Third Circuit Bankruptcy Case Summaries

Transcription

1 Third Circuit Bankruptcy Case Summaries Recent Third Circuit decision In re Garden Ridge Corp., 2010 WL (3d Cir. July 9, 2010) (Not Precedential) On July 9, 2010, the Third Circuit affirmed the judgment of the Delaware district and bankruptcy courts that substantive consolidation does not create the requisite mutuality for setoff purposes. The creditor held a claim for $310,000 against the estate of Garden Ridge Management, Inc.; an affiliated debtor, Garden Ridge, L.P., held a claim against the creditor for $250,000. The debtors estates were substantively consolidated pursuant to a plan confirmed prior to the Third Circuit s issuance of In re Owens Corning, 419 F.3d 195 (3d Cir. 2005), limiting the availability of substantive consolidation. The creditor then sought to setoff his claim. Setoff under section 553 of the Bankruptcy Code requires mutual debts. The Court found that mutuality was not created by substantive consolidation. Instead, the claimant would have to prove that the entities in question used one another as alter egos or otherwise disregarded their corporate separateness. Judge Ambro (who authored the Owens Corning decision) dissented and would have found mutuality because substantive consolidation... necessarily destroyed a mutuality defense to setoff. By virtue of the deemed consolidation, the debtors are now deemed mutual. Recent Eastern District of Pennsylvania decision Rhodes v. Diamond, 2010 WL (E.D. Pa. July 13, 2010) On July 13, 2010, the U.S. District Court for the Eastern District of Pennsylvania held that a creditor who files a proof of claim in a bankruptcy case does not have a duty to amend that proof of claim if the amount of the claim decreases. The debtors filed their bankruptcy case to stay impending foreclosure sales. The lenders and their lawyers filed proofs of claim that did not reflect refunds of fees paid for the sheriff s sales. The debtors sued the claimants under the Fair Debt Collection Practices Act for inflating their claims by failing to reflect the refunds. The court jed; that the proofs of claim were valid when filed because a claim should state the amount owed as of the petition date, and, as of the petition date, the sheriff s sale fees had not yet been refunded. The debtors did not contest the validity of the claims as filed, but instead contended that the claimants failure to timely amend their proofs of claim to reflect the refunds violated the FDCPA. The court disagreed and held that neither the Bankruptcy Code nor the Bankruptcy Rules require a claimant to amend its proof of claim. The court also ruled that an FDCPA claim can never be based on a proof of claim filed in a bankruptcy case, regardless of the ultimate validity of the underlying claim. The court found that other avenues existed for challenging the claims the debtors could have followed the normal claims objection procedure or, if they felt the claims were egregious enough, they could have sought sanctions under Bankruptcy Rule 9011.

2 Recent Eastern District of Pennsylvania Bankruptcy Court decision In re Philadelphia Newspapers, LLC, 2010 WL (Bankr. E.D. Pa. July 15, 2010) On July 15, 2010, the U.S. Bankruptcy Court for the Eastern District of Pennsylvania held that section 503(b)(1)(A)(ii) of the Bankruptcy Code does not confer administrative expense status on a claim for back wages or benefits the results from a breach of contract. The sports journalist Steven A. Smith was demoted by the Philadelphia Inquirer in 2008, which the journalists union challenged as a breach of their collective bargaining agreement. While arbitration was pending, the newspaper filed for bankruptcy. The arbitrator ruled that the demotion violated the CBA and awarded Smith $100,000 for back wages. Smith filed an administrative expense claim pursuant to section 503(b)(1)(A)(ii). Section 503(b)(1)(A)(ii) was added to the Bankruptcy Code in the BAPCPA amendments of The court found that four requirements must be met for the back wages to be entitled to administrative priority under the section: (1) they were awarded pursuant to a judicial proceeding or a proceeding of the NLRB; (2) they were awarded as back pay attributable to a period of time occurring after commencement of the debtor s bankruptcy case; (3) they were awarded as a result of a violation of Federal or State law by the debtor; and (4) the court determines that payment of the wages and benefits will not substantially increase the probability of layoff or termination of current employees, or of nonpayment of domestic support obligations, during the debtor's bankruptcy case. The court denied administrative priority to the claim, holding that the back wages were awarded as a result of a breach of contract (the CBA), and not as a result of a violation of federal or state law by the debtor. Recent Delaware Bankruptcy Court decision In re SemCrude, L.P., 2010 WL (Bankr. D. Del. July 16, 2010) On July 16, 2010, the U.S. Bankruptcy Court for the District of Delaware held that section 510(b) cannot be used to subordinate a claim related to the purchase of a security of an entity that was not an affiliate of the debtor, as that term is defined in section 101(2) of the Bankruptcy Code. Harvest purchased shares in SemGroup Energy Partners, L.P. ( SGLP ), a nondebtor. SGLP was 2% owned by SemGroup GP, also a nondebtor. SemGroup GP was wholly owned by SemGroup Holdings, which in turn was owned by SemGroup. Both SemGroup and SemGroup Holdings were debtors. Harvest timely filed proofs of claims against the debtors related to the purchase of these securities. The debtors sought subordination of the claims pursuant to section 510(b), which mandates subordination of claims arising from recission of a purchase or sale of a security of the debtor or of an affiliate of the debtor.... Based on the debtor s corporate structure and the definition of affiliate in the Bankruptcy Code, the court found that section 510(b) did not apply. Affiliate is defined as, among other things, (i) a corporation in

3 which the debtor owned 20% or more of voting stock or (ii) a person whose business is operated under an operating agreement with the debtor. SGLP, however, is a partnership, and partnerships are excluded from the definition of corporation in section 101(9) of the Bankruptcy Code. While a partnership falls under the definition of person, the debtors did not adduce any evidence that SGLP s business was operated under an operating agreement with the debtor. Recent New Jersey Bankruptcy Court decision In re Skyworks Ventures, Inc., 2010 WL (Bankr. D.N.J. July 15, 2010) On July 15, 2010, the U.S. Bankruptcy Court for the District of New Jersey held that under the majority rule applying section 303(i) of the Bankruptcy Code it would award reasonable attorneys fees and costs to the alleged debtor following its successful challenge of an involuntary petition. Because the court found that the petition was filed in bad-faith as a litigation tactic to force settlement in a two-party dispute, it also awarded punitive damages. For some years, the petitioning creditor law firm provided legal services to the Skyworks Ventures. Ventures paid most of the bills, but complained about the amount of legal fees. In September 2009, the law firm commenced a suit against Ventures for unpaid legal fees. Ventures counterclaimed for return of funds paid for alleged overbilling. In March 2010, seven creditors of Ventures subsidiary, Skyworks Interactive, filed an involuntary petition against it, and the law firm sought to join them as a petitioning creditor. Shortly thereafter, the seven initial petitioners reached an agreement with Interactive to withdraw the petition. The law firm opposed the withdrawal and simultaneously filed an involuntary petition against Ventures. The court permitted withdrawal of the petition against Interactive, but the law firm pressed forward against Ventures. The court found that the law firm s claim against Ventures was subject to bona fide dispute, and that its petition against Ventures was in bad faith. Based on these findings, the court awarded Ventures costs, fees, and punitive damages. Ventures had continuously disputed the law firm s bills throughout the representation and continued to dispute those bills after the nonbankruptcy litigation commenced. Ventures also had counterclaims, the presence of which can result in a bona fide dispute. The petition was in bad faith because there was no collective bankruptcy purpose, and instead the law firm filed it in an attempt to force Ventures to settle the law firm s disputed claim. Following the majority rule that section 303(i) of the Bankruptcy Code is a cost-shifting measure available where the debtor successfully challenges the involuntary petition, the court awarded Ventures its costs and fees. The court also awarded Ventures punitive damages because of the law firm s bad faith in bringing the petition. Recent New Jersey Bankruptcy Court decision In re Cook, --- B.R. ---, 2010 WL (Bankr. D.N.J. July 14, 2010)

4 On July 14, 2010, the U.S. Bankruptcy Court for the District of New Jersey held that section 506(d) of the Bankruptcy Code does not permit a chapter 7 debtor strip off a wholly unsecured second lien. The Supreme Court s held in Dewsnup v. Timm, 502 U.S. 410 (1992) that section 506(d) does not permit strip down of a lien of an undersecured creditor. In Nobelman v. American Savings Bank, 508 U.S. 324 (1993), the Supreme Court held that section 1322(b)(2) prevents strip down through a chapter 13 plan. The majority of courts, led by the Fourth and Sixth Circuits, and the Ninth Circuit BAP, have held that a strip off is equivalent to a strip down in and is not permitted in a chapter 7 case under Dewsnup. Nonetheless, the debtor argued that strip off in a chapter 7 case was supported by the Third Circuit s reasoning in In re McDonald, 205 F.3d 606 (3d Cir.), where the court permitted strip off a wholly unsecured second lien through section 1322(b)(2). But the court distinguished strip off through a chapter 13 plan which all six circuit courts that have addressed the issue have held is permissible under section 1322(b)(2) from strip off in a chapter 7 case, where section 1322 does not apply. In a chapter 7 cases, only section 506(d) applies, and the Supreme Court s reading and application of section 506(d) in Dewsnup proscribes strip off. Recent Eastern District of Pennsylvania Bankruptcy Court decision In LRP Mushrooms, Inc., 2010 WL (Bankr. E.D. Pa. July 13, 2010) On July 13, 2010, the U.S. Bankruptcy Court for the Eastern District of Pennsylvania held that a motion to assume a lease is timely where filed before the applicable deadline under section 365(d)(4) of the Bankruptcy Code, even if the motion is not decided until after the deadline has expired and settlement discussions with the lessor push the decision on the motion far beyond the deadline. Recent Middle District of Pennsylvania Bankruptcy Court decision In re Blue Coal Corp., 2010 WL (Bankr. M.D. Pa. July 12, 2010) On July 12, 2010, the U.S. Bankruptcy Court for the Middle District of Pennsylvania held that it did not have jurisdiction to interpret a bankruptcy sale order in a 24 year old closed case that had not been formally reopened. The debtor filed for bankruptcy protection in 1976 in under the Bankruptcy Act of In 1994, the debtor sold its assets, and in 2000 the case was closed. In 2010, the purchaser of the assets brought a suit against the debtor seeking a determination of the extent of its purchase of the debtor s assets. The issue had substantial economic implications. However, no party moved to reopen the case. The bankruptcy court recognized that it could only act within its jurisdiction, and that its jurisdiction did not extend indefinitely, particularly after the closing of a case. See Donaldson v. Bernstein, 104 F.3d 547, 552, 553 (3d Cir. 1997). While it may be possible for the bankruptcy court to handle simple

5 housekeeping matters without reopening the case, the relief requested by the purchaser was not mere housekeeping. Because neither party had moved to reopen the case pursuant to Bankruptcy Rule 5010, the court directed that the complaint would be dismissed unless a party moved to reopen the case within 21 days. Submitted by: MORRIS, NICHOLS, ARSHT & TUNNELL LLP 1201 North Market Street, 18th Floor P.O. Box 1347 Wilmington, DE Main: Gregory W. Werkheiser Direct Dial: Fax: gwerkheiser@mnat.com Matthew B. Harvey Direct Dial: Fax: mharvey@mnat.com