Restructuring

Contributed by Elisa Lemmer
You might recognize the last name “Underhill” from the 1980’s movie, Fletch. In the movie, the main character, Irwin “Fletch” Fletcher overhears snobby country club member Mr. Underhill speaking rudely to a waiter. To get revenge, Fletch famously tells the waiter he’s “with the Underhills” and proceeds to charge a Bloody Mary, a steak sandwich and…a steak sandwich to the Underhills’ tab. In the recent case of In re Underhill (no relation to the Fletch Underhills, in case you were wondering), the United States Court of Appeals for the Sixth Circuit decided that it, too, was “with the Underhills” when it reversed two lower court rulings and found (in the Underhills’ favor) that debtors’ tortious interference claim was not properly includable in the debtors’ pre-bankruptcy estate.
Background
Beth and Robert Underhill were owners of a shop called “Golf Chic Boutique, LLC.” In 2010, the Underhills filed personal bankruptcy petitions under chapter 7 of the Bankruptcy Code. They listed Golf Chic Boutique as an asset on their schedules and represented that neither they nor Golf Chic had any assets that constituted unliquidated claims. Three months after the bankruptcy court closed their chapter 7 case, a supplier canceled its contract with Golf Chic, resulting in Golf Chic’s downfall. The Underhills subsequently discovered that a competitor, Ladies Pro Shop, had been complaining to a supplier about Golf Chic’s prices and had asked the supplier to sever ties with Golf Chic. Golf Chic sued Ladies Pro for tortious interference with contract and for disparagement. The lawsuit eventually settled, and Golf Chic’s lawyers eventually forwarded a portion of the settlement proceeds to Beth Underhill.
When it learned of the settlement, Huntington National Bank, a creditor of the Underhills, sought to reopen the bankruptcy case so that the chapter 7 trustee could re-administer the asset (in this case the tortious interference claim) and distribute the proceeds of the settlement to creditors. Huntington acknowledged that the proceeds of the settlement would belong to the estate only if the cause of action “constituted a property interest before the Underhills filed for bankruptcy.” Consequently, the dispute between the parties turned on whether the cause of action arose in 2009 – when Ladies Pro started to complain about Golf Chic’s prices to the supplier – or in 2010, when the supplier canceled its contract with Golf Chic.
The bankruptcy court found that the cause of action was “sufficiently rooted in the [Underhills’] pre-bankruptcy past” because the events that gave rise to the cause of action started to occur in 2009. The Bankruptcy Appellate Panel affirmed the bankruptcy court’s decision, applying the same rationale. Undeterred, the Underhills appealed.
Sixth Circuit Sides With the Underhills
Section 541(a)(1) of the Bankruptcy Code creates a bankruptcy estate consisting of legal or equitable interests of the debtor in property as of the commencement of the case. The Sixth Circuit began its analysis of the issue by citing to section 541(a)(1) and by observing that “[p]re-petition [sic] causes of action belong to the bankruptcy estate and post-petition [sic] actions belong to the debtor.” To buttress its position on the issue, the Sixth Circuit cited to Segal v. Rochelle, a pre-Bankruptcy Code decision in which the Supreme Court defined prepetition assets as those “sufficiently rooted in the pre-bankruptcy past” of the debtor. Citing Segal, the Sixth Circuit stated further that prepetition conduct alone would not “root” a claim in the past – the claimant must have suffered a prepetition injury. Applying this to the facts, the court concluded that even though Ladies Pro had complained about Golf Chic’s prices in 2009, its complaints, alone, did not constitute tortious interference with contract. Instead, the court held that the cause of action, which requires intentional procurement of a contract’s breach, manifested in 2010, when Ladies Pro emailed the supplier – after the Underhills’ bankruptcy case had been closed. The Sixth Circuit reversed the lower court’s opinion and remanded for proceedings consistent with its ruling.
Not Everyone Was “With” the Underhills
The Sixth Circuit’s opinion on the issue was not unanimous. In a dissent, Honorable Bernice Bouie Donald wrote that every conceivable interest is within the reach of section 541 of the Bankruptcy Code. Citing Segal, again, she observed that a claim need only be “sufficiently rooted in the pre-bankruptcy past” so as to be part of the debtor’s estate, and although prepetition conduct or facts, without more, will not root a claim in the pre-bankruptcy past, courts have not applied the test consistently. Judge Bouie Donald observed that some courts have taken a more expansive view of the analysis and that those courts had left open the possibility that unaccrued claims could be rooted in a debtor’s bankruptcy past so as to constitute part of the bankruptcy estate. Judge Bouie Donald also found it significant that the Underhills were aware of Ladies Pro’s conduct when they filed their bankruptcy case, but had failed to list that the potential claims as contingent interests on their schedules. Ultimately, Judge Bouie Donald noted that, unlike her colleagues, she was not “with” the Underhills.
Conclusion
Whether other courts considering a similar issue will hold as the court did in In re Underhill is not clear. As the dissent noted, the precedent cited by the Sixth Circuit in support of its holding leaves some room open for a more expansive view of “property of the estate.” Of course, that is no matter to Beth and Robert Underhill, who will be able to keep the proceeds of the settlement. So if you happen to find yourself at their country club one day ordering two portions of Beluga caviar and some Dom Perignon (as Chevy Chase a/k/a Fletch did), it is possible they might encourage you to “charge it to the Underhills!”