Contributed by Maurice Horwitz
From the high-stakes litigation in Caesars to missed deadlines in personal bankruptcy cases, the Weil Bankruptcy Blog served up something for everyone in the first few weeks of September. Here’s a look back at the topics that we covered in the previous two weeks.
Judge Scheindlin Rules in Caesars that Trust Indenture Act Bars “Core” Impairments
The Caesars parent guarantee litigation – in which certain debtholders have used the Trust Indenture Act to challenge the release of guarantees by the Ceasars non-debtor parent company – has grabbed the attention of many spectators in the distressed debt arena. In his two-part series, Doron Kenter analyzed Judge Shira Scheindlin’s recent, much-awaited decision on a summary judgment motion brought in this litigation. In part one of Judge Scheindlin Rules in Caesars that Trust Indenture Act Bars “Core” Impairments; Certifies the Issue to the Second Circuit OR What’s the Deal with the Caesars Parent Guarantee Litigation? Doron reviewed the facts of the case, noting that Judge Scheindlin had already concluded that section 316(b) of the TIA “protects more than simply formal, explicit modification of the legal right to receive payment,” which would allow a sufficiently clever issuer to gut the [TIA]’s protections” (internal quotations omitted). But certain open questions remained: What kinds of impairment violate section 316(b) of the TIA, and did the TIA bar the release of the Caesars parent guarantee without first obtaining the consent of each noteholder? The court denied the indenture trustee’s motion for summary judgment, although it did not accept Caesars’ argument that the parent guarantee was merely a “regulatory device” to comply with SEC regulation. As Doron explains in part two of Judge Scheindlin Rules in Caesars that Trust Indenture Act Bars “Core” Impairments; Certifies the Issue to the Second Circuit OR What’s the Deal with the Caesars Parent Guarantee Litigation? the court rejected the indenture trustee’s argument that any impairment violates the TIA. As a general rule, section 316(b) bars informal debt restructurings or nonconsensual amendments to “core terms” of debt instruments. The question was whether any of the transactions at issue rose to such a level. The court concluded that a factual inquiry would be necessary to determine whether the transactions collectively constituted an impermissible out-of-court restructuring. Finally, the court recognized that courts across the country (and even within New York) are divided over the interpretation of section 316(b) of the TIA, and specifically, whether that section only protects noteholders’ legal rights, or also their practical right to payment of principal and interest. Given its importance, and because this question is a pure matter of law, the court certified an immediate interlocutory appeal to the United States Court of Appeals for the Second Circuit to consider the correct interpretation of section 316(b) of the TIA. To be continued.
Piper Aircraft Bankruptcy Court Gives Parties ‘Crash’ Course in Parameters of Channeling Injunction
Switching to channeling injunctions, in Piper Aircraft Bankruptcy Court Gives Parties ‘Crash’ Course in Parameters of Channeling Injunction, Abigail Lerner reported on a recent decision from a not-so-recent case: the case of Piper Aircraft Corporation, whose chapter 11 plan was confirmed more than twenty years ago. The plan provided for the sale of substantially all of the debtor’s assets and for the creation of a trust to address successor liability claims arising in the future. To constitute such a “Future Claim,” the claim must have (a) arisen out of liability based on planes or parts manufactured by the debtor and (b) been based on wrongdoing by the debtor, whether for product liability, design defects, or failure to warn. The purpose of the channeling injunction was to redirect Future Claims to the trust and away from the purchaser of Piper’s assets. The injunction worked well for more than two decades, but in the past year, two lawsuits arose against the purchaser that required the United States Bankruptcy Court for the Southern District of Florida to decide whether certain claims met the definition of a Future Claim under the plan. In one set of lawsuits, the plaintiffs based liability against the purchaser solely upon the purchaser’s alleged failure to warn of a defect unknown to Piper Aircraft, but later known to the purchaser. In another set of lawsuits, the plaintiffs alleged that the purchaser was negligent for failing to update its Pilot’s Operating Handbook despite changes in safety recommendations. As to both sets of complaints, the court held that liability could not be established based on the debtor’s wrongdoing, and therefore were not “Future Claims” that could be channeled to the trust.
Bankruptcy Court Analyzes English and Luxembourgish Insolvency Law – Opts to Take a Cup of Tea With its Decision and Decline Luxembourg’s Eau de Vie
You’ll need to read Yvanna Custodio’s post, Bankruptcy Court Analyzes English and Luxembourgish Insolvency Law – Opts to Take a Cup of Tea With its Decision and Decline Luxembourg’s eau de vie, yourself to learn what Luxembourgish eau de vie is and how it relates to this cross-border dispute arising out of the English liquidation proceeding of Hellas Telecommunications (Luxembourg) II SCA. Here’s a hint: Hellas is a Luxembourgish company, but it moved its “center of main interests” from Luxembourg to the United Kingdom to avail itself of England’s restructuring regime. Ultimately, the company was placed into compulsory liquidation in England, and its joint liquidators sought chapter 15 recognition to sue certain private equity firms that indirectly owned Hellas’s ultimate parent. The United States Bankruptcy Court for the Southern District of New York considered whether to dismiss three claims. First, the bankruptcy court permitted the liquidators to assert fraudulent transfer-type claims, rejecting the defendants’ argument that only the English High Court had jurisdiction. On a close call, the bankruptcy court also let stand the second claim – for fraudulent trading, i.e., carrying on a business with the intent to defraud creditors. The bankruptcy court rejected the defendants’ argument that Luxembourgish law, which has no equivalent fraudulent trading-type claim, should be applied and agreed with the liquidators that English law would apply because England had the greater interest. But the bankruptcy court rejected the third claim – an attempt by the liquidators to confer standing on Hellas’s creditors to bring their own fraudulent transfer actions – because the liquidators failed to submit authority demonstrating that they had standing to bring an action on behalf of a debtor’s creditors. Eau de vie, anyone?
Our Bad: Bankruptcy Court Denies Creditors’ Motion to Reopen Chapter 7 Case and Vacate Discharge Order Based on Parties’ Mutual Mistake
In Our Bad: Bankruptcy Court Denies Creditors’ Motion to Reopen Chapter 7 Case and Vacate Discharge Order Based on Parties’ Mutual Mistake, Matthew Goren reported on a chapter 7 case, in re Fe M. Lavandier, that answers a variant on that age-old zen koan: if litigants enter into a private agreement to change deadlines mandated by statute or rule, but the agreement is not “so ordered” by a court, do the deadlines actually change? To the dismay of the would-be plaintiff in this case, the answer is no. In this case, Envios de Valores La Nacional Corp. (“LAN”) – a licensed money transmitter – moved to reopen the debtor’s chapter 7 case to vacate the discharge order and permit the late-filing of a non-dischargeability complaint against the debtor. A discharge order already had been entered in the case, but LAN argued that the order was entered by mistake because the debtor and LAN previously had entered into a stipulation extending LAN’s deadline to object to the dischargeability of the debtor’s debt to LAN under section 523(a) of the Bankruptcy Code. But there were two holes in LAN’s argument. First, LAN’s attorney filed the executed stipulation with the bankruptcy court, but did not seek to have the court “so order” the stipulation. Accordingly, there was no court order extending the time to object to the debtor’s discharge. It turns out, if parties sign a stipulation to extend statutory deadlines, but the stipulation isn’t “so ordered,” it doesn’t make a sound. Second, the stipulation had one other “fatal” flaw: by its terms, the stipulation had no effect on LAN’s claim that the debtor’s debt was non-dischargeable. It merely purported to extend the deadline to object to the debtor’s general discharge pursuant to section 727(a), and not to prosecute exceptions to discharge of the types listed in section 523(a) of the Bankruptcy Code. As a result, the court concluded that no purpose would be served by reopening the case to permit LAN to file a time-barred claim.
“Conduct” Test Now the Rule in the Seventh Circuit – But We Still Don’t Know How the Seventh Circuit Will Deal With Due Process Concerns
The Seventh Circuit finally weighed in on the issue of when a claim arises in a bankruptcy case, as previously reported in “Conduct” Test Now the Rule in the Seventh Circuit – But We Still Don’t Know How the Seventh Circuit Will Deal With Due Process Concerns. From among the various tests employed by courts across the country – the “conduct” test, “fair contemplation” standard, or “prepetition relationship” rule – the Seventh Circuit chose the “conduct” test, holding that the date a claim arises is determined by the date of the conduct by the debtor that gave rise to the claim. In adopting the “conduct” test, the Seventh Circuit found that all the relevant acts in the case before it occurred prepetition – the legislature’s adoption of a fee payable by hospitals, the approval of the fee by federal regulators and calculation of the entire fee payable by the debtor hospital. The court therefore concluded that the state’s collection of a fee assessed prepetition, but not payable until the debtor hospital’s postpetition fiscal year, constituted an act to collect a prepetition claim and, therefore, violated the automatic stay imposed by section 362(a) of the Bankruptcy Code. Notably, the Seventh Circuit expressly did not decide how it would characterize a claim in the future if the claimant lacked the kind of prepetition relationship that existed between the debtor hospital and the state.
Fail to ‘Notice’ an Objection to Your Proof of Claim? Too Bad Says the Bankruptcy Court
Good lawyers agonize over providing proper notice in any legal proceeding, and with good reason, as Abigail Lerner explained in her discussion of a recent decision by the United States Bankruptcy Court for the District of Colorado in Fail to ‘Notice’ an Objection to Your Proof of Claim? Too Bad Says the Bankruptcy Court. In that chapter 13 case, the debtors filed an objection to a creditor’s proof of claim and served the objection on the creditor at the address specified by the creditor in its proof of claim. The response deadline for the objection came and went with no response by the creditor, so the claim was expunged. The creditor later sought to vacate the court’s judgement under Fed. R. Civ. P. 60(b). The creditor argued that notice of the objection had been deficient because the debtors had not served the objection on an officer, managing agent or general agent, or any other agent, as required by Bankruptcy Rules 9014 and 7004(b)(3). The court ruled against the creditor in two respects. First, the court held that Rule 60(b) was not the correct predicate for relief; instead, the creditor should have sought relief under section 502(j) of the Bankruptcy Code, which allows a court to reconsider the allowance or disallowance of claims “for cause.” Second, and more importantly, the court cited Bankruptcy Rule 2002(g)(1)(A), which states that “a proof of claim filed by a creditor . . . that designates a mailing address constitutes a filed request to mail notices to that address . . . .” Based on this rule, the court found that the creditor had consented to service at the address provided in its proof of claim and knowingly chose not to designate an officer or agent. The court also found that the creditor could not have reasonably expected to receive service anywhere else, having filed a proof of claim with a specific address and no reference to an officer, agent or other representative.
Maurice Horwitz is an Associate at Weil, Gotshal & Manges LLP in New York.