Latest 9 Cases This Week: In re: Tribune Company Fraudulent Conveyance Litigation (2d Cir.), In re: Millennium Lab Holdings II LLC (3d Cir.), ...

Taking Stock: A Review of Justice Stevens’s Last Book and an Appreciation of His Extraordinary Service on the Supreme Court

RODGER CITRON

Rodger D. Citron, the Associate Dean for Research and Scholarship and a Professor of Law at Touro College, Jacob D. Fuchsberg Law Center, comments on the late Justice John Paul Stevens’s last book, The Making of a Justice: Reflections on My First 94 Years. Citron laments that, in his view, the memoir is too long yet does not say enough, but he lauds the justice for his outstanding service on the Supreme Court.

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In re: Tribune Company Fraudulent Conveyance Litigation

Court: US Court of Appeals for the Second Circuit

Docket: 13-3992

Opinion Date: December 19, 2019

Judges: Winter, Droney

Areas of Law: Bankruptcy

Representatives of certain unsecured creditors of the Chapter 11 debtor Tribune Company appealed the district court's grant of a motion to dismiss their state law, constructive fraudulent conveyance claims brought against Tribune's former shareholders. The district court held that appellants lacked statutory standing under the Bankruptcy Code. The Second Circuit affirmed the dismissal of appellants' state law, constructive fraudulent conveyance claims on preemption grounds rather than standing grounds. The court held that appellants were not barred by the Bankruptcy Code's automatic stay provision from bringing claims while avoidance proceedings against the same transfers brought by a party exercising the powers of a bankruptcy trustee on an intentional fraud theory are ongoing, because appellants have been freed from its restrictions by orders of the bankruptcy court and by debtors' confirmed reorganization plan. However, the court held that appellants' claims were preempted by section 546(e) of the Bankruptcy Code, because this section shields certain transactions from a bankruptcy trustee's avoidance powers, including, inter alia, transfers by or to a financial institution in connection with a securities contract, except through an intentional fraudulent conveyance claim.

In re: Millennium Lab Holdings II LLC

Court: US Court of Appeals for the Third Circuit

Docket: 18-3210

Opinion Date: December 19, 2019

Judge: Jordan

Areas of Law: Bankruptcy, Constitutional Law

Millennium provides laboratory-based diagnostic services. In 2014, it entered into a $1.825 billion credit agreement with several lenders, including Voya. Millennium refinanced existing financial obligations and paid a $1.3 billion special shareholders dividend. The U.S. Department of Justice, which had been investigating since 2012, then filed a False Claims Act complaint; Millennium’s Medicare billing privileges were revoked. Millennium agreed to pay the government entities $256 million to settle. Millennium lacked adequate liquidity to pay both its debt and the settlement and began working with the lenders, including Voya, to restructure its obligations. The lenders suggested that there were potential claims based on Millenium's lack of disclosure regarding the government’s investigation. Millennium, its equity holders, and the lenders, except Voya, entered into an agreement that required Millennium’s equity holders to transfer their equity interests to the lenders, including Voya. The equity holders were to “receive full releases.” Millennium filed a petition for bankruptcy with a “Prepackaged Joint Plan of Reorganization” that contained broad releases that would bind even non-consenting lenders. Voya objected, stating that it intended to assert claims for material misrepresentations in connection with the 2014 credit agreement against Millennium and Millennium’s equity holders and that the Bankruptcy Court lacked authority to approve the releases. The Bankruptcy Court overruled Voya’s objections and confirmed the plan. Voya filed suit, asserting RICO and other claims. The district court affirmed the Bankruptcy Court’s ruling on constitutional authority. The Third Circuit affirmed. On these facts, the Bankruptcy Court can, without running afoul of Article III of the Constitution, confirm a Chapter 11 reorganization plan containing nonconsensual third-party releases and injunctions. The releases and injunctions were “integral to the restructuring of the debtor-creditor relationship.”

Wells Fargo, N.A. v. Bear Stearns & Co., Inc.

Court: US Court of Appeals for the Third Circuit

Docket: 18-2887

Opinion Date: December 24, 2019

Judge: Smith

Areas of Law: Bankruptcy, Business Law, Commercial Law

HomeBanc, in the residential mortgage loan business, obtained financing from Bear Stearns under 2005 repurchase agreements and transferred multiple securities to Bear Stearns. In 2007 HomeBanc failed to repurchase the securities or pay for an extension of the due date. Bear Stearns issued a notice of default. HomeBanc filed voluntary bankruptcy petitions. Bear Stearns, claiming outright ownership of the securities, auctioned them to determine their fair market value. After the auction closed, Bear Stearns’s finance desk determined that Bear Stearns’s mortgage trading desk had won. Bear Stearns allocated the $60.5 million bid across 36 securities. HomeBanc believed itself entitled to the August 2007 principal and interest payments from the securities. HomeBanc claimed conversion, breach of contract, and violation of the automatic bankruptcy stay. Following multiple rounds of litigation, the district court found that Bear Stearns acted reasonably and in good faith. The Third Circuit affirmed. A bankruptcy court’s determination of good faith regarding an obligatory post-default valuation of collateral subject to a repurchase agreement receives mixed review. Factual findings are reviewed for clear-error while the ultimate issue of good faith receives plenary review. Bear Stearns liquidated the securities at issue in good faith compliance with the Repurchasing Agreement. Bear Stearns never claimed damages; 11 U.S.C. 101(47)(A)(v) “damages,” which may trigger the requirements of 11 U.S.C. 562, require a non-breaching party to bring a legal claim for damages. The broader safe harbor protections of 11 U.S.C. 559 were relevant.

Henry v. Educational Financial Service

Court: US Court of Appeals for the Fifth Circuit

Docket: 18-20809

Opinion Date: December 16, 2019

Judge: Per Curiam

Areas of Law: Arbitration & Mediation, Bankruptcy

The Fifth Circuit withdrew its previously filed opinion and substituted the following opinion. The court held that its holding in In re Nat'l Gypsum Co., 118 F.3d 1059, 1069 (5th Cir. 1997), that bankruptcy courts have discretion to refuse to compel arbitration in proceedings seeking enforcement of a discharge injunction, remains good law following the Supreme Court's decision in Epic Sys., 138 S. Ct. at 1623-24. In this case, the court affirmed the bankruptcy court's denial of Wells Fargo's motion to compel arbitration of a dispute over whether debtor's discharge applied to a student loan.

Whitlock v. Lowe

Court: US Court of Appeals for the Fifth Circuit

Docket: 18-50335

Opinion Date: December 23, 2019

Judge: Oldham

Areas of Law: Bankruptcy

In this adversary proceeding, the Fifth Circuit held that appellant received fraudulently transferred funds and had an obligation to return the transferred funds to debtor, the transferor, for the benefit of his creditors. The court explained that appellant could satisfy that obligation by transferring the funds back to him prior to his bankruptcy filing, and nothing required her to hold onto the funds until after he filed for bankruptcy. Furthermore, if appellant had satisfied her obligation, there was nothing left for the trustee to recover. Accordingly, the court vacated the district court's judgment holding otherwise and remanded for further proceedings.

Burciaga v. Moglia

Court: US Court of Appeals for the Seventh Circuit

Docket: 19-2246

Opinion Date: December 13, 2019

Judge: Frank Hoover Easterbrook

Areas of Law: Bankruptcy, Labor & Employment Law

Burciaga lost his job and filed for bankruptcy a week later. On the date the bankruptcy proceeding began, Burciaga’s former employer owed him approximately $24,000 for unused vacation time. Illinois treats vacation pay as a form of wages. Exemptions for debtors in Illinois rest on state law, 11 U.S.C. 522(b)(2). Burciaga asked the district court to treat 85% of the vacation pay as exempt from creditors’ claims. Illinois permits creditors to reach 15% of unpaid wages but forbids debt collection from the rest. The Chapter 7 Trustee, objected. The bankruptcy judge and district court sided with the Trustee. The Seventh Circuit reversed, finding nothing ambiguous about Illinois law or section 522(b)(2) and (3)(A); 85% of unpaid wages are exempt from creditors’ claims in Illinois, and vacation pay is a form of wages.

Doughty v. Douglas

Court: US Court of Appeals for the Eighth Circuit

Docket: 19-6023

Opinion Date: December 17, 2019

Judge: Schermer

Areas of Law: Bankruptcy

The bankruptcy appellate panel affirmed the bankruptcy court's order dismissing debtor's request for relief for alleged violations of the automatic stay and discharge injunction. In this case, debtor's 2019 request did not clearly identify the matters at issue and how they were related to specific automatic stay or discharge injunction violations. Furthermore, debtor provided nothing to show that she was complaining of debts that were derived from something other than matters concerning the children and incidental court orders. Therefore, the panel held that debtor failed to state a cause of action based on an automatic stay violation and a discharge injunction violation.

Waltrip v. Sawyers

Court: US Court of Appeals for the Eighth Circuit

Docket: 19-6016

Opinion Date: December 19, 2019

Judge: Dow

Areas of Law: Bankruptcy

The bankruptcy appellate panel affirmed the bankruptcy court's grant of debtor's motion to avoid a judicial lien. The panel upheld the bankruptcy court's determination that the value of the real estate at issue was fixed on the date that the petition was filed and thus the pre-restoration value of the property was the appropriate value to use in the avoidance analysis. The panel rejected the creditor's claims of unjust enrichment and laches.

Rumsey Land Company v. Resource Land Holdings

Court: US Court of Appeals for the Tenth Circuit

Docket: 18-1452

Opinion Date: December 20, 2019

Judge: Scott Milne Matheson, Jr.

Areas of Law: Bankruptcy, Civil Procedure, Real Estate & Property Law

Rumsey Land Company, LLC (“Rumsey”) owned a property subject to a first deed of trust held by Pueblo Bank & Trust Company, LLC (“PBT”). In 2010, Rumsey filed for bankruptcy. Resource Land Holdings, LLC (“RLH”) offered to purchase the property, but the bankruptcy court did not approve the sale. Shortly thereafter, PBT purchased the property at a bankruptcy auction. PBT then transferred the land to RLH. In 2015, Rumsey discovered that during the bankruptcy proceedings, RLH had entered a loan purchase agreement to purchase PBT’s interest in the property. The agreement eventually led to litigation in state court between RLH and PBT, which culminated with a settlement agreement allowing RLH to purchase Rumsey’s property from PBT for $4.75 million. Rumsey believed the loan agreement, lawsuit, and settlement influenced the price at its bankruptcy auction. It initiated this adversarial proceeding in bankruptcy court against RLH and PBT (collectively “Defendants”), alleging: (1) fraudulent concealment in violation of state law; and (2) collusive bidding activities in violation of 11 U.S.C. 363(n). The case was transferred to federal district court, which granted summary judgment to defendants on both claims. The Tenth Circuit affirmed finding: (1) Rumsey forfeited its arguments about PBT’s duty to disclose its transaction with RLH and did not argue plain error on appeal; and (2) in the section 363(n) collusive bidding claim, it was time-barred by a one-year limitations period in Federal Rule of Civil Procedure 60(c)(1), and Rumsey failed to demonstrate a genuine dispute of material face as to whether Defendants intended to control the sale price at the bankruptcy auction.