).

In July 2017, several California municipalities brought state-court actions against more than thirty energy companies for public and private nuisance, strict liability for failure to warn, strict liability for design defect, negligence, negligent failure to warn, and trespass related to the companies’ production and promotion of fossil fuels and their impact on global warming and rising sea levels. The energy companies removed the actions to federal court, asserting multiple bases for subject-matter jurisdiction, including but not limited to, jurisdiction pursuant to 28 U.S.C. § 1452(a) due to the fact that the claims were “related to” bankruptcy cases. The district court rejected all of the energy companies’ grounds for removal, including “related to” bankruptcy jurisdiction, but stayed its remand orders to allow the companies to appeal. The Ninth Circuit affirmed the district court’s determination only as to federal-officer removal, holding that it did not appellate jurisdiction to review the district court’s order as to the other basis for removal under 28 U.S.C. § 1447(d). The energy companies then appealed to the Supreme Court. While their petition for certiorari was pending, the Supreme Court decided BP p.l.c. v. Mayor & City Council of Baltimore, 141 S. Ct. 1532 (2021), which interpreted section 1447(d) as permitting appellate review of all grounds for removal. The Supreme Court then granted the petition for writ of certiorari in this case, vacated the Ninth Circuit’s prior decision, and remanded for further proceedings in light of Baltimore.

After reviewing the district court’s remand order a second time—this time considering all bases for removal articulated by the energy companies—the Ninth Circuit again affirmed the district court’s remand order, finding that the energy companies had failed to adequately articulate any basis upon which the district court could find subject-matter jurisdiction to remove the cases, including “related to” bankruptcy jurisdiction.

In its holding related to bankruptcy jurisdiction, the Ninth Circuit relied heavily on its own precedent regarding “related to” bankruptcy jurisdiction under 28 U.S.C. § 1334(b). First, the circuit court noted that, in the Ninth Circuit, the determination of what “related to” means, as used in section 1334(b), depends on whether a plan has been confirmed by the bankruptcy court. If a plan has not been confirmed, “related to” is interpreted broadly, and any proceeding that “could conceivably have an effect” on the bankruptcy estate, In re Fietz, 852 F.2d 455, 457 (9th Cir. 1988), will fall within the district court’s jurisdiction. But after plan confirmation, a proceeding is “related to” a bankruptcy case only if there is a “close nexus to the bankruptcy plan or proceeding.” In re Pegasus Gold Corp., 394 F.3d 1189, 1194 (9th Cir. 2005).

The energy companies based their claims for bankruptcy removal jurisdiction on the bankruptcy proceedings of defendants Peabody Energy Corp. and Texaco, Inc. Because both defendants had plans confirmed before the commencement of the municipalities’ suits, the Ninth Circuit required a showing of a “close nexus” to the bankruptcy plans of each of Peabody and Texaco to ground removal jurisdiction. The energy companies argued that the plans of both were implicated to determine whether the municipalities’ claims were barred. In particular, with respect to Peabody’s plan, the energy companies argued that a bankruptcy court had previously interpreted Peabody’s plan to determine whether the municipalities’ claims could be prosecuted against Peabody. The Ninth Circuit determined that merely reading the plans to determine whether the plans barred certain claims was not sufficient to create a “close nexus” that conferred “related to” jurisdiction on the district court. Accordingly, the Ninth Circuit affirmed the district court’s remand order as it pertained to bankruptcy removal jurisdiction under 28 U.S.C. § 1452(a).

Harrington v. Mayer (In re Mayer), 28 F. 4th 67 (9th Cir. 2022). Answering a question left open by the Supreme Court in Ritzen Group, Inc. v. Jason Masonry, LLC, 140 S. Ct. 582 (2020), the Ninth Circuit reversed the district court to hold that an order denying stay relief—without prejudice—was final and appealable where it conclusively resolved the request for stay relief.

After a dispute arose between two real estate business partners, Harrington and Mayer, litigation ensued in Massachusetts state court. Shortly before the scheduled jury trial, Mayer filed a petition for relief under chapter 7 of the Bankruptcy Code in the Southern District of California. As a result, the Massachusetts court placed the state court action on inactive status. Harrington filed a complaint in the bankruptcy court, seeking a determination that his claims against Mayer were nondischargeable. The complaint largely reiterated Harrington’s allegations contained in the Massachusetts state court actions. In addition, Harrington filed a proof of claim against Mayer, seeking over $2 million in damages, based on the same Massachusetts state law claims. Harrington subsequently filed a motion for relief from the automatic stay to allow the Massachusetts suit to proceed to trial. The bankruptcy court denied Harrington’s lift stay motion without prejudice. Harrington filed a motion for leave to appeal, but the district court denied the motion on the grounds that (i) the bankruptcy court’s denial of the motion for relief from the stay was without prejudice, and (ii) Harrington had failed to establish his entitlement to an interlocutory appeal. Harrington appealed, arguing that the bankruptcy court’s order denying stay relief was a final order and was immediately appealable as an abuse of discretion.

Relying on Ritzen, the Ninth Circuit found that the bankruptcy court had “unreservedly denied relief” on Harrington’s motion for relief from the stay. The circuit court found that the bankruptcy court clearly conveyed that it was reserving to itself adjudication of Harrington’s claims vis-à-vis his nondischargeability action. By determining that Harrington’s claims would be litigated in bankruptcy court in California and not Massachusetts state court, the bankruptcy court had rendered a decision resolving Harrington’s substantive right to pursue litigation in the state court on a final basis. Therefore, the order was final and appealable.

The circuit court also observed that the bankruptcy court’s denial of stay relief without prejudice was intended to convey that the bankruptcy court was willing to consider alternate stay relief requests from Harrington (as long as the requests were for a purpose other than pursuing the Massachusetts state court litigation), rather than that the order was not final and appealable. Accordingly, the Ninth Circuit reversed the district court’s denial of leave for appeal.

NetJets Aviation, Inc. v. RS Air, LLC (In re RS Air, LLC), 638 B.R. 403 (B.A.P. 9th Cir. 2022). The Ninth Circuit Bankruptcy Appellate Panel became one of the first appellate panels to rule on a debtor’s subchapter V eligibility. The panel held that section 1182(1)(A)’s requirement that a debtor must be “engaged in commercial or business activities” is not limited to the debtor’s core or historical operations, as long as the debtor is “presently” engaged in some sort of commercial or business activity, and the activity need not be profit oriented.

RS Air, LLC was formed in 2001 to provide aircraft transportation services, to buy and sell fractional ownership interests in private aircraft, and to provide depreciation tax benefits to its sole member. As part of its operations, RS Air routinely contracted with NetJets Aviation, Inc., a private jet charter company, and certain of its affiliates (collectively, “NetJets”) for the purchase or lease of the fractional ownership interests described above. The two companies maintained a healthy business relationship until July 2017, when the parties sued each other in state court for breach of contract following a non-injury runway crash. In November 2020, on the eve of trial, RS Air filed for chapter 11 under subchapter V. NetJets objected to RS Air’s subchapter V designation, arguing that RS Air was ineligible under section 1182(1)(A) because for it was not currently “engaged in commercial or business activities.” In its ruling, the U.S. Bankruptcy Court for the Northern District of California placed the burden of proving ineligibility on NetJets and then overruled NetJets’ objection, finding that RS Air was “engaged in commercial or business activities” on the date of filing because: (1) RS Air transformed its business from flight services to investigating and litigating with NetJets; (2) RS Air intended to resume fractional jet ownership with a different partner; (3) RS Air paid its aircraft registry fees; (4) RS Air remained in good standing as a Delaware LLC; and (5) RS Air filed and paid taxes as required. NetJets renewed its objection during the confirmation hearing, but the bankruptcy court again overruled NetJets, holding that it was bound by its prior decision under the “law of the case” doctrine. NetJets then appealed the confirmation order.

The BAP first addressed NetJets’ arguments on appeal that the bankruptcy court erred in finding that RS Air was “engaged in commercial or business activities” under section 1182(1)(A). Reviewing the decisions of other bankruptcy courts to have considered the issue, the BAP held that there was no requirement for a debtor to maintain its core or historical operations on the date of filing. The debtor did, however, have to be “presently” engaged in some type of commercial or business activities at the time of filing in order to satisfy section 1182(1)(A). The BAP considered that the scope of commercial and business activities was sufficiently broad to encompass such activities of the sort that RS Air had engaged, such as pursuing litigation with NetJets, paying aircraft registration fees, remaining in good standing under Delaware law, and paying taxes. As a corollary this determination, the BAP also found that the fact that RS Air did not have a “profit motive” did not negate RS Air’s subchapter V eligibility.

The BAP then addressed the issue of which party bears the burden of proving the debtor’s subchapter V eligibility. Looking to other analogs under the Bankruptcy Code, the panel found that the bankruptcy court erred in allocating the burden of proof to NetJets. Rather, the burden should be on the debtor to establish eligibility. However, the BAP concluded that the bankruptcy court’s error was harmless because RS Air demonstrated that it was engaged in commercial or business activities on the petition date, which was the only eligibility factor subject to challenge.

Finally, the BAP refused to find that the bankruptcy court had abused its discretion when it adopted the law of the case doctrine to refuse reconsideration of NetJets’ confirmation objection on grounds of RS Air’s eligibility.

Perryman v. Dal Poggetto (In re Perryman), 631 B.R. 899 (B.A.P. 9th Cir. 2021). Requesting continuances and attending status conferences in connection with a litigation commenced prepetition do not constitute violations of the automatic stay. In other words, the automatic stay does not require a litigant in a prepetition lawsuit to dismiss his or her claims against the debtor once the debtor files a bankruptcy petition.

Jerome Perryman and Karen Dal Poggetto were previously married. In 2017, Dal Poggetto filed a petition for dissolution of the marriage. Under the terms of the parties’ marital settlement agreement and the judgment entered in their dissolution proceeding, Perryman was awarded the marital home, but was required to pay Dal Poggetto out for her interest in the home in the amount of $29,000. Perryman was required to execute a promissory note and deed of trust against the home to collateralize the payable to Dal Poggetto. When Perryman failed to do so, Dal Poggetto filed a Request for Order in the dissolution proceeding, seeking to enforce the terms of their agreement (i.e., execution of the note and deed). In addition, Dal Poggetto sought sanctions and attorneys’ fees. Shortly before the matter was set to be heard in the dissolution proceedings, Perryman commenced proceedings under chapter 13 of the Bankruptcy Code. Perryman provided notice of the bankruptcy filing to Dal Poggetto and also filed a notice of stay in the dissolution proceeding. The Request for Order was continued several times during the pendency of Perryman’s bankruptcy proceedings in deference to the automatic stay. During this time, Dal Poggetto did not pursue the Request for Order, but merely sought to continue the hearings in the dissolution proceeding until Perryman’s bankruptcy proceedings were resolved. After approximately eighteen months of continuances, Perryman sought a motion for contempt against Dal Poggetto, arguing that her requests for continuances constituted continued prosecution of the Request for Order and were willful violations of the automatic stay. Dal Poggetto argued that she was not moving forward with the Request for Order; it was only being continued while Debtor’s Chapter 13 case proceeded, pending a later discharge, if any. The bankruptcy court denied the contempt motion. This appeal followed.

The Bankruptcy Appellate Panel (the “BAP”) affirmed the bankruptcy court. The BAP analogized the status conferences and continuances to postponement and rescheduling of a foreclosure sale, which the Ninth Circuit determined was not a violation of the automatic stay in First National Bank of Anchorage v. Roach (In re Roach), 660 F.2d 1316, 1318-19 (9th Cir. 1981) and Mason-McDuffie Mortgage. Corp. v. Peters (In re Peters), 101 F.3d 618, 620 (9th Cir. 1996). The panel then rejected Perryman’s argument that, by continuing to hold status conferences and to adjourn the Request for Order, Dal Poggetto was engaged in the “continuation of a judicial action” under section 362(a)(1). According to the panel, such continuances and status hearings were “commonplace” and did not “constitute prosecution of the matter.” Thus, because the status conferences did not “disturb the status quo,” there was no violation of the automatic stay.

Smart Cap. Invs. I LLC v. Hawkeye Ent. LLC (In re Hawkeye Ent. LLC), 49 F.4th 1232 (9th Cir. 2022). The Ninth Circuit confirmed that if a default has occurred under a real property lease—regardless of whether the default is ongoing or has already been cured or whether the default was material—a landlord is still entitled to the curative requirements under section 365(b)(1) of the Bankruptcy Code, including adequate assurance of future performance. However, where the default has already been cured, the form of additional “adequate assurance” provided by the debtor may be limited.

Landlord Smart Capital Investments had leased four floors and part of a basement to Hawkeye Entertainment, LLC for use as a dance club. Because the lease was significantly under market, Smart Capital attempted to terminate the lease due to Hawkeye’s alleged nonmonetary defaults. Ultimately, Hawkeye sought relief under chapter 11 of the Bankruptcy Code, and shortly thereafter moved to assume the lease before Smart Capital could complete termination of the lease. The bankruptcy court held a trial on Hawkeye’s motion, ultimately holding that the defaults described by Smart Capital were not material and therefore did not trigger Smart Capital’s entitlement to adequate assurance pursuant section 365(b)(1), under which a contract counterparty is only entitled to adequate assurance “[i]f there has been a default” in the contract. The district court affirmed.

The Ninth Circuit, however, disagreed with the bankruptcy court’s limitation on a contract counterparty’s right to receive adequate assurance pursuant to section 365(b)(1). Hawkeye argued that section 365(b)(1) was inapplicable because (1) there was no current default and (2) the defaults were not material. The circuit court overruled both. On the first argument, the Ninth Circuit noted that Congress could have employed alternate constructions of the phrase “[i]f there has been a default” that would have clarified whether cured defaults qualified for the purpose of triggering section 365(b)(1), such as “if there was a default” or “if there is a default.” But the fact that Congress chose “[i]f there has been a default,” signifying that section 365(b)(1) applies where a default has occurred, regardless of whether that default has been resolved or is ongoing. As to Hawkeye’s second argument, the Ninth Circuit rejected Hawkeye’s and the bankruptcy court’s interpretation that a default must be “material”—such that it warrants forfeiture under California law—in order to trigger section 365(b)(1). The court noted that there was no basis for such an interpretation, which appeared to conflate the term “default” with “termination,” contravening the ordinary meaning of the term “default.”

Notwithstanding the Ninth Circuit’s holdings on the law, the court went on to find that the bankruptcy court had not committed reversible error by misconstruing the applicability requirements of section 365(b)(1). Rather, because Hawkeye had already cured any defaults and had promised to adhere to the terms of the lease going forward, and because Smart Capital could not identify any additional assurance that would have substantively impacted its right to full performance of the lease, Smart Capital had already received all of the “adequate assurance of future performance” to which it was entitled under section 365(b)(1)(C).

§ 1.11 Tenth Circuit

Bear Creek Trail, LLC v. BOKF, N.A. (In re Bear Creek Trail, LLC), 35 F.4th 1277 (10th Cir. 2022). In this case, the Tenth Circuit held that a debtor’s former management lacks standing to file an appeal on behalf of the debtor after an order converting the case from chapter 11 to chapter 7 has been entered. Following the entry of the conversion order, the Tenth Circuit found that the chapter 7 trustee is the only one who has authority to file an appeal on behalf of the debtor.

An individual failed to repay a mortgage loan from BOKF, N.A. (d/b/a Bank of Texas). After a Texas state court awarded the bank a judgment against the individual in the amount of approximately $1.3 million, the court thereafter appointed a receiver to take possession of and sell all of the individual’s assets, including his interests in several corporate entities. One of the entities, Bear Creek Trail, LLC (the “Debtor”), filed a chapter 11 bankruptcy. The receiver appointed by the Texas state court moved to convert the Debtor’s case to a chapter 7 liquidation. The bankruptcy court granted the motion and appointed an interim chapter 7 trustee. The attorney who had represented the Debtor in its original chapter 11 filing then sought to appeal the conversion order. The district court dismissed the appeal, holding that only the chapter 7 trustee had authority to file a notice of appeal. This appeal followed.

The Tenth Circuit affirmed the district court’s dismissal, finding that the Debtor’s former management and its former attorney lacked authority to appeal the conversion order on behalf of the Debtor. Following the conversion and the appointment of a chapter 7 trustee, the Debtor’s former management no longer had authority to act on behalf of the Debtor. However, the Debtor’s former management and other parties in interest did retain the ability to file an appeal on their own behalf, which they declined to do in this case. This failure rendered additional arguments that the Debtor had “aggrieved party” standing to appeal unsupportable. Accordingly, the district court properly dismissed the appeal.

§ 1.12 Eleventh Circuit

Auriga Polymers Inc. v. PMCM2, LLC., 40 F.4th 1273 (11th Cir. 2022). The Eleventh Circuit joined the Third Circuit in holding that the “new value” defense to preference liability, pursuant to section 547(c)(4) of the Bankruptcy Code, is not subject to reduction due to the receipt of postpetition transfers.

On July 16, 2017, Beaulieu Group, LLC and its affiliates commenced chapter 11 cases. Subsequently, the bankruptcy court confirmed Beaulieu’s liquidating plan, pursuant to which a liquidating trust was established. All of Beaulieu’s assets, including its causes of actions, were transferred to the trust to be managed by the liquidating trustee. The trustee then filed a complaint which sought, among other things, (i) to avoid $2.2 million in payments made by Beaulieu to creditor Auriga in the ninety days before Beaulieu’s bankruptcy filing, pursuant to section 547(b) of the Bankruptcy Code, and (ii) to reclassify Auriga’s $694,502 section 503(b)(9) claim to a general unsecured claim to the extent any amounts were included as part of Auriga’s new value defense. In response, Auriga counterclaimed for a declaratory judgment that (as relevant here) its use of the new value defense pursuant to section 547(c)(4) did not preclude Auriga from recovering the same value as an administrative expense claim pursuant to section 503(b)(9). Ultimately, the dispute came down to whether $421,119, representing value provided by Auriga within twenty days of Beaulieu’s bankruptcy filing, could be used to offset Auriga’s preference liability pursuant to the new value defense, when the debtor had established a reserve to pay the amount as an administrative expense pursuant to section 503(b)(9).

The bankruptcy court denied Auriga summary judgment as to the $421,119 amount, holding that Auriga could not use the value provided as both a section 503(b)(9) administrative claim and as a preference defense under section 547(c)(4). In so holding, the bankruptcy court relied on an earlier adversary proceeding brought by the liquidating trustee against another creditor, wherein the bankruptcy court held that funds held in reserve to pay section 503(b)(9) claims were “otherwise unavoidable transfer[s]” pursuant to section 547(c)(4), and so could not be used to offset preference liability. The bankruptcy court also purported to rely on the Eleventh Circuit’s decision in Kaye v. Blue Bell Creameries, Inc. (In re BFW Liquidation, LLC), 899 F.3d 1178 (11th Cir. 2018), in which the court held that “[n]othing in the language of § 547(c)(4) indicates that an offset to a creditor’s § 547(b) liability is available only for new value that remains unpaid.” Id. at 1189. Utilizing this logic that all requirements for the new value defense must be explicitly provided by the language the statute, the bankruptcy court found that postpetition transfers, including reserves for payment of section 503(b)(9) administrative expenses, may qualify as “otherwise unavoidable transfers” that were excepted from the section 547(c)(4) new value defense because there was no time limitation provided in the statute.

On appeal, Auriga argued that (1) the $421,119 could not be used to offset its new value defense because the funds were held in reserve and were not paid to Auriga, and (2) “otherwise unavoidable transfers” could not be interpreted to include postpetition transfers. While the Eleventh Circuit summarily rejected Auriga’s argument that the reserves did not qualify as a transfer, the court agreed with Auriga that such transfers made postpetition did not affect a creditor’s new value defense. In so holding, the court noted that the bankruptcy court had erred in extrapolating from BFW Liquidation that subsequent transfers, whenever they occur, could offset a new value defense simply because the language of section 547(c)(4) did not contain a time limitation for such transfers. BFW Liquidation involved a prepetition transfer, and so the case did not require the court to consider whether transfers pursuant to section 547(c)(4) were inherently time limited, notwithstanding the absence of explicit language so indicating. The court then examined the statutory context. Similar to the Third Circuit in Friedman’s Liquidating Trust v. Roth Staffing Cos. LP (In re Friedman’s Inc.), 738 F.3d 547 (3d Cir. 2013), the Eleventh Circuit concluded that, due to several clues contained in the statutory context, the term “otherwise unavoidable transfer,” as used in section 547(c)(4), must refer only to transfers made prepetition. Accordingly, the postpetition reserve on account of the $421,119 did not reduce Auriga’s new value defense.

Jackson v. Le Centre on Fourth, LLC (In re Le Centre on Fourth, LLC), 17 F.4th 1326 (11th Cir. 2021). On facts similar to those presented to the Supreme Court in United Student Aid Funds v. Espinosa, 559 U.S. 260 (2010), the Eleventh Circuit held that a chapter 11 debtor’s failure to adhere to Bankruptcy Rule 2002(c)(3) in providing notice to creditors of third-party releases contained in the debtor’s plan did not violate due process where the creditors received actual notice of the content of the debtor’s plan.

A guest staying at a hotel on property owned by the debtor was severely injured when he was struck from behind by a car driven by the hotel’s valet parking attendant. The injured guest and his wife subsequently sued the valet driver and the valet company in Kentucky state court for damages related to the injuries sustained. The guests then sought to amend their complaint to add the debtor-property owner, the hotel, and the hotel’s manager. Because of the debtor-property owner’s bankruptcy filing, the guests sought limited relief from the automatic stay before the bankruptcy so that they could pursue nominal claims against the debtor, solely for the purpose recovering on the debtor’s insurance policy. The guests were thereafter included as creditors entitled to notice in the bankruptcy proceedings.

As the debtor’s bankruptcy proceedings progressed, the debtor filed a plan and disclosure statement, which included third-party release provisions which extended to both the hotel and the hotel manager. The guests, through their attorney, received copies of the filings, as well as copies of the bankruptcy court’s order setting the date for the confirmation hearing. However, the guests did not appear at the confirmation hearing nor file an objection to confirmation of the plan. The bankruptcy court subsequently confirmed the plan, including the third-party releases, which the bankruptcy court found “integral” to the debtor’s reorganization.

Following the entry of the confirmation order, the debtor, the hotel, and the hotel manager sought to dismiss the guests’ state court suit against them as barred by the confirmation order, which contained a discharge injunction, and by the releases contained in the debtor’s plan. In response, the guests moved the bankruptcy court to clarify that neither the confirmation order nor the plan precluded them from nominally asserting claims against the debtor, the hotel, and the hotel manager to reach their insurance. The guests also argued that applying the releases against them would violate due process because the debtor had failed to provide notice that complied with Bankruptcy Rule 2002(c)(3). The debtor, the hotel, and the hotel manager opposed the relief sought other than permitting the guests to proceed nominally against the debtor, which the debtor conceded. The bankruptcy court denied the motion, finding that the guests had received actual notice of the debtor’s plan and the releases contained therein, and therefore there was no due process violation. The bankruptcy court also held that the guests could not proceed against the hotel or the hotel manager, even nominally, because such claims, through various indemnity agreements between the parties, could result in direct indemnity claims against the debtor. The district court affirmed.

On further appeal, the Eleventh Circuit affirmed as well. On the due process argument, the circuit court applied the reasoning from the Supreme Court’s decision in United Students Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010). There, the Court held that notice required under the Bankruptcy Rules of a chapter 13 debtor’s intent to discharge accrued interest on the debtor’s student loans was a right granted by a procedural rule, and the failure of the debtor to follow those rules did not violate the creditor’s constitutional right to due process because the creditor had actual notice of the contents of the debtor’s plan. Although Espinosa arose in the context of a chapter 13 proceeding, the Eleventh Circuit nonetheless found it applicable here, where the guests’ attorneys had received the actual plan documents containing the release provisions, in spite of the fact that the debtor did not provide a notice of hearing on the confirmation of the plan complying with Bankruptcy Rule 2002(c)(3).

The Eleventh Circuit then addressed whether the district court had erred in not allowing claims to proceed nominally against the hotel and hotel manager. Because the bankruptcy court was authorized to release non-debtor, third parties pursuant to section 105(a) of the Bankruptcy Code, the circuit court determined that the applicable standard of review was abuse of discretion. The circuit found no error in the bankruptcy court’s conclusion that permitting nominal claims to proceed against the hotel and hotel manager could impose an economic burden on the debtor, and therefore the bankruptcy court acted within its discretion in denying the guests’ request to modify the confirmation order.

Reynolds v. ServisFirst Bank (In re Stanford), 17 F.4th 116 (11th Cir. 2022). The Eleventh Circuit was asked to determine whether the district court had properly dismissed an appeal of a sale order as moot pursuant to section 363(m) of the Bankruptcy Code. Affirming the district court, the Eleventh Circuit found that the appeal was statutorily moot because section 363(m) precluded the court from providing a remedy where the sale had not been stayed and had already been consummated.

Robert and Frances Stanford (the “Stanfords”) owned American Printing Company (“APC”). Prior to commencing their respective chapter 11 cases, the Stanfords and APC had borrowed money from ServisFirst Bank in the amount of $5 million and $7.2 million, respectively. The Stanfords’ loan was secured by real property (the “Property”). In addition, the Stanfords and APC guaranteed each other’s loans.

After the Stanfords and APC each commenced their chapter 11 proceedings, APC obtained debtor-in-possession financing from ServisFirst in the amount of $13.2 million, which “rolled up” the $12.2 million in debt that APC owed or had guaranteed. Approximately one month later, the Stanfords sought bankruptcy court approval for the sale of the Property to ServisFirst in exchange for a $3.5 million credit bid. The bankruptcy court approved the sale, and expressly found that ServisFirst was a good faith purchaser under section 363(m) of the Bankruptcy Code.

Shortly after the sale was approved, in a surprise turn, the Stanfords moved to amend the sale order and stay the sale, arguing for the first time that APC’s roll-up had discharged the Stanfords of any liability on their $5 million loan and that ServisFirst therefore did not have valid lien on the Property that it could use to credit bid. The bankruptcy court denied the motion to amend. On the merits, the bankruptcy court held that the roll-up had only made APC a co-obligor on the Stanford’s $5 million loan and did not discharge the Stanford’s liability for the loan. The bankruptcy court also found that the Stanfords were barred by the doctrines of equitable estoppel, judicial estoppel, and law of the case from raising an objection to ServisFirst’s credit bid. When the Stanfords appealed both the sale order and the order denying their motion to amend, they also sought a stay of the sale pending appeal. The bankruptcy court conditionally granted the stay if the Stanfords posted a $1.5 million supersedeas bond, which the Stanfords did not do. The sale of the Property to ServisFirst was eventually consummated, at which point ServisFirst moved the district court to dismiss the appeal as moot under section 363(m). The district court granted ServisFirst’s motion, and this appeal followed.

On appeal, the Stanfords argued that section 363(m) did not apply because (i) section 363(m) only applies to sales authorized by the Bankruptcy Code, not by the bankruptcy court, and (ii) ServisFirst was not a good faith purchaser. The Eleventh Circuit rejected both arguments. On the Stanfords’ first argument, the circuit court found that the language of section 363(m) was clear that it applied to all “authorization[s] under subsection (b) or (c)” of section 363, 11 U.S.C. § 363(m), and did not contain a qualifier that such authorizations must be “proper” under the Bankruptcy Code. In addition, the circuit noted that, since section 363(m) is conditioned on “such authorization and such sale or lease [being] stayed pending appeal,” id., the term “authorization” must refer to authorization by a bankruptcy court order, and not the Code, since the Code cannot be stayed.

Before addressing the Stanfords’ arguments as to whether ServisFirst was a good faith purchaser, the Eleventh Circuit first concluded that appellate courts are entitled to review whether a buyer acted in good faith for the limited purpose of determining whether section 363(m) applied. So concluding, the circuit court then addressed the Stanfords’ argument that ServisFirst lacked good faith because it provided no value in the sale (due to its hollow credit bid). The Eleventh Circuit rejected the Stanfords’ argument, holding that the bankruptcy court had not clearly erred in its finding—based on the Stanfords’ own motion—that ServisFirst was a good faith purchaser. The bankruptcy court had concluded that the APC roll-up did not affect ServisFirst’s lien on the Property, and therefore, the credit bid did represent cognizable value. But, the Eleventh Circuit continued, even if the lien dispute had not been resolved, there was precedent for using a contested lien to credit bid under section 363(k).

After concluding that section 363(m) applied, the Eleventh Circuit next determined whether it precluded the relief sought by the Stanfords. Although the Stanfords argued that ServisFirst could simply pay cash, rather than unwinding the sale, the court found that the form of payment—credit bid versus cash—was a central element of the purchase that could not be altered without undoing the sale itself. Accordingly, the Stanfords’ appeal was properly dismissed as moot pursuant to section 363(m).

Circuit Judge Jordan joined the court’s opinion except as to Part III.A.1, which addressed the Stanfords’ textual arguments pertaining to applicability of section 363(m). Although Judge Jordan concurred in the judgment, he arrived via a different route: he reasoned that the Stanfords were precluded, pursuant to the invited error doctrine, from appealing an order granting their own sale motion.

Spring Valley Produce, Inc. v. Forrest (In re Forrest), 47 F.4th 1229 (11th Cir. 2022). In a case of first impression for that circuit, the Eleventh Circuit determined that the exception to discharge contained in section 523(a)(4) of the Bankruptcy Code—which excepts debts “for fraud or defalcation while acting in a fiduciary capacity” from discharge—does not apply to debts incurred by a produce buyer who is acting as a trustee pursuant to the Perishable Agricultural Commodities Act, 7 U.S.C. §§ 499a et seq. (“PACA”).

The Forrests were owners and officers of a market (“Central Market”) that purchased over $260,000 worth of produce from Spring Valley Produce (“SVP”) for which Central Market never paid. Because SVP and Central Market were both licensed under PACA at the time of the transactions, when SVP sold its produce to Central Market, Central Market became obligated to hold such produce in trust for SVP until Central Market paid SVP for the produce. See 7 U.S.C. §499e(c)(2). The trust arises automatically on delivery of the produce.

The Forrests subsequently filed for chapter 7, shortly after which SVP commenced an adversary proceeding seeking a declaratory judgment that the Forrests’ personal liability for the $260,000 PACA-related debt was nondischargeable under section 523(a)(4). The Forrests moved to dismiss the proceeding, arguing that section 523(a)(4) does not apply to PACA-related debts because PACA does not require trust assets to be segregated nor does it prohibit the use of trust assets for non-trust purposes. The bankruptcy court agreed and granted the Forrests’ motion to dismiss. SVP appealed and the bankruptcy court certified its order for direct appeal the Eleventh Circuit.

Noting a lack of uniformity among bankruptcy courts in the circuit for determining whether section 523(a)(4) applied, the Eleventh Circuit began by delineating a clear standard governing when section 523(a)(4) excepted a debt from discharge. Drawing on Supreme court precedent and the Restatement (Third) of Trusts, as well as precedent from its own and other circuits, the Eleventh Circuit announced the following test for determining whether a debtor is acting in a “fiduciary capacity” under section 523(a)(4):

First, the fiduciary relationship must have (1) a trustee, who holds (2) an identifiable trust res, for the benefit of (3) an identifiable beneficiary or beneficiaries. . . . Second, the fiduciary relationship must define sufficient trust-like duties imposed on the trustee with respect to the trust res and beneficiaries to create a technical trust. . . . [T]he two most important trust-like duties . . . are the duty to segregate trust assets and the duty to refrain from using trust assets for a non-trust purpose. Third, the debtor must be acting in a fiduciary capacity before the act of fraud or defalcation creating the debt.

47 F.4th at 1241. Turning to the case at hand, the Eleventh Circuit then found that PACA satisfied the first prong because it created a trustee, an identifiable trust res, and identifiable beneficiaries. But the circuit court found that PACA failed the second prong, since the statute did not impose sufficient trust-like duties to create a technical trust. PACA neither required the segregation of trust assets nor precluded trustees from using trust assets for non-trust purposes. While these facts alone were not determinative, the court did not find the existence of other trust-like duties that enabled it to conclude that a PACA trust qualified as a technical trust. Rather, the court concluded that a PACA trust was more similar to a constructive trust than a technical trust, which did not fall with section 523(a)(4)’s exception to discharge. After briefly considering certain policy-based arguments, the Eleventh Circuit then affirmed the bankruptcy court’s dismissal of SVP’s adversary action.

U.S. Pipe & Foundry Co. v. Holland (In re U.S. Pipe & Foundry Co.), 32 F.4th 1324 (11th Cir. 2022). A divided panel of the Eleventh Circuit held that the chapter 11 plans of three debtors, confirmed in 1995, discharged the debtors’ obligation to pay various retiree health benefits mandated by the Coal Industry Retiree Health Benefit Act of 1992, 26 U.S.C. §§ 9701 et seq. (the “Coal Act”), notwithstanding that the debtors were not purported to be liable for such obligations until 2016. The majority found that, because the debtors were made jointly and severally liable for such statutory obligations as “related persons” to a coal company in 1992, the obligations were “claims” within the meaning of section 101(5) of the Bankruptcy Code that arose prior to plan confirmation and thus were discharged. Circuit Judge Anderson concurred in part and dissented in part, agreeing with the majority that one category of benefits was a claim arising prior to confirmation, but rejecting that view as to the other two categories of benefits.

This case begins with the Coal Act. The Coal Act sought to ensure that retiree funds established to provide coal workers and their immediate families with health benefits for the rest of their lives would not become insolvent. It did so by making certain coal companies and their “related persons”—defined broadly to include companies under common ownership as of July 20, 1992, see 26 U.S.C. § 9701(c)(2)—jointly and severally liable for funding three types of obligations: (1) paying premiums to a “Combined Benefit Fund,” 26 U.S.C. § 9704(a); (2) continuing to provide health-care benefits to workers, id. § 9711(a), (b), (c)(1); and (3) if the covered entities fail to provide healthcare in accordance with section 9711, paying premiums to the 1992 United Mineworkers of America Benefit Plan (the “1992 Plan”), id. § 9712(b)(2)(B), (d)(1), (d)(4). The obligations continued for so long as the coal company and its related person were in business (which business need not be limited to the coal industry). See id. §§ 9701(c)(7), 9704(f)(2)(B), 9711(a).

In 1989, Walter Industries, Inc. and its subsidiaries, including United States Pipe & Foundry Co., JW Aluminum Company, and JW Window Components LLC (collectively, the “Jim Walter Companies”), as well as a coal company called Jim Walter Resources, Inc. (“JW Resources”), filed for chapter 11 protection in the Middle District of Florida. On July 20, 1992, because of Walter Industries’ ownership of both the Jim Walters Companies and JW Resources (a coal company covered by the Coal Act), they all became “related persons” under the Coal Act. Notwithstanding that all of the companies were jointly and severally liable as “related persons” under the Coal Act, the trustees for the Combined Benefit Fund and the 1992 Plan (the “Trustees”) only filed a proof of claim for past due amounts against JW Resources; they did not file proofs of claims for future Coal Act obligations. In 1995, the bankruptcy court confirmed a consensual plan of reorganization, pursuant to which all claims that arose before the effective date were discharged, unless otherwise included in the plan. Walter Industries (now Walter Energy, Inc.), but no other debtors, expressly assumed the Coal Act obligations. The Trustees did not object to the plan.

In the years that followed, the Jim Walter Companies separated from Walter Energy and exited the coal industry. When Walter Energy filed a second bankruptcy proceeding in 2015, the Jim Walter Companies were not involved. But in its 2015 bankruptcy filing, Walter Energy obtained bankruptcy court approval to terminate its Coal Act obligations. In April 2016, Walter Energy stopped paying its obligations. As a result, in July 2016, the Trustees gave notice to the Jim Walter Companies that they were liable for the Coal Act obligations. The Jim Walter Companies eventually commenced adversary proceedings in their original 1989 proceedings, asserting that they were discharged from all Coal Act obligations in 1995 and that the Trustees were barred from enforcing such obligations against them. The bankruptcy court granted summary judgment to the Trustees, applying the test from County Sanitation District No. 2 of Los Angeles County v. Lorber Industries of California, Inc. (In re Lorber Industries of California, Inc.), 675 F.2d 1062 (9th Cir. 1982) to determine whether the Coal Act obligations were in the nature of a tax, which could not be discharged, as opposed to a contingent claim, which would have been discharged. The bankruptcy court concluded that the Coal Act obligations were “unquestionably a tax,” and so were not dischargeable. The district court affirmed on similar grounds.

On appeal, however, the Eleventh Circuit ignored the Lorber test, finding the Coal Act obligations were clearly in the nature of “claims” under the Bankruptcy Code and that the determinative question was whether the claims arose before or after confirmation of the plan in 1995. Both the majority and the dissent proceeded to analyze each category of obligation under the Coal Act to determine when the “claim” arose. While the majority found that all three categories were claims based on pre-confirmation conduct (i.e., the Jim Walter Companies’ association with JW Resources as of July 20, 1992), the dissent agreed only as to the obligation to pay premiums to the Combined Benefit Fund, and posited that the obligation to provide section 9711 benefits and to pay the 1992 Plan premiums only arose after Walter Energy stopped paying in 2016.

The majority’s reasoning relied on the fact that statutory liability was fixed as of July 20, 1992. Although the amount of the obligations was contingent, it still constituted a “right to payment,” and therefore was in the nature of an unliquidated claim, which could be discharged in bankruptcy. The Trustees’ argument that the obligations did not become enforceable until 2016 also did not persuade the majority that the obligations were not “claims” because the term “claim” is defined so broadly under the Bankruptcy Code as to include “a cause of action or right to payment that has not yet accrued or become cognizable.” 32 F.4th at 1332 (quoting 2 Collier on Bankruptcy ¶ 101.05[1] (16th ed. 2022)).

The dissent, like the majority, conducted a distinct analysis for the three types of obligations, but arrived at a different conclusion. Circuit Judge Anderson agreed with the majority’s conclusion that the obligation to pay the Combined Benefit Fund premiums was a claim pursuant to section 101(5)(A), and therefore discharged in 1995, but disagreed with their conclusion that the section 9711 obligation was a claim under section 101(5)(B). Judge Anderson argued that, in order to constitute a “right to an equitable remedy for breach of performance,” 11 U.S.C. § 101(5)(B), the breach of performance must necessarily occur pre-confirmation. Since the breach of performance did not occur until 2016, when Walter Energy and the Jim Walter Companies failed to provide health-care benefits in accordance with section 9711, the ensuing claim could not have been discharged in 1995. And because the obligation to pay 1992 Plan premiums was triggered only when Walter Energy and the Jim Walter Companies failed to provide health-care benefits in accordance with section 9711, that claim too also arose in 2016, and could not have been discharged in 1995.