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Business Law Today

March 2024

Recent Developments in Bankruptcy Litigation 2024

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

Recent Developments in Bankruptcy Litigation 2024

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§ 1.1.1. Supreme Court

Bartenwerfer v. Buckley, 598 U.S. 69, 143665 (2023). In this case the Court was confronted with the Bankruptcy Code’s exception to discharge for any debt obtained by fraud (contained in Section 523(a)(2)(A)). While this provision clearly applies to the active fraudster, the Court noted that sometimes a debtor may be liable for fraud that she did not personally commit. “For example, deceit practiced by a partner or an agent.” The question for the Court was whether the bar extends to this latter situation.

In 2005, Kate and David jointly purchased a house in San Francisco. Acting as business partners, they decided to remodel the house and sell it at a profit. David took charge of the project. Kate was largely uninvolved. Kate and David ultimately married and sold the house to Kieran Buckley. In connection with the sale, Kate and David attested that they had disclosed all material facts relating to the property. After closing, Buckley discovered several undisclosed defects. Buckley sued Kate and David and obtained a judgment in his favor. Kate and David were unable to pay Buckley and sought Chapter 7 bankruptcy protection. Buckley filed an adversary complaint alleging that the money owed on the state-court judgment fell within Section 523(a)(2)(A)’s exception to discharge for any debt for money obtained by fraud. The bankruptcy court ruled in Buckley’s favor holding that David’s fraudulent intent would be imputed to Kate because they had formed a legal partnership to execute the renovation and resale project. The Ninth Circuit bankruptcy appellate panel agreed as to David’s fraudulent intent but did not agree as to Kate. The panel concluded that the Code only barred her from receiving a discharge if she knew or had reason to know of David’s fraud. The Ninth Circuit reversed, holding that a debtor who is liable for her partner’s fraud cannot discharge that debt in bankruptcy, regardless of her own culpability. The Supreme Court granted certiorari to resolve confusion in the lower courts.

The Court began its analysis with the text of the Code. Justice Barrett wrote that “this text precludes Kate Bartenwerfer from discharging her liability for the state-court judgment.” There was no dispute that Kate was an individual debtor nor that the judgment was a debt. The focus of the Court’s analysis, and the arguments of the parties, revolved around whether the debt arose from money obtained by false pretenses, a false representation, or actual fraud. Kate disputed this last premise. She admitted that the statute was written in the passive voice, which does not specify a fraudulent actor. But she argued that the statute should be most naturally read to bar discharge of debts for money obtained by the debtor’s fraud. In other words, she argued that the passive voice hides the relevant actor in plain sight. The Court disagreed finding that the passive voice simply removes the actor from the equation.

By framing the statute to focus on an event without reference to the specific actor, the statute does not depend on the actor’s intent or culpability. The Court noted that this was consistent with the common law of fraud, which “has long maintained that fraud liability is not limited to the wrongdoer.” Both precedent and Congress’s response eliminated any doubt as to the propriety of the Court’s textual analysis. The Court had long ago held that the discharge exception was not limited to fraud by the debtor herself. Justice Barrett wrote that the Court must assume that Congress meant to incorporate the interpretations adopted by precedent when it reenacted the bankruptcy laws (without addressing the issue). In this case, the Congress went even further. Thirteen years after the Court’s decision Congress overhauled bankruptcy law and deleted “the strongest textual hook counseling against the outcome” reached by the Court. The Court concluded by noting that “innocent people are sometimes held liable for fraud they did not personally commit and, if they declare a bankruptcy, §523(a)(2)(A) bars discharge of that debt.” Justices Sotomayor and Jackson concurred noting that the Court did “not confront a situation involving fraud by a person bearing no agency or partnership relationship to the debtor.”

Lac Du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin, 599 U.S. 382, 143 S. Ct. 1689 (2023). This case concerned whether the express abrogation of sovereign immunity found in Section 106(a) of the Bankruptcy Code extended to federally recognized Indian tribes. The Lac Du Flambeau Band of Lake Superior Chippewa Indians is a federally recognized Indian tribe, with several wholly owned businesses. One of those businesses loaned money to Brian Coughlin. Coughlin sought Chapter 13 bankruptcy protection before repaying the loan. Notwithstanding the automatic stay imposed by Section 362(a) of the Bankruptcy Code, the tribe’s lending entity, Lendgreen, continued its collection efforts notwithstanding. Ultimately, Coughlin filed a motion with the Bankruptcy court to enforce the automatic stay and sought damages for emotional distress along with costs and attorney’s fees. Lendgreen moved to dismiss arguing that the bankruptcy court lacked subject-matter jurisdiction as both the Tribe and its subsidiaries enjoyed tribal sovereign immunity. The bankruptcy court agreed with the Tribe and dismissed the case on sovereign immunity grounds. The First Circuit reversed, holding that the Bankruptcy Code “unequivocally strips tribes of their immunity.” The Supreme Court granted certiorari to resolve a circuit split (the Ninth Circuit had held that the Bankruptcy Code abrogates Tribal sovereign immunity, while the Sixth Circuit reached the opposite conclusion).

In her opinion for the Court, Justice Jackson began by noting that two provisions of the Bankruptcy Code apply. First, Section 106(a) abrogates the sovereign immunity of “governmental unit[s].” And Section 101(27) defines “governmental units” to mean a number of specified governmental entities and then concludes with a catchall: “or other foreign or domestic government.” In order to abrogate sovereign immunity, the Court had previously held that Congress must make its intent “unmistakably clear.” Because Indian tribes possess the “common-law immunity from suit traditionally enjoyed by sovereign powers,” this well-settled rule applies with equal force to federally recognized Tribes. Thus, if there is a plausible interpretation of the statute that preserves sovereign immunity, the Court will conclude that Congress has not unambiguously made its intent to abrogate clear. But the rule does not require magic words.

Given this rule, the majority concluded “that the Bankruptcy Code unequivocally abrogates the sovereign immunity of any and every government that possess the power to assert such immunity.” And this includes federally recognized tribes. The Court’s analysis began with the proposition that the term “governmental unit” was defined in such a way to exude comprehensiveness from beginning to end. Furthermore, the catchall phrase quoted above was notable. “Few phrases in the English language express all-inclusiveness more than the pairing of two extremes.” The pairing of foreign with domestic was such a construction. Thus, by coupling foreign and domestic together and placing that pair at the end of an extensive list, “Congress unmistakably intended to cover all governments in §101(27)’s definition, whatever their location, nature or type.” Carving out any government from the definition of “governmental unit” would have required the Court to upend the policy choice embodied in the Code. Because the Code unequivocally abrogates sovereign immunity of all governments and Tribes are undisputedly governments, §106(a) unmistakably abrogates Tribal sovereign immunity.

Justice Thomas concurred in the judgment but reiterated his longstanding position that “to the extent that Tribes possess sovereign immunity at all, that immunity does not extend to “suits arising out of a Tribe’s commercial activities conducted beyond its territory.” Justice Gorsuch dissented. He began by noting that there had not been a single example in all of history where the Court had found that Congress intended to abrogate Tribal sovereign immunity without an express mention that Indian Tribes in the statute. Moreover, Justice Gorsuch found that the phrase “other foreign or domestic governments” could mean what the Court concluded, but there was a plausible other meaning. That is, it could mean every other foreign government and every other domestic government, but Indian Tribes are neither. In his view, the Tribes enjoy unique status that requires specific mention.

MOAC Mall Holdings LLC v. Transform Holdco LLC, 598 U.S. 288, 143 S. Ct. 927 (2023). “[T]he Bankruptcy Code permits a debtor (or a trustee) to sell or lease the bankruptcy estate’s property outside of the ordinary course of the bankruptcy entity’s business … Interested parties may file an objection to such a sale or lease, and may appeal if the Court authorizes the sale or lease of the estate’s property over their objection. But §363(m) restricts the effect of such an appeal if successful.” Namely, it provides that “[t]he reversal or modification on appeal of an authorization … of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization of such sale or lease was stayed pending appeal.” Thus, “sometimes, a successful appeal of a judicial authorization to sell or lease estate property will not impugn the validity of a sale or lease made under that authorization.” In this case, the Supreme Court was asked to decide whether the statutory mootness of Section 363(m) was jurisdictional.

In 2018, Sears filed for Chapter 11 bankruptcy protection. In 2019, Sears sought to sell most of its assets to the respondent subject to bankruptcy court approval. As part of the sale, the respondent was given the right to designate to whom a lease between Sears and certain landlords would be assigned. The agreement did not designate an assignee; it simply meant that if the respondent designated one, Sears would be compelled to assign the lease to the designee. One of the leases in question was a lease with the petitioner MOAC, the owner of the Minnesota Mall of America.

Section 365 of the Code prohibits assignment of an unexpired lease absent adequate assurance of future performance by the assignee, generally. And it contains specific rules regarding adequate assurance applicable to shopping centers. Respondent designated the Mall of America lease for assignment to a wholly owned subsidiary. MOAC objected on the grounds that the respondents had not provided the requisite adequate assurance of future performance. The bankruptcy court disagreed and approved the assignment. MOAC sought a stay of that order. The bankruptcy court denied the request, reasoning that an appeal of the assignment order did not fall within the scope of Section 363(m). Thus, a stay was not necessary. The bankruptcy court further noted that the respondent had explicitly represented that it would not invoke Section 363(m) against MOAC. No stay was granted, the order became effective, and Sears assigned the lease. MOAC successfully appealed the order to the district court, which concluded that the respondent did not satisfy the requirements of adequate assurance. The district court, therefore, vacated the order. The respondent then sought rehearing and, for the first time, backed away from its previous commitments and argued that Section 363(m) deprived the district court of jurisdiction. While the district court was appalled by the gambit, it was bound by Second Circuit precedent holding that Section 363(m) is jurisdictional and not subject to waiver or judicial estoppel. The Second Circuit affirmed. The Supreme Court granted the Mall’s petition for certiorari to resolve a circuit split.

Before turning to the jurisdictional arguments, the Court first addressed the respondent’s argument that the case was moot because the lease had been transferred out of the estate via the assignment. The Court noted that “a case is only moot when it is impossible for the court to grant any effective relief.” The respondent argued that the only way for the Court to grant relief would be to avoid the transfer pursuant to Section 549 of the Code. As Section 549 could only be asserted by the debtor and the debtor had expressly waived any right to bring such an action, the transfer of the lease could not be undone.

The Court noted that its precedents disfavor these kinds of mootness arguments. MOAC simply sought typical appellate relief: the reversal of the lower courts’ decisions. In that regard, the Court would not conclude that the parties did not have a concrete interest in the relief sought. And the Supreme Court declined to act as the court of “first view” with regard to the respondent’s contention that no actual relief remains legally available.

The Court then turned to the question of jurisdiction. Whether Section 363(m) is jurisdictional is “significant because it carries with it unique and sometimes severe consequences.” Not only does a jurisdictional condition deprive the Court of the power to hear a case, but it is also impervious to excuses like waiver or forfeiture. If the statute is jurisdictional even the egregious conduct of the respondent would not permit application of judicial estoppel. Given these extreme consequences, the Court has previously held “that jurisdictional rules pertain to ‘“‘the power of the court rather than to the rights or obligations of the parties.’”’ And a provision will only be held to be jurisdictional if Congress clearly states its intent that it be applied in that fashion. But magic words are not required.

The Court found nothing in Section 363(m) that purported to govern the Court’s ability to adjudicate a dispute. To the contrary, Section 363(m) clearly anticipates that courts will exercise jurisdiction over a covered authorization, and it is, thus, permissible to read the text as merely cloaking certain good-faith purchasers with protection, even when jurisdiction exists. Moreover, Congress separated Section 363(m) from other provisions that actually limit a court’s jurisdiction, and Section 363(m) does not contain any clear connection to those plainly jurisdictional provisions. The Court further rejected the respondent’s argument that the transfer of a res to a good-faith purchaser removes it from the bankruptcy estate and from the court’s in rem jurisdiction. It found this argument to be a red herring. The important issue is the text of the statute where Congress did not clearly limit judicial power as opposed to merely restricting the effects of a valid exercise of that power. The Supreme Court vacated the Second Circuit’s judgment and remanded the case for further proceedings.

§ 1.1.2. First Circuit

Botelho v. Buscone (In re Buscone), 61 F.4th 10 (1st Cir. 2023). Although the Fifth, Sixth, Tenth, and Eleventh Circuits have all found an exception to judicial estoppel in circumstances where the failure to disclose a legal claim in bankruptcy was inadvertent, the First Circuit Court of Appeals seemingly indicated, in dicta, that it would not permit such an exception.

Neighbors Mary and Ann went into business together. When their business failed in 2014, Ann commenced chapter 7 proceedings that same year. In her bankruptcy schedules, Ann neglected to include any claims against Mary. Ann subsequently received a discharge. Approximately three years later, in 2018, Ann sued Mary in Massachusetts state court and secured a default judgment of $91,673.45 when Mary failed to respond to the suit. Shortly thereafter, Mary commenced her own chapter 7 proceeding in which she listed in her schedules Ann’s claim against her in the default judgment amount. Ann commenced an adversary proceeding in Mary’s bankruptcy, seeking a determination that her default judgment against Mary was non-dischargeable under sections 523(a)(2)(A) and 523(a)(4) of the Bankruptcy Code. Section 523(a) provides that:

A discharge under section 727 . . . does not discharge an individual debtor from any debt—

. . .

(2) for money, property, [or] services . . . to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud . . . ; [or]

. . .

(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. . . .

11 U.S.C. § 523(a). Mary sought to dismiss Ann’s adversary complaint on the basis that Ann was foreclosed from asserting that her claim was non-dischargeable by reason of judicial estoppel because Ann failed to list in her bankruptcy schedules. After the bankruptcy court converted Mary’s motion to one for summary judgment, the parties proceeded to discovery. However, after Mary failed to comply with multiple discovery orders, the bankruptcy court ultimately granted Ann’s motion for sanctions, including an order finding default judgment in Ann’s favor. On Mary’s motion to reconsider both the sanctions order and Mary’s motion for summary judgment, the bankruptcy court re-affirmed its decisions. After the Bankruptcy Appellate Panel largely reiterated the bankruptcy court’s findings, Mary appealed (i) the bankruptcy court’s denial of her motion for summary judgment, (ii) the default judgment entered against her as a discovery sanction, and (iii) the bankruptcy court’s denial of her motion to reconsider to the First Circuit.

Turning to the question of Mary’s motion for summary judgment, the First Circuit took under consideration whether Ann should have been judicially estopped from pursuing the state court judgment. The court began with an overview of the judicially-created doctrine, noting its purpose “‘to protect the integrity of the judicial process,’ by ‘prohibiting parties from deliberately changing positions according to the exigencies of the moment.’” Id. at 21 (quoting New Hampshire v. Maine, 532 U.S. 742, 749–50 (2001)). The court highlighted “two baseline factors,” which—when met—afford a court the discretion to estop a party from asserting a legal position: (1) a party’s position must be “clearly inconsistent” with an earlier position; and (2) the party must have “succeeded in persuading a court to accept [their] earlier position.” Id. (quoting New Hampshire v. Maine, 532 U.S. 742, 750 (2001)) (emphasis original). But in the bankruptcy context, where judicial estoppel is often applied to prevent a debtor, who previously obtained a discharge on the representation that no claims exist, from resurrecting those claims, the First Circuit acknowledged that certain of its sister circuits had found an exception to judicial estoppel where the failure to disclose a legal claim in bankruptcy was inadvertent. Although the question before it was whether the bankruptcy court abused its discretion in denying Mary’s motion for summary judgment, the First Circuit seemingly indicated it would split from its sister circuits, reiterating from prior precedent that “a party is not automatically excused from judicial estoppel if the earlier statement was made in good faith.” Id. at 28 (quoting Thore v. Howe, 466 F.3d 173, 184 n.5 (1st Cir. 2006)); see also id. at 23 (“[w]e have never recognized such an exception and have noted that deliberate dishonesty is not a prerequisite to application of judicial estoppel.”) (quoting Guay v. Burack, 677 F.3d 10, 20 n.7 (1st Cir. 2012)). The court then affirmed the bankruptcy court’s denial of summary judgment, finding no error in its conclusion that a further factual record was required to determine if judicial estoppel foreclosed Ann’s non-dischargeability action.

The First Circuit went on to affirm the bankruptcy court on the latter two issues as well, finding that it was squarely within the bankruptcy court’s discretion to award default judgment as a discovery sanction in the face of Mary’s repeated failures to comply with the court’s prior orders and to deny Mary’s motion for reconsideration when she had primarily regurgitated her prior arguments.

Rodgers, Powers & Schwartz, LLP v. Minkina (In re Minkina), 79 F.4th 142 (1st Cir. 2023). In this case, the First Circuit examined whether the Butner principle created a conflict with the Bankruptcy Code in the context of a valuation dispute under section 522(f) of the Bankruptcy Code. Overturning the Bankruptcy Appellate Panel’s (the “BAP”) longstanding Snyder v. Rockland Tr. Co. (In re Snyder), 249 B.R. 40 (1st Cir. B.A.P. 2000) decision, the First Circuit concluded that a debtor’s interest in property held as a tenant by the entirety must be determined by the fair market value of such interest, notwithstanding that Massachusetts law defines a tenancy by the entirety as a “unitary title.”

At the time of Nataly Minkina’s chapter 13 bankruptcy filing in 2018, Minkina and her husband owned their Brookline, Massachusetts home as tenants by the entirety. The property was subject to (1) two mortgages totaling $177, 741, and (2) a judicial lien, solely on Minkina’s interest in the property, in favor of law firm Rodgers, Powers & Schwartz, LLP (“RPS”) for $250,094, resulting from a state court judgment ordering Minkina to reimburse RPS for the expenses incurred in defending against Minkina’s frivolous malpractice suit. Minkina was also entitled to a $500,000 homestead exemption. In 2019, Minkina moved to avoid the RPS judicial lien on the grounds that the lien impaired her homestead exemption pursuant to section 522(f). For the purposes of the lien avoidance, the parties agreed to value the property as a whole at $1.05 million. But the question then arose as to how the parties should value Minkina’s interest in the property as a tenant by the entirety. While RPS argued that the bankruptcy court was bound to follow the Snyder decision, in which the BAP ruled that a Massachusetts debtor’s interest in a tenancy by the entirety is equal to 100% of the value of the property for purposes of the section 522(f) formula, Minkina argued that her interest in the property should be appraised based on either an actuarial approach or a simple 50% interest in the value of the property. Following a preliminary ruling, in which the bankruptcy court indicated that it would not follow Snyder, the parties stipulated to a valuation of Minkina’s interest in the property, subject to her husband’s right of survivorship, of $525,000, while also preserving RPS’s right to pursue a valuation of Minkina’s interest at 100% of the property value. As previewed, the bankruptcy court granted Minkina’s motion to avoid RPS’s lien, rejecting Snyder. RPS petitioned for, and was granted, direct appeal to the First Circuit.

On appeal, RPS argued primarily that the Massachusetts Supreme Judicial Court’s decision in Coraccio v. Lowell Five Cents Sav. Bank, 415 Mass. 145 (1993), which determined that a tenancy by the entirety constitutes a “unitary title” under Massachusetts law, compels the conclusion that Minkina’s interest in the property should be valued at the full market value of the property. The First Circuit dispatched this argument easily, finding that Coraccio did not concern valuation, and therefore had no bearing on the requirement established under Snyder to value Minkina’s interest in the property as the full property value.

The First Circuit then examined whether the bankruptcy court erred in declining to follow Snyder’s approach to valuing a tenancy by the entirety at the full property value. Holding that the bankruptcy court had not erred when it accepted the stipulated 50% valuation, the First Circuit instead found that Snyder impermissibly deviated from the plain text of the Bankruptcy Code. The Bankruptcy Code defines the term “value,” as used in section 522(f), as “fair market value as of the date of the filing of the petition.” 11 U.S.C. § 522(a)(2). Snyder’s valuation of a tenancy by the entirety at 100% of the property value assumes that an interest in a tenancy by the entirety is equally as marketable as an interest in the property in fee simple, without accounting for the limitations of a tenancy by the entirety (i.e., the right of survivorship). By failing to establish a fair market value for an interest in a tenancy by the entirety, the First Circuit held, the BAP in Snyder failed to abide by the plain text of section 522.

§ 1.1.3. Second Circuit

ESL Invs., Inc. v. Sears Holdings Corp. (In re Sears Holdings Corp.), 51 F.4th 53 (2d Cir. 2022). In the context of a section 507(b) super-priority claim litigation, the Second Circuit was asked to determine how to value the assets of Sears Holding Corporation and its debtor-affiliates (collectively, “Sears”). Although the Second Circuit relied on the reasoning underlying the Supreme Court’s decision in Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997), it nonetheless found that the net orderly liquidation value (“NOLV”) was the appropriate measure for Sears’ assets, rather replacement value, as used by the Supreme Court.

Before the bankruptcy court, certain holders of Sears’ second-lien debt (the “second-lien claimholders”) asserted that they were entitled super-priority claims pursuant to section 507(b) of the Bankruptcy Code, for the diminution in value of their collateral during the course of Sears bankruptcy proceeding. The bankruptcy court was therefore required to determine whether the second-lien claimholders’ collateral had decreased in value after the October 15, 2018, commencement of the Sears bankruptcy proceeding (the “Petition Date”). The second-lien claimholders would only be able to assert their section 507(b) claim to the extent that the value of the collateral as of the Petition Date, less the obligations owed to the first-lien lenders, exceeded the $433.5 million credit bid that the second-lien claimholders had used to purchase Sears’ assets during the bankruptcy.

After hearing the evidence, including expert testimony, the bankruptcy court determined that the value of the second-lien claimholders’ collateral as of the Petition Date was $2.147 billion, based on the NOLV approach. Included in that determination was a zero-dollar valuation for a subset of inventory (the “NBB Inventory”) and a face-value valuation for $395 million in letters of credit Sears purchased, since—as the bankruptcy court held—the second-lien claimholders had not offered a reasonable valuation method for either category of asset. Because the bankruptcy court found that the first-lien lenders were owed $1.96 billion, the second-lien claimholders were therefore only secured to the extent of $187 million, which was less than the value they received via their $433.5 million credit bid. Accordingly, the bankruptcy court determined that the second-lien claimholders were not entitled to a super-priority claim under section 507(b). The district court affirmed.

On appeal to the Second Circuit, the second-lien claimholders argued that the bankruptcy court had erred in (1) valuing the inventory at its NOLV, rather than replacement value or retail value, (2) assigning zero value to the NBB Inventory, and (3) valuing the letters of credit at their full face value. First addressing the inventory valuation methodology argument, the Second Circuit began by examining the Supreme Court’s decision in Rash. The Rash Court was asked to determine the present value of collateral in accordance with section 506(a)(1) of the Bankruptcy Code, which provides that the value of collateral “shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property.” 11 U.S.C. § 506(a)(1). There, because the collateral was being used to continue the debtor’s business, the Supreme Court held that the proper value of the collateral was its replacement value. Although the second-lien claimholders argued that Rash required the bankruptcy court to apply the replacement value, the Second Circuit rejected this argument, instead interpreting Rash to stand for the proposition that, “when valuing collateral pursuant to section 506(a), the value of the property should be calculated ‘in light of the disposition or use in fact proposed, not the various dispositions or uses that might have been proposed.’” Id. at 63 (quoting Rash, 520 U.S. at 964). Because the only realistic outcomes contemplated—a going-concern sale or a forced liquidation—the Second Circuit concluded that the bankruptcy court had reasonably decided to assess the collateral according to the NOLV.

Turning next to the second-lien claimholders’ argument that the bankruptcy court should not have valued the NBB inventory at zero, the Second Circuit found that the second-lien claimholders had waived their argument that they did not have the burden of proving the value of the collateral. Accordingly, the bankruptcy court was entitled, in the absence of an acceptable valuation methodology establishing any other value, to value the NBB Inventory at zero. Similarly, because the second-lien claimholders failed to propose a valuation methodology that adequately addressed the contingent nature of the letters of credit, the bankruptcy court was entitled to apply face value.

TLA Claimholders Grp. v. LATAM Airlines Grp. S.A. (In re LATAM Airlines Grp. S.A.), 55 F.4th 377 (2d Cir. 2022). The Second Circuit joined the Third, Fifth, and Ninth Circuits in holding that an unsecured claim may be treated as unimpaired under a plan of reorganization even if the plan does not provide for the payment of postpetition interest, despite the debtor’s solvency.

Certain unsecured creditors of Tam Linhas Aéreas S.A. (“TLA”), an affiliate of LATAM Airlines Group S.A. (collectively, “LATAM”), opposed confirmation of the LATAM chapter 11 plan. The TLA creditors objected to the plan’s classification of their claims as “unimpaired” when, although the claims were being paid in full, the plan did not provide for payment of postpetition interest on their claims. The TLA creditors further argued that because TLA was solvent, based on both a waterfall analysis and a discounted cash flow analysis, they were entitled to interest payments on their claims during the pendency of the bankruptcy pursuant to the “solvent-debtor” exception to the general rule of bankruptcy that interest stops accruing upon a bankruptcy filing. However, the bankruptcy court disagreed with both arguments, confirming the plan over the TLA creditors’ objection. The bankruptcy court found that the definition of impairment contained in section 1124(1) did not supersede the limitation in section 502(b)(2) of the Bankruptcy Code prohibiting allowance of claims for unmatured interest. The bankruptcy court further found that TLA was insolvent, relying on the liquidation analysis and the balance sheet test put forward by LATAM, such that the solvent-debtor exception was inapplicable. After the district court confirmed the bankruptcy court’s findings, the TLA creditors appealed to the Second Circuit.

On appeal, the Second Circuit first addressed whether the TLA creditors’ claims were impaired under section 1124(1) of the Bankruptcy Code. Relying heavily on the precedents established in the Third, Fifth, and Ninth Circuits, the Second Circuit looked to the statutory language of section 1124(1), which provides that a class of claims or interests is impaired under a plan, unless the plan does not alter the legal, equitable, and contractual rights to which the claim holder is entitled. See 11 U.S.C. § 1124(1). Although the TLA creditors had a contractual right to collect interest on their claims outside of bankruptcy, section 502(b)(2) of the Bankruptcy Code cut off the TLA creditors’ claim to interest. And because the creditors’ rights were altered by operation of the Bankruptcy Code, rather than the chapter 11 plan itself, the Second Circuit held that the TLA creditors’ claims were unimpaired.

The Second Circuit then considered whether the bankruptcy court erred in determining that TLA was insolvent. The TLA creditors argued first that the solvent-debtor exception is derived from the absolute priority rule, and thus the solvent-debtor exception is triggered if a chapter 11 plan proposes to pay equity holders. The Second Circuit dismissed this argument, reasoning that, because the plan proposed to pay the TLA creditors the allowed amount of their claims, see 11 U.S.C. § 1129(b)(2)(B)(i), the TLA creditors could not invoke the absolutely priority rule as a measure of TLA’s solvency. Turning to the TLA creditors’ argument that the bankruptcy court should have applied the discounted cash flow analysis based on the precedent established in Consolidated Rock Products Company v. DuBois, 312 U.S. 510 (1941), the Second Circuit found that the Supreme Court’s holding in that case was limited to the common-law absolute priority rule such that it could not be “imported” to the absolute priority rule as codified in the current Bankruptcy Code. Accordingly, the Second Circuit found no error in the bankruptcy court’s ruling that TLA was insolvent and that the solvent-debtor exception was inapplicable.

Tutor Perini Building Corp. v. NYC Regional Cntr. George Washington Bridge Bus Station & Infrastructure Dev. Fund, LLC (In re George Washington Bridge Bus Station Dev. Venture, LLC, 65 F.4th 43 (2d Cir. 2023). The Second Circuit Court of Appeals narrowly construed who may assert a cure claim under section 365(b)(1)(A) of the Bankruptcy Code, holding that a party “must have some right to pursue a breach of contract claim under the executory contract or unexpired lease a debtor assumes under § 365(a)” to receive a right to payment to payment in full. Id. at 51.

In 2011, the debtor, a redevelopment company, entered into a lease agreement (the “Lease”) with the Port Authority of New York and New Jersey (“Port Authority”). The Lease provided that the debtor would renovate the George Washington Bridge Bus Station in Manhattan and receive a 99-year lease to operate a retail mall to be built on the property. The Lease further required the debtor to pay all claims against it by its contractors, subcontractors, material-men, and workmen in full. The debtor subsequently entered into a contract (the “Construction Contract”) to engage Tutor Perini Building Corp. (“Tutor Perini”) as the general contractor for the project. In 2015, the relationship between the debtor and Tutor Perini soured when Tutor Perini commenced arbitration proceedings against the debtor, claiming that it was owed approximately $113 million in damages for the debtor’s failure to pay amounts due under the Construction Contract.

When the debtor filed chapter 11 proceedings in 2019, it sought to sell substantially all of its assets, including its rights under the Lease. Tutor Perini opposed the sale, arguing that the debtor was obligated to pay Tutor Perini’s $113 million claim under the Construction Contract in full to cure the default of the Lease provision requiring the debtor to pay its contractors and subcontractors. Both the bankruptcy court and the district court rejected Tutor Perini’s two main arguments in support of its cure claim: (1) that section 365(b)(1)(A) does not limit who may assert a cure claim; and (2) that, if section 365(b)(1)(A) did limit who may assert a cure claim, Tutor Perini was entitled to assert a cure claim as a third-party beneficiary to the Lease.

The Second Circuit affirmed on both arguments. First, the court held that administrative priority under section 365(b)(1)(A) should be limited to those whose claims arise from the contract to be assumed under section 365(a). The purpose of section 365, the court reasoned, is to preserve the benefit of the bargain struck between the parties to fairly compensate the non-debtor contracting party who is obligated, under the Bankruptcy Code, to continue performing under the contract to be assumed. Where no bargain had been struck as between the debtor and Tutor Perini, the court was unwilling to alter the narrowly-construed statutory priorities established under the Bankruptcy Code. Furthermore, the court found unpersuasive Tutor Perini’s argument that the text of section 365(b)(1)(A) did not explicitly limit cure claims to those with rights under the subject contract. Looking to both sections 365(b)(1)(B) and 365(g), the Second Circuit concluded that “Congress clearly contemplated the rules of priority for creditors with claims actually arising under contracts, and not just for any party who claims some tangential interest in a contract short of a legal right to sue under it.” Id. at 53. In addition, the court posited that section 365(g), which entitles parties to rejected executory contracts to treatment as general unsecured creditors, would be rendered meaningless if Tutor Perini’s $113 million claim, arising under the rejected Construction Contract, somehow became entitled to payment in full on the basis of a tenuous relationship to the assumed Lease.

The Second Circuit then easily dispatched Tutor Perini’s second argument by holding that Tutor Perini was not a third-party beneficiary of the Lease. Accordingly, the court was not required to address whether a third-party beneficiary is entitled to seek administrative priority pursuant to section 365(b). However, in dicta, the court noted that, because “a third-party beneficiary is one who has a ‘right to performance’ under a contract because ‘the intention of the parties’ to that contract was to afford the third party such right, … protecting the non-debtor contracting party’s bargain reasonably includes allowing the intended third-party beneficiary to be made whole as well.” Id. at 54 n.6 (quoting Restatement (Second) of Contracts § 302 (1981)).

§ 1.1.4. Third Circuit

In re Delloso, 72 F.4th 532 (3d Cir. 2022). In a precedential opinion, the Third Circuit affirmed the ruling of the Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) denying a motion of Strategic Funding Source, Inc. d/b/a Kapitus (“Kapitus”), a creditor of Louis N. Delloso (the “Debtor”), to reopen the bankruptcy case because (i) Kapitus’s request for relief was time-barred, and (ii) Kapitus had an alternative forum in which to seek relief.

In 2011, several years prior to the Debtor’s bankruptcy filing, Kapitus and Greenville Concrete, a company partially owned by the Debtor, entered into an agreement whereby Kapitus would purchase receivables from Greenville Concrete, and Greenville Concrete would deposit the receivables into an account on behalf of Kapitus. On March 6, 2013, Greenville Concrete failed to deposit certain receivables, and Kapitus issued a notice of default.

After out-of-court resolution efforts stalled, Kapitus sued Greenville Concrete in New York state court alleging breach of contract. This suit ended in a settlement under which Greenville Concrete was to make weekly payments until it had reached an agreed-upon amount. The settlement agreement provided that if Greenville Concrete failed to make such payments, Kapitus could enter a default judgment against Greenville Concrete. Greenville Concrete later defaulted, and Kapitus received a judgment against the Debtor and Greenville Concrete in the amount of $776,600.25.

On March 31, 2016 (the “Petition Date”), the Debtor filed a case under chapter 7 of title 11 of the U.S. Code (the “Bankruptcy Code”). The Debtor listed the debt owed to Kapitus in his schedules and disclosed that his sole employer for the three years prior to the Petition Date was “Bari Concrete Construction” (“Bari Concrete”). Following the filing of the bankruptcy case, the Bankruptcy Court notified creditors that the final day to oppose the Debtor’s discharge or the dischargeability of certain debts was July 5, 2016. Having received no responses, on July 6, 2016, the Bankruptcy Court granted a discharge of the Debtor’s debts and on August 5, 2016, the case was closed.

On November 15, 2021, over five years after the case was closed, Kapitus moved to reopen the case, asserting that Bari Concrete appeared to operate as a mere continuation of Greenville Concrete. Kapitus separately sued Bari Concrete in state court seeking satisfaction of its debt against Greenville Concrete, among other causes of action. In the Bankruptcy Court, Kapitus requested that the case be reopened (i) so that it could seek a determination of non-dischargeability of its scheduled claim of $776,600.25; or (ii) so that a chapter 7 trustee could administer a purported ownership interest of the Debtor in Bari Concrete, an asset which was not disclosed at the time of the bankruptcy filing. In the alternative, Kapitus asked that the Court revoke the Debtor’s discharge because the discharge was obtained through fraud, and Kapitus did not know of the fraud until after the discharge.

Following oral argument, the Bankruptcy Court declined to reopen the case. The Bankruptcy Court based its decision on two of the factors listed in the case of In re New Century TRS Holdings, Inc., No. 07-10416 (BLS), 2021 WL 4767924, at *6–7 (Bankr. D. Del. Oct. 12, 2021): (i) Kapitus would not be able to obtain the relief it sought even if the case were reopened, as Kapitus’s claims were time-barred, and the Bankruptcy Court was precluded from modifying the applicable time period by, among other things, Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) 4007(c) and 9006(b) and Supreme Court precedent in Nutraceutical Corp. v. Lambert, 139 S. Ct. 710 (2019) (providing guidance on the application of rules regarding time limitations); and (ii) Kapitus could obtain the relief it sought in the state court action it had previously commenced against Bari Concrete. Following the Bankruptcy Court’s decision, Kapitus requested an immediate appeal to the Third Circuit, which the Third Circuit granted.

On appeal, Kapitus argued that (i) the case should be reopened to allow for pursuit of “potentially viable theories of relief,” Delloso, 72 F.4th at 536, and that (ii) the presence of its state court action against Bari Concrete should not preclude reopening the bankruptcy case for purposes of administering a previously undisclosed asset.

Kapitus argued that Bankruptcy Rules 4007(c) and 9006(b), which set the time periods during which Kapitus was required to file its claims, are each subject to doctrines such as equitable tolling, as well as Bankruptcy Code section 105(a). Kapitus further argued that the Bankruptcy Court’s application of Supreme Court precedent was in error. The application of these doctrines, according to Kapitus, would allow it to pursue its claims in the reopened bankruptcy case.

The Third Circuit disagreed, noting that the cited Supreme Court precedent applied to the Bankruptcy Court’s analysis, and adopting the reasoning of the Bankruptcy Court that Bankruptcy Rule 4007(c) precludes equitable tolling, explaining that, among other reasons, Bankruptcy Rule 9006 “singles out Rule 4007(c) for inflexible treatment.” Delloso, 72 F.4th at 540 (internal quotations omitted). Therefore, the Third Circuit concluded, the Bankruptcy Court properly reasoned that Kapitus’s claims were time-barred.

Kapitus also argued that the existence of its state court action against Bari Concrete should not preclude reopening of the bankruptcy case. The Third Circuit was unconvinced by this argument, explaining that the Bankruptcy Court had considered this fact and weighed reopening the case to administer the previously undisclosed asset against the cost of reopening a case that had been closed for over five years. The Bankruptcy Court concluded that state court remedies would provide adequate value if any remedy was warranted. The Third Circuit decided that this was not an abuse of the Bankruptcy Court’s discretion.

Because Kapitus’s claims were time-barred, Kapitus had an adequate remedy in the form of its state court action against Bari Concrete, and the Bankruptcy Court did not abuse its discretion in deciding so, the Third Circuit affirmed the order of the Bankruptcy Court denying Kapitus’s motion to reopen the bankruptcy case.

In re National Medical Imaging, LLC, No. 22-1727 (3rd Cir. 2023). In this non-precedential opinion, the Third Circuit vacated and remanded the Bankruptcy Court for the Eastern District of Pennsylvania’s decision to disallow U.S. Bank’s right to setoff under 11 U.S.C. § 553(a).

This case arises from years of litigation between National Medical Imaging (“NMI”) and U.S. Bank. In 2008, U.S. Bank and others filed an involuntary bankruptcy petition against NMI. The bankruptcy court later dismissed the involuntary petition. The dismissals caused NMI to sue U.S. Bank for costs and attorneys’ fees under 11 U.S.C. § 303(i)(1) as well as proximate and punitive damages under section 303(i)(2) for an alleged bad-faith involuntary petition. The bankruptcy court stayed that case, on and off, until 2021.

In the interim, U.S. Bank obtained a judgment against NMI for $12 million plus post-judgment interest. U.S. Bank sought to execute on those judgments by moving a Florida state court to force NMI to sell its section 303(i)(2) causes of action. Presumably, U.S. Bank would then credit bid and acquire the claims against itself to nix them. The Florida court granted U.S. Bank’s motion.

Shortly thereafter, NMI voluntarily filed for bankruptcy, declaring its section 303(i) claims to be its only significant assets. NMI then sought two declaratory judgments in an adversary proceeding against U.S. Bank. First, it requested a declaration that U.S. Bank may not set off its money judgment against NMI’s section 303(i) award. Second, NMI asked the bankruptcy court to declare that “U.S. Bank is prohibited from taking any action to interfere with the Debtors’ prosecution of their claims under Section 303(i)” other than defending against those claims.

The bankruptcy court entered judgment in favor of NMI as to the setoff request, reasoning that, “as a matter of public policy,” section 303(i)(1) remedies are not subject to setoff. As to NMI’s second request, the bankruptcy court initially dismissed the claim as unripe because the automatic stay “precludes any action U.S. Bank might wish to take…that might impair or extinguish [NMI’s] § 303(i) claims,” but later sua sponte reversed and entered judgment for NMI. U.S. Bank timely appealed.

The Third Circuit rejected the bankruptcy court’s ruling that U.S. Bank may not set off its judgments against its section 303(i)(1) liability “as a matter of public policy.” The Third Circuit held that public policy cannot displace a statute that is directly on point, as is the case with section 553(a), which governs a creditor’s ability to set off debt owing to reorganizing debtors. Section 553(a) provides:

[T]his title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case.

Section 553 does not create a right of setoff; rather, it preserves whatever setoff rights that may exist outside of bankruptcy. Accordingly, for a creditor to assert a right to setoff under section 553(a), the creditor must demonstrate (i) a right to setoff exists under applicable state law, (ii) the debts are “mutual,” and (iii) that the debts “arose before the commencement of the case.”

In the case at hand, under governing Pennsylvania law, setoff “is an inherent power of the courts, regulated by equitable principles.” The Third Circuit found that the bankruptcy court did not assume the posture of a court sitting in equity, nor did it reference Pennsylvania law in analyzing the circumstances of NMI’s case. The Third Circuit held that the bankruptcy court should have considered whether a right to setoff existed under Pennsylvania law (the threshold question in a section 553 analysis) instead of prematurely barring setoff on public policy grounds. The Court then found that the debts at issue were mutual and arose prior to the petition date, satisfying the statutory requirements of section 553(a). The Court concluded that U.S. Bank is not barred from setting off its section 303(i)(1) liability as a matter of law and remanded to the bankruptcy court to decide whether setoff was available under Pennsylvania law.

In re TE Holdcorp, LLC, No. 22-1807 (3d Cir. 2023). In this opinion, the Third Circuit held that the Bankruptcy Court had jurisdiction to interpret its own orders and properly held that its orders did not preserve any claims by a disgruntled contract counter-party, Spitfire Energy Group, LLC (“Spitfire”) of the debtor TE Holdcorp LLC (“Templar”) against the successful purchaser, Presidio Petroleum LLC (“Presidio”).

Templar filed for Chapter 11 in June of 2020 and also sought to sell substantially all of its assets under section 363 of the Bankruptcy Code and pursue a plan of liquidation. Spitfire raised several objections to Templar’s proposed plan, which Templar resolved by entering into a stipulation that preserved Spitfire’s claims resulting from any rejection of its contract with Templar. As part of the stipulation, Spitfire opted out of the plan’s third-party releases, of which included releases of the successful purchaser.

Presidio was the successful purchaser of Templar’s assets, and the Bankruptcy Court entered an order approving the sale free and clear of all liens, claims, and encumbrances, including contracts not designated for assumption. Spitfire’s contract was not assumed through the sale and Spitfire did not object to the sale. The sale also provided for the deemed consent of any interest-holder who did not object to the Sale.

The Bankruptcy Court entered the confirmation order, which included Spitfire’s opt-out as well as a representation that Spitfire would not file any additional documents or appeal the Chapter 11 cases beyond filing general unsecured claims. Thereafter, Spitfire sued Presidio in state court over the contract Presidio decided not to assume. Believing that the Sale Order and Confirmation Order foreclosed Spitfire’s suit, Presidio moved the Bankruptcy Court to enforce both, which the Bankruptcy Court did, and the District Court affirmed.

On appeal, Spitfire contested two issues: (1) the Bankruptcy Court’s jurisdiction over the enforcement proceedings, and (2) the Bankruptcy Court’s interpretation of its Sale and Confirmation Orders.

The Court noted that the Bankruptcy Court had core jurisdiction over the enforcement motion because it had jurisdiction to interpret and enforce those prior orders, notwithstanding that the Bankruptcy Court’s jurisdiction wanes post-confirmation. In particular, sale and confirmation orders are core bankruptcy proceedings.

With respect to the interpretation of the provisions themselves, the sale order unambiguously provided that any interest holder who fails to object to the “free and clear” sale is deemed to consent. Spitfire participated in the sale hearing, but did not object, so it was deemed to consent to Templar’s asset sale free and clear of any Spitfire’s contractual obligations to Presidio. Likewise, the opt-out provision in the confirmation order did not represent a separate agreement between Spitfire and Presidio, and the stipulation Spitfire entered into with Templar could not be enforced against Presidio. Accordingly, the Third Circuit agreed with the lower courts in enforcing the sale order and confirmation order against Spitfire.

§ 1.1.5. Fourth Circuit

Kiviti v. Bhatt, 80 F.4th 520 (4th Cir. 2023). The Fourth Circuit Court of Appeals sent a strongly worded reminder to bankruptcy litigants that a final bankruptcy order cannot be manufactured for purposes of an appeal. In so doing, the Fourth Circuit differentiated bankruptcy courts’ jurisdiction from that of Article III courts, finding that bankruptcy courts can adjudicate matters that would be found “moot” if put before an Article III court.

A husband and wife (the “Kivitis”) hired a contractor to renovate their Washington, D.C. home. However, the contractor was not properly licensed. D.C. law therefore entitled the Kivitis to recover what they had paid the contractor. However, the Kivitis could prevail in their suit to recover their money, the contractor commenced chapter 7 proceedings. To continue pursuing their claims, the Kivitis filed a proof of claim for their damages, but also commenced an adversary proceeding seeking both a determination that they were entitled to repayment (“Count I”) as well as a determination that their right to repayment was non-dischargeable (“Count II”). When the bankruptcy court dismissed Count II without resolving Count I, finding that the claim—if it existed—was dischargeable, both parties agreed to voluntarily dismiss Count I (without prejudice) so that the bankruptcy court’s dismissal order resolved all of the Kivitis’ claims against the contractor. The Kivitis then appealed the bankruptcy court’s dismissal to the district court, which affirmed without addressing the “finality” of the bankruptcy court’s order.

On appeal, the Fourth Circuit refused to address the underlying substance of the dismissal, instead finding that the district court lacked jurisdiction over the appeal under 28 U.S.C. § 158(a). 28 U.S.C. § 158(a)(1) grants district courts jurisdiction to hear appeals “from final judgments, orders, and decrees” of bankruptcy courts. Focusing on the fact that the parties had voluntarily dismissed Count I to engineer their desired outcome, the Fourth Circuit held that the bankruptcy court’s dismissal of Count II was not a final order when it was entered, because it did not dispose of all claims against the contractor. See Fed. R. Bankr. P. 7054(a) (incorporating Fed. R. Civ. P. 54(a)-(c) into adversary proceeding); Fed. R. Civ. P. 54(b) (“any order or other decision, however designated, that adjudicates fewer than all the claims . . . does not end the action”). Accordingly, the district court did not have jurisdiction to hear the appeal.

In response, the Kivitis argued that Affinity Living Group, LLC v. StarStone Specialty Insurance Co.,959 F.3d 634 (4th Cir. 2020) establishes an exception wherein a partial dismissal may be considered final and appealable after the parties dismiss the remaining claims. They argued that, because the surviving Count I was essentially the same as their proof of claim, the bankruptcy court’s dismissal order had mooted the adversary proceeding. The Fourth Circuit rejected this argument, finding that mootness, which arises from Article III’s “case-or-controversy” requirement, does not constrain bankruptcy courts’ authority to act. Accordingly, because the bankruptcy court was capable of adjudicating a constitutionally moot matter, such as the remaining Count I, the dismissal of Count II did not give rise to a final order.

§ 1.1.6. Fifth Circuit

RDNJ Trowbridge v. Chesapeake Energy Corp. (In re Chesapeake Energy Corp.), 70 F.4th 273 (5th Cir. 2023). After it emerged from Chapter 11, Chesapeake Energy Corporation tested the limits of post-confirmation jurisdiction by asking the bankruptcy court to approve settlements of certain purported class actions that had been filed before the bankruptcy case. The problem was that no proof of claim was filed by most of the class members. And certain features of the settlement conflicted with the plan and disclosure statement. The Fifth Circuit concluded that attempting to handle these cases within the bankruptcy court exceeded post-confirmation jurisdiction and remanded with instructions to dismiss.

The underlying lawsuits were two federal class actions filed in Pennsylvania and a third state-court proceeding brought by the Pennsylvania Attorney General. All three lawsuits involved the underpayment of royalties. In the case of one class action, the district court preliminarily approved a settlement, but a large number of putative class members opted out. In the other class action, a preliminary settlement was reached but preliminary approval had not been granted. The state-court litigation was pending before the Supreme Court of Pennsylvania at the time Chesapeake filed for bankruptcy. The bankruptcy filing stayed all three of these aforementioned non-bankruptcy cases.

Following the filing of the bankruptcy case, the Bankruptcy court set a claims bar date of October 30, 2020. None of the named plaintiffs in federal the class actions filed proofs of claim nor did the vast majority of landowners within the putative classes. The Attorney General did file a timely proof of claim as did the individual lease holders within the two putative classes. Ultimately, the bankruptcy court confirmed Chesapeake’s plan of reorganization and approved its disclosure statement. The disclosure statement provided that the landowners’ claims for nonpayment of royalties would be included in the class of general unsecured claims. And holders of allowed claims within this class were estimated to receive 0.1% of the amount owed. The plan, and the disclosure statement, assured Chesapeake’s creditors that the mineral leases in question would remain in full force and effect and that no royalty interest would be compromised or discharged by the plaintiff. But prepetition rights to royalty payments would be treated as a claim under the plan and subject to discharge. The plan further stated that late-filed proofs of claim would be deemed disallowed and expunged, absent an order of the court deeming the claim timely filed. The plan further rejected the pending, pre-petition class settlement agreements. While the plan did authorize certain late filing of proofs of claim, none were filed by any of the class plaintiffs. Thus, only the Attorney General and the 161 individual leaseholders were eligible to vote or receive any distribution of account of their damage plans. The leases rode through the bankruptcy unimpaired.

On the effective date, the Attorney General’s claims were settled. But a month after the effective date, Chesapeake reached new settlement agreements with the two class action plaintiffs, which purportedly resolved all of Chesapeake’s remaining Pennsylvania royalty-related litigation disputes. The two settlements called for Chesapeake to pay a combined $6.25 million dollars and resolved the claims of approximately 23,000 Pennsylvania landowners. Chesapeake sought preliminary approval of the settlements from the bankruptcy court. The lessors who had filed proofs of claim opposed the motion. The bankruptcy court concluded that it had “core” jurisdiction over the settlements pursuant to 28 U.S.C. §1334(a). Ultimately, the Court overruled the objections and preliminarily approved the settlements, preliminarily certified the settlement classes, and approved the form and manner of notice. The Bankruptcy court further concluded that an Article III court would need to make the final determination regarding class certification and settlement approval. On appeal, the district court affirmed the bankruptcy court’s preliminary approval. The district court disagreed with the bankruptcy court’s determination of core jurisdiction. While core jurisdiction was lacking, the district court nonetheless found jurisdiction existed to adjudicate the settlements because they related to the confirmed Chapter 11 plan.

These decisions were ultimately appealed to the Fifth Circuit. Finding that the jurisdictional issue was determinative, the appellate court limited its review to that issue. The court initially rejected the contention that there was core bankruptcy jurisdiction. The settlements were not within the ordinary claims adjudication process. Thousands of leaseholders who were potential class members never filed proofs of claim, nor did Chesapeake file a proof of claim of any sort referencing Pennsylvania royalty claims. The plan emphatically provides that late filed proofs of claim would be deemed disallowed and expunged. And because no proofs of claim were ever filed, they cannot now be deemed timely filed. Moreover, neither court below had held that the claims were timely filed.

Treating the class actions as if they had been the subject of timely filed proofs of claim would simply disregard the reorganization process. The requirement of filing a proof of claim is more than a technicality. “Proofs of claim are the touchstone for plan approval and proper distribution of the debtor’s assets allotted to each creditor class.” Notwithstanding the fact that these claims were classified as general unsecured claims to be paid only 0.1% of their pre-petition amount, the settlements would result in the leaseholders obtaining well over 20% of the amount they negotiated in their pre-petition settlement agreements. The Court found this to be an enormous windfall when compared with the treatment of other general unsecured creditors. This approach “thwarted the transparency of the reorganization process.” And the 161 leaseholders who did file timely proofs of claim could not be the basis for class settlements to fall within core jurisdiction. The Fifth Circuit found this to be an “audacious attempt to bootstrap a few objectors’ preserved rights into a basis for ‘fundamental reset’ between the debtor and nearly 23,000 other Pennsylvania lessors who did not preserve their rights.”

The court then turned to the question of “related-to jurisdiction.” The Court acknowledged that this sort of jurisdiction presented a closer question. In the post-confirmation context, the question is whether the dispute concerns the effectuation of the plan.” In that context, the Court has identified three factors that constitute a “useful heuristic”:

  • First, do the claims at issue principally deal with post-confirmation relations between the parties?
  • Second, was there an antagonism or a claim pending between the parties as of the date of the reorganization?
  • Third, are there any facts or laws deriving from the reorganization of the plan necessary to the claim?

The Court addressed each of these factors in turn.

Because the settlements in question predated the bankruptcy, they do not principally deal with post-confirmation business. The vast majority of the class action claimants would have no recourse in bankruptcy court for their pre-petition monetary claims as the debts owed to them were discharged and expunged. The class action plaintiffs cannot resurrect those claims, use them to invoke bankruptcy jurisdiction, and then lay them to rest via class settlements. Moreover, the settlement agreements purported to modify the terms of the lease going forward for all the class members, even those who originally opted out of the settlements. This is contrary to the plan which stated that the leases would ride through unaffected. Accordingly, the Fifth Circuit found that this first factor weighed against jurisdiction.

In regard to whether there was antagonism pending at the date of reorganization, the Court agreed that that antagonism predated confirmation. But the class action against Chesapeake did not survive confirmation. Post-confirmation, the class members could not pursue their discharged claims and the plan did not adversely affect or modify their pre-petition royalty provisions. Thus, this factor did not warrant the exercise of related-to jurisdiction.

The third factor also worked against the class plaintiffs. Nothing in the plan is necessary to the disposition of the claims or the settlement agreements. Those agreements have nothing to do with any obligation created by the plan nor did Chesapeake contend that modifying the leases going forward would affect its distribution to creditors under the plan. To the contrary, the settlements contradict the plan. Thus, far from merely enforcing the plan, the settlement effects a fundamental reset of the relationship. The effect of this reset concerns the future, not the consummated reorganization. Thus, the approval of the settlements did not pertain to the implementation or execution of the plan. Because these were voluntary arrangements paying off claims that were already discharged, it would make little sense to hold that post-confirmation jurisdiction extended to them. Thus, the bankruptcy and district courts lacked jurisdiction, the judgments were vacated, and the proceedings were remanded with instructions to dismiss for lack of jurisdiction.

§ 1.1.7. Sixth Circuit

Hall v. Meisner, 51 F.4th 185 (6th Cir. 2022). The Sixth Circuit Court of Appeals held that a Michigan law permitting the county to take absolute title to real property for failure to pay certain property taxes violated the Takings Clause of the Fifth Amendment, overturning the district court’s dismissal of the claim. In so holding, the Sixth Circuit conducted a deep historical analysis of longstanding principles affording property owners equitable title in their property and disfavoring strict foreclosure.

The Michigan General Property Tax Act afforded either the county or the state to foreclose on real property in the event that property taxes remained unpaid for more than twelve months. Under the law, upon foreclosure, “absolute title” would vest in the governmental unit exercising its foreclosure right. The statute then afforded first the state, and then the city or town the right to buy the property from the foreclosing governmental unit for the amount of the tax delinquency. At that point, the property could then be sold at public auction. However, the statute did not afford the former property owner the right to receive any surplus from the auction.

Plaintiffs in the case at hand owed tax liabilities of $22,642, $30,547, and $43,350, respectively. Oakland County foreclosed under the General Property Tax Act and subsequently transferred the properties to the City of Southfield for the amount of the tax deficiencies. Southfield, in turn, sold the properties to the Southfield Neighborhood Revitalization Initiative, a for-profit entity, for $1. The Initiative then sold the first two properties for $308,000 and $155,000, respectively; the third property had not yet been sold at the time of the Sixth Circuit’s decision. The plaintiffs brought suit against the County, Southfield, the Initiative, and certain officers of each under 42 U.S.C. § 1983, alleging, among other things, that the County impermissibly deprived them of the equity in their homes without just compensation, in violation of the Takings Clause of the Fifth Amendment. The district court, however, dismissed the claim, finding that there was no surplus from the County’s disposition of the properties. The plaintiffs appealed the dismissal to the Sixth Circuit.

The Sixth Circuit disagreed with the district court’s approach, finding that the district court’s scope of review—which focused only on the question of whether there was a surplus, and therefore equity available to the property owners—was too limited. Looking instead to the mechanics of the Michigan General Property Tax Act, the Sixth Circuit considered whether Michigan had, ipse dixit, effected a taking “merely by defining [the property owners’ equity in their homes] away,” contravening longstanding principles of traditional property interests. Id. at 190. After a lengthy survey of a mortgagor’s equitable interests in property, covering 12th century English case law through 19th century American case law, the Sixth Circuit established that both English and American courts have consistently held strict foreclosure—whereby a property owner’s equitable interest in their property is entirely extinguished and given to the foreclosing in fee simple—to be an “unconscionable” and impermissible abrogation of debtor-property-owner’s rights. Both the English and American legal systems recognized that, although a creditor has a right to his security, that right only exists to the extent of the debts he is owed. The debtor has an equitable right to any value realized above the value of the debt. Because the Michigan General Property Tax Act did not contain a mechanism to afford property owners of their equitable right to any amounts above the tax deficiency amount, the Sixth Circuit held that the law effected an unconstitutional taking, reversing the district court.

§ 1.1.8. Seventh Circuit

Mann v. LSQ Funding Group, LLC, 71 F.4th 640 (7th Cir. 2023). The Seventh Circuit Court of Appeals had occasion to evaluate the Bankruptcy Code’s requirement for there to be a transfer of “an interest of the debtor in property” in connection with a voidable preferential or fraudulent transfer. See 11 U.S.C. §§ 547(b), 548(a)(1). The Seventh Circuit’s decision—that a transfer sought to be avoided under either sections 547 or 548 of the Bankruptcy Code must, at least, have had some diminutive effect on the debtor’s estate—aligns with decisions from other circuits that have held or suggested that the presence of a fraud is not sufficient to render a transaction voidable under the Bankruptcy Code. See id. at 648 (collecting cases).

Prior to its bankruptcy filing, Engstrom, Inc. engaged in a factoring agreement with LSQ Funding Group, L.C. (“LSQ”), pursuant to which LSQ agreed to provide upfront payments to Engstrom on the basis of its future receivables. Pursuant to the arrangement, LSQ took a security interest in Engstrom’s receivables. However, when LSQ discovered that the receivables were fictitious, it terminated the arrangement, creating a $10.3 million payable for Engstrom. Engstrom’s CEO then allegedly hatched a plan whereby she arranged for a new lender, Millennium Funding (“Millennium”), to buy Engstrom’s $10.3 million payable from LSQ, replacing LSQ as creditor. In connection with the transfer, LSQ transferred its interest in the Engstrom’s receivables to Millennium. After Engstrom commenced chapter 7 proceedings, however, the trustee sought to avoid the transfer between LSQ and Millennium as a payoff of Engstrom’s debt. The bankruptcy court disagreed and awarded summary judgment to LSQ based on the doctrine of “earmarking,” pursuant to which one creditor may provide a debtor “earmarked” funds to pay off a specific debt in full, thereby assuming the original creditor’s position, without being subject to a preference action. Accordingly, the bankruptcy court found that Millennium’s payment to LSQ was not a transfer of an “interest of the debtor in property.” The district court affirmed.

On appeal, the Seventh Circuit disposed of any analysis of the earmarking doctrine, instead relying only on an analysis of whether the transfer between LSQ and Millennium constituted a transfer of “an interest of the debtor in property.” In so doing, the Seventh Circuit considered both “(1) whether the debtor c[ould] exercise control over the funds transferred; and (2) whether the transfer diminishe[d] the property of the estate.” Id. at 645 (citing Matter of Smith, 966 F.2d 1527, 1535 (7th Cir. 1992)). Looking first to the question of Engstrom’s control, the Seventh Circuit found insufficient evidence to conclude that Engstrom had, in fact, controlled the payoff between LSQ and Millennium. But regardless of the infirmities in the factual record in connection with the first question, the panel found that, because there was no diminution to the estate resulting from the transaction, there was definitively no transfer of “an interest of the debtor in property” for both purposes of section 547 and section 548. As such, the issue of fraud remained solely between LSQ and Millennium.

Warsco v. Creditmax Collection Agency, Inc. (In re Harris), 56 F.4th 1134 (7th Cir. 2023). The Seventh Circuit heard and decided a direct appeal in a preference action in order to overturn its own precedent established in In re Coppie, 728 F.2d 951 (7th Cir. 1984). The Seventh Circuit panel determined that Coppie was in direct conflict with the Supreme Court’s decision in Barnhill v. Johnson, 503 U.S. 393 (1992).

A chapter 7 trustee commenced an adversary seeking to avoid approximately $3,700 in payments made by the debtor to creditor Creditmax in the ninety days prior to the debtor’s bankruptcy proceeding. The payments were made pursuant to a garnishment order that Creditmax had obtained from an Indiana state court more than ninety days before the bankruptcy proceeding commenced. In defense of the payments, Creditmax argued that Coppie, which held that (1) the definition of a “transfer” for purposes of section 547 of the Bankruptcy Code depended on state law, and (2) that, under Indiana law, the date of a transfer with respect to a garnishment occurs when the garnishment order is entered, required dismissal of the trustee’s claims. The bankruptcy court agreed, nevertheless noting that it thought Coppie was wrongly decided, but stating that only the Seventh Circuit could overrule its decision.

After accepting the case on direct appeal, the Seventh Circuit reversed the bankruptcy court to find that the garnished payments were voidable preferential transfers. In so holding, the panel acknowledged that the Supreme Court’s decision in Barnhill abrogated Coppie. Barnhill held that the meaning of “transfer,” for the purpose of section 547, was defined by federal—rather than state—law. Furthermore, the Court in Barnhill determined that, for purposes of a preference claim, the transfer is made as of the date money passes to the creditor. Although the instrument at issue in Barnhill was a check, rather than a garnishment, the Seventh Circuit applied the same reasoning in its holding that the garnished payments arose within the ninety-day preference window, and therefore remanded the case back to the bankruptcy court for further proceedings on the merits of the trustee’s claim.

§ 1.1.9. Eighth Circuit

Pitman Farms v. ARKK Food Co., LLC (In re Simply Essentials, LLC), 78 F.4th 1006 (8th Cir. 2023). The Eighth Circuit definitively held that avoidance actions can be sold as property of the estate under section 541(a).

The debtor operated a chicken production and processing facility in Iowa. It was forced into an involuntary chapter 7 proceeding by disgruntled creditors. Upon his appointment, the chapter 7 trustee determined that the estate did not have sufficient funds to pursue certain avoidance actions it had against creditor Pitman Farms (“Pitman”). After soliciting bids, the trustee selected another creditor, AARK Food Company (“AARK”), as the winning bidder, over Pitman’s competing bid. The bankruptcy court then approved the trustee’s sale to AARK over Pitman’s objection. Pitman appealed.

On appeal, Pitman argued that avoidance actions are not property of the estate and instead belong to the trustee or other creditors. Looking first to the plain language of section 541(a) of the Bankruptcy Code, the Eighth Circuit disagreed, finding that avoidance actions fit within the broad ambit of “property of the estate.” Not only does a debtor have an interest in avoidance actions that becomes property of the estate pursuant to section 541(a)(7), but the Eighth Circuit also found that, prior to the commencement of a bankruptcy proceeding, a debtor has an inchoate interest in avoidance actions that becomes property of the estate under section 541(a)(1). The Eighth Circuit was also not convinced by Pitman’s argument that including avoidance actions as property of the estate would render language in section 541(a)(3) and (4) redundant to section 541(a)(6). Noting that the “canon against surplusage is not an absolute rule,” the panel determined that the “the possibility of our interpretation creating surplusage does not alter our conclusion that avoidance actions are part of the estate under the plain language of § 541(a).” Id. at 1009–10. Finally, the Eighth Circuit found persuasive the consensus among other circuits—namely, the First, Fifth, and Seventh Circuits—that avoidance actions constitute property of the estate. Although the Third Circuit had held that avoidance actions were not “assets” of the estate, In re Cybergenics Corp., 226 F.3d 227 (3d Cir. 2000), the opinion distinguished “property of the estate” from “assets,” and so would not deter the Eighth Circuit from its holding. Accordingly, the Eighth Circuit affirmed the bankruptcy court’s ruling that the avoidance actions were property of the estate that the trustee could sell.

§ 1.1.10. Ninth Circuit

A&D Prop. Consultants, LLC v. A&S Lending, LLC (In re Groves), 652 B.R. 104 (9th Cir. BAP 2023). In affirming the bankruptcy court’s ruling, the Ninth Circuit Bankruptcy Appellate Panel (the “BAP”) held that section 363(f) of the Bankruptcy Code does not allow for the sale of property free and clear of a lien that encumbers a non-debtor co-owner’s interest in the property. This provides much needed clarity on the interplay between sections 363(f) and 363(h), which is an area where there is little caselaw.

As tenants in common, a debtor and her wholly owned limited liability company (the “LLC”) jointly owned two parcels of real property: one was the debtor’s residence (the “Residence”), while the other was an investment property (the “Investment Property”). The debtor and the LLC subsequently took out a loan secured by a deed of trust covering both properties. However, due to a clerical error, the deed of trust only encumbered the debtor’s interest in the Residence and the LLC’s interest in the Investment Property (such that the debtor’s interest in the Investment Property and the LLC’s interest in the residence were unencumbered). After filing a chapter 13 petition, the debtor initiated an adversary proceeding against the current holder of the promissory note and deed of trust (the “Secured Creditor”), seeking a declaratory judgment that the deed of trust only encumbered the debtor’s interest in the Residence and the LLC’s interest in the Investment Property. In its amended answer, the Secured Creditor asserted a counterclaim against the debtor and the LLC for reformation of the deed of trust to reflect that it encumbered the interests of the debtor and the LLC in both properties. After a two-day trial, the bankruptcy court ruled in favor of the debtor and the LLC, dismissing the Secured Creditor’s reformation claim.

After the conclusion of the adversary proceeding, the debtor moved to sell the Investment Property under section 363(h) of the Bankruptcy Code, which allows the sale of property that is co-owned by a debtor. The debtor also sought to sell the Investment Property free and clear of all liens, including the Secured Creditor’s lien on the non-debtor LLC’s interest in the Investment Property, under section 363(f)(4). The Secured Creditor objected to the sale, arguing that it still maintained a lien on the LLC’s interest in the Investment Property. The debtor argued that the Secured Creditor had waived its lien by failing to assert the lien as a compulsory counterclaim in the adversary proceeding. The bankruptcy court ultimately approved the sale free and clear of any liens on the debtor’s interest in the Investment Property, but upheld the Secured Creditor’s lien on the LLC’s interest in the property, and required that any net proceeds from the LLC’s interest in the property to be paid to the Secured Creditor in partial satisfaction of its lien. The LLC appealed as to the bankruptcy court’s ruling that the Secured Creditor maintained its lien on the LLC’s interest in the Investment Property.

In its decision, the BAP addressed the following question, among others: did the bankruptcy court err when it determined that the debtor and the LLC could not sell the Investment Property free and clear of the Secured Creditor’s lien on the LLC’s interest in the property? To answer this question, the BAP examined two cases addressing the intersection of sections 363(f) and 363(h): the first, Hull v. Bishop (In re Bishop), 554 B.R. 558 (Bankr. D. Me. 2016), permitted a sale free and clear of a lien on the non-debtor’s interest in the property, while the second, in re Marko, No. 11-31287, 2014 WL 948492 (Bankr. W.D.N.C. Mar. 11, 2014), held that it would risk overextending the Bankruptcy Code to enable a non-debtor to obtain relief from its liens under section 363(f). The BAP found the reasoning in Marko more persuasive, noting in addition that sections 363(b) and 363(f) are limited to sales of estate property. Because the LLC’s interest in the Investment Property was not part of the bankruptcy estate, it could not be sold free and clear.

Clifton Capital Group, LLC v. Sharp (In re East Coast Foods, Inc.), 66 F.4th 1214 (9th Cir. 2023). Unlike the Fourth Circuit in Kiviti v. Bhatt, 80 F.4th 520 (4th Cir. 2023), above, the Ninth Circuit “returned emphasis” to the requirement that a party must have Article III standing, in addition to “person aggrieved” standing, to appeal a bankruptcy court order. See id. at 906.

In 2016, East Coast Foods, Inc. (“ECF”), manager of four locations of Roscoe’s House of Chicken & Waffles, filed for chapter 11 bankruptcy. An official committee of unsecured creditors (the “Committee”) was appointed. In addition, the bankruptcy court determined it was necessary to appoint a chapter 11 trustee to make business decisions for ECF. Later, the Committee and ECF’s founder, Herb Hudson, put forward a plan that guaranteed creditors payment in full, plus interest. Payments under the plan were secured by a “collateral package,” which included up to a $10 million contribution from Hudson. The plan also provided a set hourly rate of $450, plus expenses, for the chapter 11 trustee.

After the plan was confirmed and became effective, the chapter 11 trustee sought final compensation in the amount of $1,155,844.71, representing the maximum allowable under the fee cap in 11 U.S.C. § 326(a). The amount represented the lodestar (i.e., 1,692.2 hours at a rate of $450 per hour) plus a roughly 65% enhancement for “exceptional services.” A creditor, Clifton Capital Group, LLC (“Clifton”), objected to the fee application, arguing that the case did not merit an enhancement beyond the lodestar. When the bankruptcy court approved the fees, Clifton appealed to the district court. On appeal to the district court, the trustee argued that Clifton lacked standing to appeal because it was not a “party aggrieved.” Finding that Clifton was adversely affected by the fee order because it further subordinated its claim, and therefore “aggrieved,” the district court then agreed with Clifton on the merits, remanding the matter to the bankruptcy court with instructions either to reduce the fees to the lodestar or make detailed findings justifying the enhancement. On remand, the bankruptcy court again approved the trustee’s full fees, including the enhancement. This time, when Clifton appealed, the district court affirmed the bankruptcy court’s order approving the fees.

On appeal before the Ninth Circuit, the panel reconsidered whether Clifton had sufficiently established an actual and imminent injury for purposes of Article III standing. Reviewing the district court’s decision, the Ninth Circuit found that the district court had relied on precedent wherein the existence of a finite pool of assets to pay claims had previously conferred appellate standing on a party whose share of the asset pool was under threat. In this particular case, however, the Ninth Circuit found that ECF’s plan did not establish such a limited fund, but rather provided for the payment in full from the reorganized debtor’s future income, guaranteed by the “collateral package” and Hudson’s $10 million contribution. In light of these circumstances, the Ninth Circuit determined that the district court had erroneously concluded that payment of the chapter 11 trustee’s fees put Clifton at risk for non-payment. The Ninth Circuit also rejected Clifton’s argument that it was harmed because payment of the trustee’s fees would prolong payment of its subordinated claim. The Ninth Circuit found that delayed payment was too conjectural to sustain an injury for the purpose of Article III standing because the plan explicitly stated that the timing of creditor distributions was uncertain. In addition, Clifton was not harmed by any delay in distribution because the plan entitled it to postpetition interest. Accordingly, Clifton had failed to establish an actual injury, and thus did not have standing under Article III to appeal the bankruptcy court’s fee order.

Sony Music Publishing (US) LLC v. Priddis (In re Priddis), No. 22-15457, 2023 WL 2203562 (9th Cir. Feb. 24, 2023). In a split decision, the Ninth Circuit held that an involuntary filing by fourteen creditors, who each had a right to a portion of a $3 million judgment, satisfied the numerosity requirement under section 303(b)(1) of the Bankruptcy Code. Reversing the bankruptcy court’s dismissal and the district court’s affirmation, the majority held that each creditor had an individual claim, notwithstanding that the debt arose from a single judgment.

In 2016, twenty-one publishers sued the debtor for copyright infringement. The debtor entered into a settlement agreement with the publishers, under which the debtor was obligated to make payments to the publishers, who could seek a judgment of $3 million if the debtor failed to make any payments. After the debtor stopped making the settlement payments, fourteen of those publishers sued the debtor and ultimately obtained a stipulated judgment in their favor in the amount of $3 million. These publishers then filed an involuntary bankruptcy against the debtor. The debtor contested the involuntary filing, and the bankruptcy court dismissed it on summary judgement holding that the petitioning creditors failed to satisfy section 303(b)(1)’s numerosity requirement as the stipulated judgment constituted a single, joint claim. On appeal, the district court affirmed, and the debtor appealed to the Ninth Circuit.

On appeal, the Ninth Circuit held that the petitioning creditors did in fact satisfy section 303(b)(1)’s numerosity requirement. The court reasoned that the judgement was easily divisible because the petitioning creditors had stipulated to statutory damages in the underlying suit and, under the Copyright Act, the petitioning creditors would receive damages strictly according to their ownership interests. The court concluded that because each petitioning creditor had an enforceable right to payment in the judgment, they also necessarily each held an individual claim.

The dissent rejected the majority’s finding that the numerosity requirement of section 303(b)(1) had been met for two primary reasons. First, the dissent agreed with the district court that the stipulated judgment merged the petitioning creditors’ claims together. Second, the dissent was troubled by the judgment’s lack of specificity as to how the $3 million figure should be allocated among the publishers. Because the publishers could have reserved their individual rights to payment, but failed to do so, it found that the numerosity requirement of section 303(b)(1) had not been met.

§ 1.1.11. Tenth Circuit

Byrnes v. Byrnes (In re Byrnes), No. 22-2049, 2022 WL 19693003 (10th Cir. Dec. 21, 2022). In an unpublished decision, the Tenth Circuit held that it lacked appellate jurisdiction over the denial of a motion to withdraw the refence of an adversary proceeding to the bankruptcy court. The Tenth Circuit panel held that such a denial is interlocutory, and accordingly that the court did not have appellate jurisdiction.

Shortly after the debtor commenced her chapter 7 proceedings, the debtor’s former spouse, Mr. Byrnes, filed two adversary proceedings against her, which were eventually consolidated. Mr. Byrnes demanded a jury trial and did not consent to the bankruptcy court’s entry of a final order on his claims. While the adversary proceeding was pending, Mr. Byrnes moved to withdraw the reference to the bankruptcy court. The district court then referred the motion to a magistrate, who recommended denial of Mr. Byrnes’ motion to withdraw the reference. Over Mr. Byrnes’ objections, the district court adopted the magistrate’s recommendation. While Mr. Byrnes sought reconsideration of the denial of the motion to withdraw the reference, the bankruptcy court entered a final order dismissing the adversary proceeding. The district court then denied Mr. Byrnes’ motion for reconsideration as moot.

The district court referred the Motion to a magistrate judge, who subsequently issued proposed findings and a recommended disposition denying the Motion (the “PFRD”). In overruling Mr. Byrnes’ objection to the PFRD, the district court denied the Motion and “dismissed the case without prejudice, and entered judgment by separate order.” Id. Mr. Byrnes then moved for reconsideration of the district court’s decision, but the bankruptcy court dismissed the underlying adversary proceeding before the district court reached a decision on the motion for reconsideration, which Mr. Byrnes appealed. The district court then denied the motion for reconsideration “as moot and, alternatively, as lacking a basis in fact or law.” Id.

Because an order to withdraw the reference is an interlocutory matter, which does not dispose of the matter, but merely determines which forum shall hear the matter, the Tenth Circuit dismissed the appeal for lack of appellate jurisdiction.

Miller v. United States, 71 F.4th 1247 (10th Cir. 2023). The Tenth Circuit joins the majority in a circuit split, holding that the waiver of sovereign immunity in section 106(a) of the Bankruptcy Code permits a bankruptcy trustee to pursue avoidance actions against the government under section 544(b)(1), notwithstanding the fact that an actual creditor could not have maintained a suit against the government outside of bankruptcy. In so holding, the Tenth Circuit sided with Ninth and Fourth Circuits against the Seventh Circuit as to how to address the interplay between sections 106(a) and 544(b)(1) of the Code. Compare In re Equip. Acquisition Res., Inc., 742 F.3d 743 (7th Cir. 2014) (holding that section 106(a)’s waiver did not extend to an Illinois state law cause of action under section 544(b)(1)), with In re DBSI, Inc., 869 F.3d 1004 (9th Cir. 2017) (holding that section 106(a)’s waiver extended to an Idaho state law cause of action under section 544(b)(1)), and In re Yahweh Ctr., Inc., 27 F.4th 960 (4th Cir. 2022) (holding in the alterative that section 106(a)’s waiver extended to a North Carolina state law cause of action under section 544(b)(1)).

In 2014, All Resorts Group, Inc. (“All Resorts”) paid the Internal Revenue Service (the “IRS”) $145,138.78 to satisfy the personal tax debts of two of its principals. When All Resorts filed for bankruptcy in 2017, the chapter 7 trustee who was ultimately appointed commenced an adversary proceeding, pursuant to Utah’s Uniform Voidable Transactions Act and section 544(b)(1) of the Bankruptcy Code, against the IRS to recover the payments. In opposition, the government argued not that the transfers did not occur, but instead that the trustee could not meet the requirement, under section 544(b)(1), for there to be an “actual creditor” who could bring suit under state law. In response, the trustee pointed to section 106(a) of the Bankruptcy Code, which abrogates sovereign immunity as to a governmental unit for several purposes, including with respect to section 544 of the Bankruptcy Code. Although no creditor could bring an avoidance action under Utah law in the absence of bankruptcy, the trustee argued that the bankruptcy filing made section 106(a)’s abrogation of sovereign immunity applicable to the underlying Utah state law. The bankruptcy court agreed with the trustee, holding that section 106(a) “unequivocally waives the federal government’s sovereign immunity with respect to the underlying state law cause of action incorporated through [section] 544(b).” Id. at 1251 (quoting In re All Resorts Grp., Inc., 617 B.R. 375, 394 (Bankr. D. Utah 2020)). The district court adopted the bankruptcy court’s decision and affirmed its judgment, and an appeal to the Tenth Circuit followed.

The Tenth Circuit affirmed, finding that section 106(a)’s abrogation of sovereign immunity reached the underlying state law cause of action through section 544(b)(1)’s authority. First looking to the language of section 106(a), the Tenth Circuit held that, in accordance with Supreme Court precedent, the phrase “with respect to” must be construed broadly and “clearly expresses Congress’s intent to abolish the [IRS’s] sovereign immunity in an avoidance proceeding arising under § 544(b)(1), regardless of the context in which the defense arises.” Id. at 1253. The Tenth Circuit then noted that the broad language of section 106(a)(2), authorizing bankruptcy courts “to hear and determine any issue with respect to the application” of section 544, among others, presumes that bankruptcy courts have subject matter jurisdiction, which would not be the case if the government were immune from suit.

§ 1.1.12. Eleventh Circuit

Braun v. America-CV Station Grp., Inc. (In re America-CV Station Grp. Inc.), 56 F.4th 1302 (11th Cir. 2023). The Eleventh Circuit required that a debtor provide a new disclosure statement and opportunity to vote whenever a Chapter 11 plan’s amendment causes a class of creditors to be materially and adversely affected.

The case arose out of an amendment to chapter 11 reorganization plans for Caribevision Holdings, Inc. and Caribevision TV Network, LLC. The initial plans provided that equity in the reorganized debtor would be split among those creditors providing new equity in the reorganized company in proportion to the amount of capital each shareholder contributed. Effectively, equity in the reorganized debtor would be split up among four shareholders. The same day as the deadline for voting on the plan, the debtor informed three out of the four shareholders (the “Pegaso Equity Holders”) that any financing that they would be providing was needed in the next ten days. The Pegaso Equity Holders missed the new deadline, at which point the remaining of shareholder (“Vasallo”) seized the opportunity to fund the entire equity contribution, resulting in Vasallo receiving all equity in the reorganized holding companies. The other creditors disputed the transaction, arguing that they were entitled to additional disclosure and voting.

The Eleventh Circuit explained that modifying a chapter 11 plan of reorganization is permissible under section 1127(a), provided that the plan remains in compliance with all ordinary substantive requirements necessary for any other chapter 11 plan. The Eleventh Circuit highlighted the requirement of section 1123(a)(4) of the Bankruptcy Code that a modified plan must “‘provide the same treatment for each claim or interest of a particular class,’” absent that class’s consent. 56 F.4th at 1308 (quoting 11 U.S.C. § 1123(a)(4)). The court stated that a modification requires the debtor to “provide a new disclosure statement and call for another round of voting” where the amended plan materially and adversely affects that class. Id. at 1309 (citing In re New Power Co., 438 F.3d 1113, 1117–18 (11th Cir. 2006)).

The Eleventh Circuit first found that the bankruptcy court improperly narrowed Bankruptcy Rule 3019(a) when it required new disclosure and voting only where a materially affected claimholder had previously voted to accept the plan. Bankruptcy Rule 3019(a) provides that if the court finds that “‘the proposed modification does not adversely change the treatment of the claim of any creditor. . . who has not accepted . . . the modification, it shall be deemed accepted by all . . . who have previously accepted the plan.’” Id. at 1311 (quoting Bankr. Rule 3019(a)). The circuit court read Bankruptcy Rule 3019(a) expansively, explaining that the use of the word “any” indicated the requirement that a class of creditors receive additional disclosure and voting, even if the class previously voted to reject the plan. Id.

The Eleventh Circuit then explained why the failure to provide additional disclosure was harmful to the Pegaso Equity Holders. The court explained that, because the only notice the appellants actually received was one day’s notice of a contemplated modification, they were denied the opportunity to vote and reject the modified plans and present their objections to the court. The court emphasized the actual notice arrived too close to the confirmation hearing and provided insufficient detail surrounding the terms of the modification.

Esteva v. UBS Fin. Servs. Inc. (In re Esteva), 60 F.4th 664 (11th Cir. 2023). In this case, the Eleventh Circuit further shed light on the ability of parties to convert an interlocutory order into a final order by holding that a stipulation of dismissal under rule 41(a)(1)(A) of the Federal Rules of Civil Procedure (“Rule 41(a)(1)(A)”) with respect to the last remaining claim of an action cannot transform an order granting partial summary judgment into an appealable final order.

A debtor in a converted chapter 11 individual bankruptcy case and his spouse (the “Plaintiffs”) commenced an adversary proceeding against UBS Financial Services and UBS Credit Corp. (together, “UBS”) to recover funds from a frozen account at UBS jointly held by the Plaintiffs (the “Account”). Prior to the bankruptcy, the debtor provided financial services to UBS and, in connection with his recruitment, entered into several agreements with UBS that provided for a $2 million loan to the debtor (the “Promissory Notes”). UBS eventually terminated the debtor on suspicions of fraudulent activity, thereby triggering a provision under the Promissory Notes making any outstanding principal immediately due and payable with interest. To secure repayment of the Promissory Notes, UBS restricted and froze the Account pursuant to a client relationship agreement that governed the Account. Subsequently, the debtor filed for chapter 7 bankruptcy and later converted his case to a proceeding under chapter 11 of the Bankruptcy Code.

During the bankruptcy case, the Plaintiffs filed a complaint against UBS seeking (1) a determination that the debtor’s tenancy-by-the-entirety renders the account exempt, (2) a determination that UBS does not have an enforceable security interest in the Account, (3) the turnover of funds in the account, and (4) restitution based on UBS’ unjust enrichment from the retention of the debtor’s book of business following his termination. UBS then filed counterclaims and the Plaintiffs moved for summary judgment on all claims except for their unjust enrichment claim. After the bankruptcy court entered an order for partial summary judgment but before trial on the remaining claim, UBS appealed the bankruptcy court’s decision without a grant of certification for immediate appeal under Bankruptcy Rule 7054, which incorporates rule 54 of the Federal Rules of Civil Procedure. The district court affirmed the bankruptcy court’s ruling and dismissed the appeal with prejudice.

UBS then appealed to the Eleventh Circuit, which directed the parties to brief the issue of whether the court had jurisdiction as the unjust enrichment claim was still pending. Before oral argument, the parties entered into a stipulation of dismissal under Rule 41(a)(1)(A) with respect to the remaining claim. In its analysis, the court first addressed whether the parties’ argument that the partial summary judgment ruling can be considered a final order because it resolved the discrete dispute over the validity of UBS’ lien against the Account. The court rejected this argument as the court had previously held in Dzikowski v. Boomer’s Sports & Recreation Center, Inc. (In re Boca), 184 F.3d 1285 (11th Cir. 1999) that an order entered in an adversary proceeding must dismiss all claims against all parties to be considered final.

The court also examined whether there were any applicable exceptions to the finality of orders that would grant jurisdiction over the appeal. The court found that the collateral order doctrine, which allows an appeal of an interlocutory order of a separable claim that is collateral to the merits and too important to delay review, did not apply because the bankruptcy court’s partial summary judgement was not separate from the underlying adversary proceeding. Next, the court held that the marginal finality doctrine did not apply because this doctrine only applies to issues of national significance and the bankruptcy suit did not rise to such a level of importance. The court also considered the applicability of the practical finality doctrine, which permits review of an interlocutory order deciding the transfer of property if delaying the appeal would cause irreparable harm. As any harm suffered by UBS here could be remedied with money damages and the debtor did not lack an ability to repay, the court found that UBS would not be subjected to irreparable harm and therefore held this exception did not apply.

Finally, the court addressed whether the stipulation of dismissal cured the court’s lack of jurisdiction under the doctrine of cumulative finality. Under this doctrine, appellate review of an interlocutory order is permitted if the appeal is filed from an order dismissing a claim and followed by a subsequent final judgment without the filing of a new notice of appeal. In analyzing voluntary dismissal pursuant to Rule 41(a)(1)(A), the court found that, pursuant to its previous holding in Perry v. Schumacher Group of Louisiana (In re Perry), 891 F.3d 954 (11th Cir. 2018), voluntary dismissal must be with respect to the entire action and not to individual claims. The stipulation of dismissal between the parties was therefore invalid because it applied to a single claim, and thus the bankruptcy court still had jurisdiction over the action. The court also briefly noted that there were alternative paths available that the parties could have taken to establish appellate jurisdiction, such as certification under Bankruptcy Rule 54(b) or moving to amend under Bankruptcy Rule 15(a), which incorporates rule 15(a) of the Federal Rules of Civil Procedure.

§ 1.1.13. D.C. Circuit

FTC v. Endo Pharms. Inc., 82 F.4th 1196 (D.C. Cir. 2023). The D.C. Circuit ultimately affirmed the district court’s decision dismissing the Federal Trade Commission’s (“FTC”) lawsuit for injunctive and other equitable relief under the Sherman Act and the Federal Trade Commission Act. In doing so, the D.C. Circuit ruled that the lawsuit fell under an exception to the automatic stay as a governmental unit’s regulatory power.

The appellee (“Endo”), a pharmaceutical company, began selling an extended-release oxymorphone, which it held several patents to, under the brand name Opana ER. A third-party (“Impax”) later began to market its own generic version of the drug. In response, Endo filed a patent infringement action in 2008, and the parties settled their dispute in 2010 (the “2010 Agreement”). Under the 2010 Agreement: (1) Impax would not sell its generic version of Opana ER until 2013; (2) Endo would convey a license to Impax to cover all of Endo’s patents regarding Opana ER; and (3) the parties would “negotiate in good faith an amendment to the terms of the License to any patents which issue[d] from any Pending Applications.” Id. at 1201 (internal citations omitted).

In 2012, acquired additional patents related to Opana ER. Pursuant to the 2010 Agreement, Impax began selling its generic version of Opana ER in 2013. Two years later in 2015, Endo asked Impax to pay an eighty-five percent royalty on the license for the additional Opana ER patents, which Impax refused, leading to Endo suing Impax for breach of the 2010 Agreement. The parties reached another settlement (the “2017 Agreement”), through which: (1) Impax was granted a license to all of Endo’s Opana ER patents for payment and royalties from Impax’s Opana ER profits; and (2) Impax’s obligation to pay royalties would terminate if Endo used its own patents to enter the market. As a result of the 2017 Agreement, Endo exited the oxymorphone market, which led to an increase in price of the drug.

The Federal Trade Commission determined that the 2017 Agreement was anticompetitive and filed a complaint for injunctive and other equitable relief against Endo. The FTC alleged that: “(1) [Endo’s] 2017 Agreement violated § 1 of the Sherman Act and it constituted an unfair method of competition in violation of § 5(a) of the FTC Act; and that (2) Amneal [the parent company of Impax] exercised monopoly power in violation of § 2 of the Sherman Act and § 5(a) of the FTC Act.” Id. at 1201–02 (internal citations omitted). Endo moved to dismiss the FTC’s complaint for failure to state a claim and lack of personal jurisdiction. The district court dismissed the action and the FTC appealed. While the appeal was pending, Endo filed for bankruptcy in 2022.

The D.C. Circuit first had to determine whether it had jurisdiction over the FTC’s action against Endo because a “party’s filing for bankruptcy generally triggers an automatic stay of any commencement or continuation of a judicial proceeding against the debtor.” Id. at 1202 (quoting 11 U.S.C. § 362(a)(1)) (internal quotation marks and alterations omitted). If the automatic stay applied, it would “strip[] [the D.C. Circuit] of jurisdiction.” Id. (citing In re Kupperstein, 994 F.3d 673, 677 (1st Cir. 2021)). The D.C. Circuit would have jurisdiction only if the case fell under one of the exceptions to the automatic stay.

One exception includes “actions by a governmental unit intended to enforce such governmental unit’s police and regulatory power.” Id. (quoting Wallaesa v. FAA, 824 F.3d 1071, 1076 n.3 (D.C. Cir. 2016)) (internal quotation marks and alterations omitted). The governmental action will be excepted from the automatic stay if it is “designed primarily to protect the public safety and welfare [and not] for a pecuniary purpose, that is, [recovering] property from the estate.” Id. (quoting In re Kupperstein, 994 F.3d at 677) (internal quotation marks omitted). Here, the FTC commenced the action “to prevent unfair methods of competition, which it is authorized to do if the competition is against public policy.” Id. (internal citations omitted). Thus the D.C. Circuit ruled that the regulatory power exception to the automatic stay applied, and the case could be adjudicated.

As to whether the district court erred in dismissing the FTC’s claims, the D.C. Circuit ruled that it did not, citing to cases that established that “a single patentee may set conditions in granting a single licensee the right to use its valid patents,” which is what the 2017 Agreement did. Id. at 1204 (citing FTC v. Actavis, Inc., 570 U.S. 136, 150 (2013)). Additionally, the “Patent Act expressly authorizes behavior that closely resembles the 2017 Agreement.” Id. The FTC argued that the 2017 Agreement was actually an agreement not to compete because the “2010 Agreement had already given Impax a license to Endo’s present and future patents.” Id. at 1205. However, the D.C. Circuit stated that the FTC “fail[ed] to explain how the 2017 Agreement . . . meaningfully differ[ed] from a standard exclusive license [and that the FTC] admitted that its challenge to the 2017 Agreement would remain the same even if the . . . 2010 Agreement never existed.” Id. The D.C. Circuit also found that there was no basis for Sherman Act liability, and so the district court’s decision to dismiss the case was affirmed.