This week, the Weil Bankruptcy Blog premieres a new series, “Lookback Period.” In these entries, we will periodically review and summarize the hot topics on which we have been writing over the last couple of weeks. We thought this might be an easy way on a summer Friday (or a rainy weekend) to catch up on what you might have missed in the Weil Bankruptcy Blog.
More Momentive, This Time From the District Court
The Momentive case continues to provide the Weil Bankruptcy Blog with an ongoing source of topics. In Momentive Plan Confirmation Affirmed: I Can See Clearly Now the Claim Has Gone, David Griffiths and Brian M. Wells discussed the affirmance by the District Court for the Southern District of New York of the bankruptcy court’s disallowance of the senior lien noteholders’ claim for a make whole premium. Agreeing with the reasoning of Bankruptcy Judge Drain in his ruling below, District Judge Bricetti held that neither the indentures nor the senior lien notes clearly and unambiguously provided the senior lien noteholders with a make whole premium in the event of an acceleration of debt caused by Momentive’s voluntary bankruptcy filing. The entry also links to the actual wording of Momentive’s make whole premium, as well as wording adopted post-Momentive in an effort to address the problems caused by the Momentive language.
Yet Another Reminder (This One From the Tenth Circuit) of the Binding Effect of Confirmation and the Unfortunate Consequences of Failing to Object to Confirmation
In Speak Before Confirmation or Forever Hold Your Peace: Tenth Circuit Upholds Dismissal of Nondischargeability Suit After Confirmed Plan Treats Claim as “Satisfied in Full,” Debra McElligott addressed the Tenth Circuit’s conclusion that a creditor could no longer pursue an appeal from a decision relating to the non-dischargeabilty of its claims against two individual debtors when the individual debtors’ confirmed plan treated the creditor’s claims as having been “satisfied” in a related corporate debtor’s chapter 11 case. The creditor mistakenly had assumed that it did not have to object to its treatment in the individual debtors’ plan because it already had an appeal pending relating to the non-dischargeability of its claims against the two individual debtors. The Tenth Circuit held that a confirmation order moots the litigation of any issue necessarily determined by the order. Because the individual debtors’ plan treated the creditor’s claim as fully satisfied under the corporate chapter 11 debtor’s plan – and the creditor did not object to the individual debtors’ plan or appeal from the order confirming such plan – the creditor was bound by the plan and the confirmation order. Notably, the creditor attempted to raise a number of arguments on appeal, including that its non-dischargeability appeal divested the bankruptcy court of jurisdiction over the question of whether the bank’s claim was fully secured. The court concluded that such issues should have been raised in an appeal from the confirmation order, not an appeal from the dismissal of the non-dischargeability proceeding.
Fifth Circuit Weighs in on the Breadth of Section 510(b) of the Bankruptcy Code
Adam Lavine reported on the Fifth Circuit’s decision to subordinate claims against a debtor that was alleged to be an affiliate of a securities issuer in Guaranteed Subordination: Fifth Circuit Subordinates Claims Arising Under Guarantees of Securities Issued by an Affiliate. In American Housing Foundation, a developer of low-income housing had issued guarantees to investors that purchased limited partnership interests in entities formed by the developer. The investments, however, were alleged to have been diverted to fund the developer’s general operations and to benefit the developer’s president personally. After the developer filed for bankruptcy protection, it sought to subordinate the investors’ claims against it under section 510(b) of the Bankruptcy Code. Disagreeing with decisions from Delaware and elsewhere, the Fifth Circuit held that the claims should be subordinated under section 510(b). The Fifth Circuit concluded that, even though the investors’ claims arose under a contract, they were for “damages” under section 510(b) because, like a typical securities fraud claim, the investors sought recovery for something other than the unpaid investment itself. The court also concluded that the claims arose “from the sale or purchase of a security” because the contractual guarantees were “intimately intertwined with” and could not “be considered apart from the other transactions that arose in connection with the investment.” Finally, the Fifth Circuit held that the debtor was an “affiliate” of the limited partnerships pursuant to section 101(2)(c) of the Bankruptcy Code because (i) the debtor operated the limited partnerships either as the general partner or the direct parent of the general partner, and (ii) the operating agreements were agreements of the debtor, even though the debtors were not parties to them.
Just in Time for the Fourth of July, the Supreme Court Upholds the “American Rule” for Attorneys’ Fees in Bankruptcy
Just as bankruptcy professionals were warming up to SCOTUS for its commonsense ruling in Wellness, the Court came out with Baker Botts LLP v. ASARCO, in which the Court likened the defense of a fee application by a bankruptcy professional to a car mechanic’s court battle with his or her client over the repair bill. Accordingly, the Court held that, under the “American Rule,” a law firm could not recover fees for the time incurred in successfully defending its fee application, although time spent preparing the fee application could be included in the fee application as part of “services rendered.” In BREAKING NEWS: Professionals Are Not Entitled to Fees for Defending Fee Apps and Supreme Court Holds Professionals Are Not Entitled to Fees for Defending Fee Applications, Katherine Doorley dissected the Court’s decision and raised some interesting questions about how bankruptcy professionals may deal with the decision in the future. Rule 9011, of course, still protects against frivolous objections, but do other means still exist?
So, Can a Creditor Get Away With Simply Saying That Documents Are Too Voluminous to Attach to a Proof of Claim?
Everyone has seen the proof of claim that states that documents are too voluminous to attach to the proof of claim and will be provided upon request. Does the failure to attach the documents, though, enable the debtor to object to the claim on the ground that it violates Bankruptcy Rule 3001(c)(1)? Doron Kenter walked through the pertinent Bankruptcy Rules and Bankruptcy Code sections to show how courts are divided on this issue in Can You Object to a Claim Just Because It Doesn’t Include Supporting Documentation? The Answer May Not Be as Simple as You Think. He notes that, although the Tenth Circuit and the Southern District of New York Bankruptcy Court have held that failure to comply with Bankruptcy Rule 3001(c)(1) provides an independent basis on which to object to a claim, other courts have held that section 502 of the Bankruptcy Code provides the exclusive grounds on which to object. In a recent decision involving an individual chapter 7 debtor, the Bankruptcy Court for the Western District of New York sided with the “exclusive” courts, noting that revised Bankruptcy Rule 3001(c)(2)(d) sets forth the complete list of remedies for a non-compliant proof of claim (including sanctions) and that disallowance of the claim is not among them.
Whether Rejection Is a Breach or Termination, Key Takeaway Is That Careful Drafting Might Have Avoided Litigation
In Delaware Bankruptcy Court Holds That Vacating Premises After Rejection of a Lease Does Not Constitute Termination of the Lease, Charlie Chen addressed Judge Walrath’s decision in Overseas Shipholding Group concluding that the rejection of a lease under section 365 of the Bankruptcy Code is a “breach” and not a “termination.” The case involved a very specific fact scenario, in which a subtenant had agreed prepetition not to hold the debtor sublessor liable for any damages arising from the “termination” of the prime lease. Even though the debtor, the prime lessor, and the subtenant entered into a bankruptcy court-approved stipulation dealing with the rejection of the prime lease and return of the premises to the lessor, the stipulation never used the word “termination.” Accordingly, because section 365(g) states that rejection constitutes a prepetition “breach,” the Delaware bankruptcy court ruled that the debtor could not avoid damages as a result of the “termination” of the prime lease. Nevertheless, the sublease also provided that the subtenant “shall not seek any damages against” the debtor for the debtor’s failure to perform its obligations under the sublease, and Judge Walrath, therefore, held that the subtenant waived any claim for rejection damages.
Leave It to the Seventh Circuit to Quantify Non-Monetary “Reasonably Equivalent Value”
In Everything Has Its Own Value: 7th Circuit Holds That Forbearances by a Lender May Be Considered When Determining Reasonably Equivalent Value, Gabe Morgan reported on the Seventh Circuit’s ruling that a mortgage lender in a single asset real estate case provided “value” when it agreed to forbear for four years from exercising remedies on its loan. The borrower claimed that the value of its real property exceeded the amount of the mortgage when the borrower agreed to place a deed in escrow in exchange for the mortgage lender’s forbearance. After its bankruptcy filing, the debtor sought to avoid the transfer of the deed as a constructive fraudulent transfer. Although the mortgage lender raised a number of defenses to the fraudulent transfer claim, the Seventh Circuit rejected all but one and found that the lender’s eleven forbearances and easing of repayment terms over a four-year period enabled the borrower to accumulate gross income over that period that was double the alleged excess value that the mortgage lender received. Accordingly, the Seventh Circuit found that the debtor had received “reasonably equivalent value” in exchange for the transfer.