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In a reopened Chapter 11 case, the debtor must file quarterly reports and pay quarterly United States Trustee (UST) fees. I’m leading with the conclusion with the hope that this post shows-up in a search engine where and when you need it most. After all, sometimes you just need a quick answer to a mundane question. This is that post.

This issue came up for us after we had reopened one of six jointly-administered Chapter 11 cases so that we could file a post-confirmation adversary proceeding. Honestly, I had not considered the issue of reporting and fees. However, a month after we reopened, our client forwarded two week’s worth of email exchanges between the debtor’s controller and the UST’s Office. Basically, “You’re missing a report for the last month of the case before you closed it and you’re past due on monthly reports and fees owing for the periods after you reopened.”

With more research than should have been necessary, I “determined” that, in a reopened Chapter 11 case, for which there is a confirmed plan and a final decree, the debtor owes quarterly reports and fees.  I say “determined” because very little has been written about this issue. As Judge Humrickhouse put it in In re Barbetta, it is “not evident from the express language of § 1930(a)(6) that the payment of quarterly fees is required in a reopened chapter 11 case which was closed after the entry of a final decree. Furthermore, no cases specifically addressing the issue could be found.”

Is a reopened Chapter 11 debtor required to pay quarterly fees? Yes.

First, let’s start with the express language of 28 U.S.C. § 1930(a)(6): “In addition to the filing fee paid to the clerk, a quarterly fee shall be paid to the United States trustee, for deposit in the Treasury, in each case under chapter 11 of title 11 for each quarter (including any fraction thereof) until the case is converted or dismissed, whichever occurs first.”

Second, Judge Humrickhouse tells us that, prior to 1996, § 1930(a)(6) provided that quarterly fees were owing until the earlier of plan confirmation, case conversion, and case dismissal. However, in 1996, Congress amended § 1930(a)(6) so that it reads as quoted above and, thus, requires quarterly fees even in those post-confirmation cases that tend to linger open. It did so because the “U.S. trustee’s office was faced with declining filings and thus a decline in fees, although a significant number of chapter 11 cases remained open post-confirmation.”

Third, Judge Humrickhouse relies on In re Wren, 315 B.R. 921 (Bankr. M.D. Ga. 2004), wherein our very own Judge Laney contemplated, but ultimately did not reach, the “issue of whether [debtors] are in fact required to file monthly reports and pay U.S. Trustee quarterly fees after the case is closed if it is re-opened to allow [debtors] to file an adversary proceeding.” Judge Laney did, however, suggest the outcome for Barbetta:

Withholding Trustee’s fees does not further the Bankruptcy Code. “These fees bear no relation to particular services performed by the Trustee. Indeed, the legislative history of the amendment to § 1930 makes it clear that the fees are used to offset other expenditures in the federal budget and that the amendment was added to increase the revenue raised from these fees.”

Therefore, concludes Judge Humrickhouse, “it is the use of the system that invokes the fee, not the specific duties imposed upon the U.S. Trustee or Bankruptcy Administrator in a particular case.”

Finally, Judge Humrickhouse moves to the immediate issue of whether UST fees are owing in reopened Chapter 11 cases. Under § 350 of the Code, a “case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause.” On the one hand, she points out, “closure of a debtor’s chapter 11 case” relieves the debtor of its “duty to pay quarterly fees.” After all, the existence of a case is the “statutory precondition” to the assessment of fees. On the other hand, the “bankruptcy court retains the jurisdiction to reopen the case for cause.” The debtor is “again responsible for the payment of quarterly fees” when a case is reopened because, “pursuant to § 1930(a)(6), quarterly fees are required ‘in each case under chapter 11’ . . . and a reopened case is, in fact, a case under Chapter 11.”

Judge Humrickhouse also points that a reopened case, like any other case, is “subject to conversion or dismissal for cause” pursuant to § 1112(b)(1) of the Code. In turn, § 1112(b)(4)(K) provides that a ground for conversion or dismissal is the debtor’s failure to pay UST fees. Therefore, a “reopened case is again a case in existence under Chapter 11 and subject to conversion or dismissal for failure to pay quarterly fees. “If a case is subject to dismissal for failure to pay quarterly fees, it follows that such fees are due.” The fact that the UST “may not have significant involvement in the administration of the case at this juncture is not relevant since the assessment of quarterly fees is not contingent upon nor related to the services performed by” the UST.

Is a reopened Chapter 11 debtor only required to file quarterly reports? Yes.

At least in Region 21, where we practice, the UST Guidelines suggest that quarterly, not monthly, reports are required in reopened cases:

Debtors have a continuing obligation to file monthly operating reports until the court confirms the plan of reorganization. After confirmation, debtors are required to file a quarterly post confirmation operating report. . .These reports must be filed quarterly until the court enters a final decree, dismisses the case, or converts the case to another chapter in bankruptcy.

Our guidelines are similar to the guidelines for other Regions. See, e.g., the Region 2 Guidelines (covering New York). Therefore, a debtor must file monthly operating reports until plan confirmation. Upon confirmation, the debtor switches to the quarterly post confirmation operating report. The debtor must file those reports until the court enters a final decree, dismisses the case, or converts the case. Admittedly, the analysis becomes circular if you let it. That is, MORs are cutoff by plan confirmation. Quarterly reports are cutoff by the final decree. Therefore, in a reopened case, one might argue that confirmation excuses the MOR requirement while the final decree excuses the quarterly report requirement.

Practically, though, the UST has to have the ability to calculate UST fees using a distribution report of some kind. Thus, the better approach is to treat the MOR responsibility as having terminated upon confirmation, with the quarterly, distribution-focused, report applying in reopened cases.

And as famously said, “that’s all I have to say about that.”

If you’d like to stay on top of this and other important bankruptcy issues, then you can subscribe to Plan Proponent via email here.

image1Bankruptcy and Beach: the perfect combo?

We’re attending ABI’s Southeast Bankruptcy Workshop, where, as one fellow attorney joked on the elevator, we are “going to class.” In one of the sessions, we heard about a case decided by the Eleventh Circuit on “equitable mootness” (h/t to Lori Vaughan for the reference). Curious, we looked it up and found a short but useful and interesting opinion on what to do to guarantee that your case will be dismissed as equitably moot. (In other words–what to never do as an attorney).

In JMC Memphis, LLC v. Soneet R. Kapila, 2016 WL 323833 (11th Cir. Jul. 21, 2016), the Eleventh Circuit, relying on the doctrine of equitable mootness, affirmed the district court’s rejection of appellant JMC Memphis LLC’s appeal of the bankruptcy court’s order approving a settlement agreement to which JMC was not a party.

Background

JMC entered into a contract with Investments Australia to purchase an apartment complex. The complex had been damaged by several fires. The last of those fires occurred on September 22, 2012, after execution of the purchase contract but before the closing. Following that fire, JMC and Investments Australia agreed that Investments Australia would assign its rights under its insurance policy with International Hanover, Ltd. “in connection with the September 22, 2012 claim” to JMC as long as JMC pursued the fire claim itself. If no insurance was recovered, then Investments Australia would pay JMC $85,000.

Investment Australia filed a civil action against Hanover as to all fires on the complex, including the claim assigned to JMC. The lawsuit resulted in a settlement in which Hanover agreed to pay $750,000 in exchange for a full release of all claims, including the September 22 fire claim.  As Edelsten, a member of Investment Australia, had filed a Chapter 7 prior to settlement, the settlement required approval by the bankruptcy court and Hanover also required an order from that court barring future claims by any party against Hanover arising under the insurance policy.

At the hearing, JMC objected, asserting that it was owed 100% of the proceeds of the settlement. The bankruptcy court approved the settlement, but required the trustee to escrow $100,000 pending resolution of JMC’s claim. The court found that JMC’s claim to the insurance proceeds was limited to those proceeds arising from the September 22 fire (i.e., the $85,000 agreed to by Investment Australia and JMC).

Importantly, JMC failed to seek a stay of the settlement approval order or object to the bankruptcy court’s order. Instead, it appealed to the district court. It did not seek a stay of the bankruptcy court’s order from the district court either. While the district court appeal was pending, the trustee went ahead and distributed the settlement proceeds to the two other members of Investments Australia, the mediator who oversaw the settlement, and Investments Australia’s attorney. The disbursements totaled $315,000 and represented 42% of the insurance proceeds. The district court dismissed the appeal under the doctrine of equitable mootness.

Overview of Equitable Mootness

Equitable mootness is a judicial doctrine in which the court declines to rule on an appeal. While the Eleventh Circuit has already set out the factors used to determine whether equitable mootness applies, see In re Club Assocs., 956 F 2d. 1065 (11th Cir. 1992), these factors are only various means used to answer the ultimate issue: can the court provide “effective judicial relief”? If the court cannot provide effective judicial relief, it will apply the doctrine of equitable mootness and refuse to consider the appeal.

Eleventh Circuit Decision

JMC appealed the dismissal to the Eleventh Circuit, which affirmed. The Eleventh Circuit faulted JMC for failing to exercise basic due diligence in protecting its interest. First, the Court noted that JMC made no attempt to pursue the claim after the assignment, particularly given that the assignment expressly required JMC, not Investments Australia, to pursue the claim. Second, JMC did not participate or contribute to Investments Australia’s effort to recover from Hanover. One can sense that the Eleventh Circuit viewed JMC as having been asleep at the switch.

Third, the Eleventh Circuit faulted JMC for failing to request a stay of execution from either the bankruptcy court or the district court, or even to formally object. The Eleventh Circuit emphasized that, by the time JMC appealed to the district court (the first time that JMC indicated that it disagreed with the bankruptcy court’s ruling), Hanover had already paid $750,000 to the trustee, who, in turn, issued nearly half of the proceeds in distributions.

Interestingly, however, the Eleventh Circuit noted that JMC’s failure was “significant to our decision—although not dispositive.” Thus, the Eleventh Circuit rejected a bright-line requirement that an appellant must request stay of a decision or formally object, although it appears that it would be an extraordinary case where the Eleventh Circuit would excuse an appellant’s failure to request a stay or object.

In seeking to avoid the consequences of its failure to prevent the consummation of the settlement agreement, JMC highlighted that it did not seek to unwind the disbursements to the mediator and Investments Australia. Nevertheless, the Eleventh Circuit refused to allow even a partial unwinding of the settlement agreement. “Granting such relief [against the other two principals of Investments Australia and the trustee] would necessarily reform the settlement agreement to reflect an agreement that no party intended/contemplated. . . It would be inappropriate at this state—particularly in light of JMC’s overall failure to exercise due diligence—for a court to unwind select portions of the settlement agreement.”

Conclusion

While the Eleventh Circuit continues to emphasize the high-level requirement for equitable mootness that any appellate court cannot grant effective judicial relief and the factors courts use to answer this question (for a good list of these factors, see In re Club Assocs., 956 F 2d. 1065 (11th Cir. 1992)), JMC highlights the Court’s unwillingness to exert itself for an appellant who has illustrated a substantial lack of due diligence. The requirement of due diligence on the part of the appellant is a requirement which is not implicated in the underlying “no effective judicial relief” requirement of equitable mootness but is a very real consideration nonetheless.

 

A year and a day ago, we published our first of a number of posts on Baker Botts  v. ASARCO, wherein the Supreme Court held that bankruptcy professionals may not recover fee-defense costs incurred in “defending” their fee applications. So, what better way to mark the one year anniversary of our coverage of Baker Botts than more coverage of Baker Botts. And, we figured we’d make-up for a lost June (this is our first and last post in June!) by plugging some of our non-blog coverage that came out in June. That counts, right?

First, I participated in a short interview with Jim Christie of Reuters on June 15. Jim, a reporter out of San Francisco, has been covering Baker Botts for quite a few months now, especially as it has played out in Delaware. He’s been nice enough over the last year to call a few times and ask this humble country lawyer from Macon, Georgia what he thinks about the cases. This time around, Jim called about the latest Baker Botts objection filed in Delaware in the Sports Authority Chapter 11. In that case, the Acting United States Trustee, Andrew Vara, who’s been leading the charge on Baker Botts, objected to the debtor’s application to employ Gordon Brothers Asset Advisors as an appraiser. The application garners a copy/paste objection from Vara because it reflects yet another attempt in Delaware to avoid Baker Botts. The objection is notable, though, because it’s aimed at a non-attorney professional. Click here for the Reuters article.

Second, the Association of Insolvency & Restructuring Advisors published its Second Quarter 2016 AIRA Journal earlier this week. Reflecting its exceptional taste or a fit of insanity, AIRA chose my Baker Botts article for the front cover of all places! The article is titled “Baker Botts v. ASARCO: An Equal Opportunity Application of the Supreme Court’s Prohibition on Fee-Defense Reimbursement to All Bankruptcy Professionals.” Super catchy and concise, eh? It provides a nice summary of the case for those, especially non-attorneys, who don’t read Plan Proponent.

It also covers an issue that we haven’t covered already: the application of Baker Botts to non-attorneys. Back in March when I submitted article, In re River Road Hotel Partners, LLC, an Illinois case, had just hit the District Court on appeal and, thus, was a good starting point for that issue. In that case, the bankruptcy court held that there is no meaningful distinction under Baker Botts between attorneys and non-attorneys and, thus, Baker Botts applies to non-attorney professionals, too. Fast forward to June: Mr. Vera relies on In re River Road in his objection (as he should).

We’ll keep an eye on Sports Authority and the River Road appeal. In the meantime, click here for the 2Q 2016 Edition of the AIRA Journal. You can also click that giant, subtle picture at the top!

That’s all for the moment. I’ll now go enjoy the last 15 minutes of my 30s!

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SCOTUS-master1050

On Tuesday, we blogged about the Supreme Court’s decision in Husky International Electronics Inc. v. Daniel Lee Ritz. The decision focused on the phrase “actual fraud” in 11 U.S.C. § 523(a)(2)(A), which excepts from discharge any debts arising from money, property, services, or credit “to the extent obtained by . . . false pretenses, a false representation, or actual fraud.” Regardless of what we think of the merits of the case, the Supreme Court held in a precise, narrow Part A of the opinion that “actual fraud” doesn’t require, as urged by the Fifth Circuit and Justice Thomas (in his dissent) a false representation. As promised, we’ll now cover Part B of the opinion, arguably the more interesting but almost more confusing part of the opinion.

Decoding Part B of Husky v. Ritz

In Part B, Justice Sotomayor addresses the arguments raised by Ritz and by Justice Thomas in his dissent.  Initially, Part B is a straightforward response to Ritz’ arguments on appeal. In fact, the majority dispenses easily with Ritz’ arguments that Husky’s and, ultimately, the majority’s reading of § 523(a)(2)(A) somehow renders “duplicative” or overlaps undesirably with § 523(a)(4), (a)(6), and § 727(a)(2).

However, discovering a more formidable argument in Justice Thomas’ emphasis on the phrase “obtained by” in § 523(a)(2)(A), the majority starts to color outside the lines of an otherwise precise and logical decision. In our opinion, Part B is simply dicta and, thus, arguably is worthy of being left alone. And we would leave it alone if it wasn’t already causing needless confusion–academic confusion at least. Additionally, it very well might confuse litigation under § 523(a)(2)(A). As a result, even the best of the practitioners studying the decision might find themselves drawn confused as to the definition of “obtained by.”

Justice Thomas “Speaks”

Justice Thomas, who some are suggesting is the Court’s last remaining vestige of “plain meaning,” argues that the majority misconstrues the phrase “obtained by” to bring fraudulent transfers under the purview of § 523(a)(2)(A). Specifically, he reads the majority opinion as imposing a weaker definition of “obtained by” in which debts from money, property, or services “traceable to the fraudulent conveyance” are excepted from discharge. He makes two arguments against this weaker definition. First, Field v. Man’s discussion of “actual fraud” includes “reliance” on some false statement, misrepresentation, or omission. Second, the phrase “obtained by” modifies “false pretenses,” “false representation,” and “actual fraud” equally. Because neither the debt nor the money, property, or services was obtained by the fraudulent transfer, Justice Thomas concludes that the debt should be dischargeable.

Justice Sotomayor Responds Too Much

In seeking to push back against Justice Thomas, the majority opinion only succeeds in  muddying the waters of an otherwise very narrow, clear opinion. Indeed, in Part A, the majority isolates the narrow issue that produced the split between the Fifth and Seventh Circuits, sides with the Seventh Circuit, and “drops the mic” so to speak. But then Justice Sotomayor picks back up the mic in Part B.

Initially, Justice Sotomayor acknowledges that the transferor does not “obtain” debts in a fraudulent conveyance. Nor, we would note, does the debtor obtain money, property, or services in a fraudulent transfer; the debtor’s purpose in making a fraudulent transfer is to lodge those items in a trustworthy third party for protection from creditors. But Justice Sotomayor then points out that “the recipient of the transfer—who, with the requisite intent, also commits fraud, can ‘obtai[n]’ assets ‘by’ his or her participation in the fraud.” (Justice Sotomayor may have made this point because Ritz was arguably both the transferor and transferee. If Ritz was the transferee (because of his interest in the companies receiving the assets), then Justice Sotomayor is pointing to Ritz’ receipt of money and property as the crux of the dischargeability action. Indeed, she makes this dual transferor/transferee point in footnote 3 of the opinion.)

While we can understand the majority’s desire to address Justice Thomas’ arguments, we’re at a loss to understand exactly what to take away from Part B and where it leaves us in defining the phrase “obtained by.” The Supreme Court states that the transferee of a fraudulent transfer (if the necessary actual fraud is found) can be the subject of a § 523(a)(2)(A) action to except that debt from his or her bankruptcy discharge. The majority opinion acknowledges that this factual scenario “may be rare” because the transferee is unlikely to be headed for bankruptcy, but claims that this supports the argument that fraudulent conveyances are not wholly incompatible with the “obtained by” requirement. Even more puzzlingly, after going through all the brain damage, the Supreme Court ducks the “obtained by” issue entirely, as footnote 3 of the opinion remands to the Fifth Circuit “whether the debt to Husky was ‘obtained by’ Ritz’ asset-transfer scheme.”

Conclusion

In our view, Part B of the majority opinion was unnecessary and causes more questions than answers. (Stern v. Marshall anyone?)  The Supreme Court had already addressed the definition of “actual fraud,” and the district court had found that Ritz had committed actual fraud. Thus, the third element of § 523(a)(2)(A) was satisfied. The opinion should have stopped there. Instead, we are left with a muddled understanding of “obtained by” under § 523(a)(2)(A).

First, we’re not clear how the Supreme Court found that Ritz owed a debt for money, property, or services to Husky. For that matter, we aren’t even sure if the Court did make that finding. As best we can tell, the Supreme Court relied upon the district court’s holding that Ritz was liable to Husky under the Texas statute quoted in the last post. Does that mean that the Ritz incurred the debt when he committed the fraudulent transfer or when the district court entered the judgment against him? The opinion doesn’t say. If the former, how did Ritz incur a debt to Husky? If the latter, how can it be said that the debt (i.e., the judgment) was obtained by actual fraud? Or is the district court’s finding of actual fraud equivalent to a veil piercing action which, in essence, holds that Ritz became liable when Chrysalis did, as if Ritz had ordered the products from Husky? It’s critical to understand the nature of a piercing remedy.

Second, the majority’s loose use of language in discussing the “obtained by” language will cause confusion. For example, it states at one point in the opinion that “any debts ‘traceable to’ the fraudulent conveyance will be nondischargable under § 523(a)(2)(A).” “Traceable to” and “obtained by” are, in our humble opinion, two different concepts. Nevertheless, we anticipate that some creditor at some point will make exploit or conflate the two, and cite to Husky.

Third, the majority also rejects Justice Thomas’ contention that the fraud must arise at the inception of a credit transaction, but fails to address Justice Thomas’ contention that the phrase “obtained by” modifies “false pretenses” “false representation,” and “actual fraud,” equally. Does the dicta in Husky apply to these phrases as well?

Fourth, it is clear that the Supreme Court distinguishes between fraudulent transfers judgment based on actual fraud and constructive fraud for purposes of a transferee filing bankruptcy to discharge the judgment. For example, under Georgia law, a creditor may obtain a judgment against a debtor and a transferee if the debtor made a voidable transfer either with actual intent or as a constructive matter. O.C.G.A. § 18-2-74. Under Husky, a judgement against the transferee would be excepted from discharge as long as the transferee was found to have acted with actual intent to hinder, delay, or defraud. Conversely, the transferee would be free to discharge a judgment under a constructively fraudulent theory. While courts have long looked at the debtor-transferor’s intent, it now appears that courts will have to rule on the transferee’s intent, as well, if creditors want to except their judgment against the transferee in bankruptcy.

In summary, we don’t think that Justice Sotomayor eliminated the “obtained by” requirement for excepting a debt from discharge. In fact, footnote 3 leaves it for the Fifth Circuit to figure out. The statutory language is still there and the unusual facts of the case (especially the fact that the debtor was, arguably, both the transferor and transferee) coupled with the fact that the Supreme Court expressly stated that the Fifth Circuit should consider the “obtained by” issue on remand should limit the confusion caused Justice Sotomayor’s dicta on the phrase.

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(Getty Images)[1]

Talk about timing. Yesterday, barely a week after Dave blogged about Justice Thomas’ admission that he might enjoy and appreciate bankruptcy cases more than his colleagues, Justice Thomas was the sole dissenting justice in the Supreme Court’s 7-1 decision in Husky International Electronics, Inc. v. Daniel Lee Ritz. The stated issue before the Court: Does the term “actual fraud” in 11 U.S.C. § 523(a)(2)(A) require a misrepresentation? The Court answered “No.” Justice Thomas disagreed.

We’ll cover Husky in 2 posts. Today, I’ll provide the overview that all Supreme Court decisions merit. Next, I’ll attempt to untangle Justice Sotomayor’s dicta (holding?) regarding the term “obtained by” in § 523(a)(2). Thus, over the next couple of days, we’ll aim to sort out whether the Supreme Court’s surgical attempt to resolve a limited split between the Fifth and Seventh Circuits spilled over into and, thus, clouded (rather than illuminated) our understanding of § 523(a)(2)(A).

Overview of the Case

The Husky facts do not represent a typical voidable transfer[2]. As a result, they’re necessary to, but also might obstruct, a clear understanding of the majority’s opinion.

Underlying Dispute

Husky, an electronic components supplier, sold its products to Chrysalis. Over the course of Chrysalis’ purchases, Chrysalis ran-up a $163,999 bill. During that time, Daniel Ritz was a director of Chrysalis and owned at least 30% of Chrysalis’ common stock. In 2006 and 2007, Ritz drained Chrysalis of sufficient assets to pay Husky by transferring large sums of Chrysalis’ money to other entities controlled by Ritz. In 2009, Husky sued Ritz, claiming that Ritz was personally liable for Chrysalis’ debt under Texas Business Organizations Code § 21.223(b). While the Supreme Court did not quote that provision, the text is important.

Specifically, it provides that § 21.223(a)(2), which limits shareholder liability for corporate obligations, “does not prevent or limit the liability of a holder, beneficial owner, subscriber, or affiliate if the obligee demonstrates that the holder, beneficial owner, subscriber, or affiliate caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the holder, beneficial owner, subscriber, or affiliate.” Essentially, § 21.223(b) is a veil-piercing statute.

Ritz Files Bankruptcy

Before the federal District Court could rule, Ritz filed an individual Chapter 7 bankruptcy. In response, Husky simply repackaged its claim against Ritz in an adversary proceeding in the Bankruptcy Court and then raised § 523(a)(2)(A) as bar to Ritz being discharged of his liability for that claim on account of his “actual fraud.” Section 523(a)(2)(A) provides that a bankruptcy discharge “does not discharge an individual debtor from any debt…for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by…false pretenses, a false representation, or actual fraud…”

Bankruptcy Court v. District Court 

The Bankruptcy Court rejected both of Husky’s claims, concluding that (1) Ritz was not liable for Chrysalis’ debt under the Texas statute and (2) even if Ritz were liable, § 523(a)(2)(A) did not except that liability from discharge. The District Court disagreed with the former, concluding that, by draining Chrysalis of its assets (i.e., orchestrating “fraudulent transfers”) Ritz committed “actual fraud” against Husky within the meaning of the Texas statute. Therefore, Ritz was personally liable for the Chrysalis debt. Nevertheless, the District Court agreed with the latter. Specifically, it concluded that, because the term “actual fraud” in § 523(a)(2)(A) requires a misrepresentation and Ritz made no misrepresentation to Husky, Ritz’ liability for Chrysalis’ debt should still be discharged in Ritz’ bankruptcy.

Appeal in the Fifth Circuit

On appeal, the Fifth Circuit affirmed. However, it didn’t address whether Ritz was liable for Chrysalis’ debt under Texas law. Instead it focused on the the § 523(a)(2)(A) issue. That is, does the term “actual fraud” in § 523(a)(2)(A) require a misrepresentation? Agreeing with the District Court, the Fifth Circuit held, as paraphrased by the Supreme Court, that a “necessary element of ‘actual fraud’ is a misrepresentation from the debtor to the creditor.” And because the fraudulent transfers orchestrated by Ritz didn’t involve misrepresentations to Husky, § 523(a)(2)(A) didn’t provide an exception. In holding so, the Fifth Circuit split with the Seventh Circuit’s decision in McClellan v. Cantrell (holding, essentially, that the term “actual fraud” doesn’t require a misrepresentation).

Part A of the Decision: Majority Reads “Actual Fraud” Broadly

A 7-1 Supreme Court reversed, with Justice Thomas dissenting. The majority opinion breaks down into two major sections. Part A addresses the circuit split: Does the term “actual fraud” in § 523(a)(2)(A) require a false representation? No, answers the majority. Part B addresses Ritz’, as well as Justice Thomas’, positions. In the process, the majority discusses § 523(a)(2)(A)’s “obtained by” term and, arguably, confuses an otherwise straightforward opinion. Put another way, my knee-jerk reaction was to get caught-up in that discussion instead of the stated “actual fraud” issue that created the Circuit split. More on this later.

Does “actual fraud” require a misrepresentation? No.

The majority concludes that the term “actual fraud” does not, in fact, require a misrepresentation. First, the majority makes much of the distinction between the prior Bankruptcy Act (“false pretenses or false representations”) and the current Bankruptcy Code (“false pretenses, a false representation, or actual fraud). Emphasizing, as it always does, the canons of construction, the Court presumed that Congress intended a change to the statute and, thus, rejected Justice Thomas’ contention that “actual fraud” was added to clarify, rather than expand, the scope of the phrases “false pretenses” and “false representation.”

Second, the majority relies on the Court’s Field v. Mans decision to conclude that the common law informs the terms used in § 523(a)(2)(A), including the term “actual fraud.” Thus, under the common law, the word “actual” refers to any fraud that involves “moral turpitude” or “intentional wrong.” On the one hand, the majority, refusing to be pinned-down on a definition “for all times and all circumstances,” leaves the definition of “fraud” open. On the other hand, the majority is satisfied that, going all of the way back to the Statute of 13 Elizabeth, “fraud” has included transfers of assets that (“like Ritz’ scheme”) impair a “creditor’s ability to collect” (i.e., fraudulent transfers). Further, the majority concludes that, historically, being liable for such “fraud” didn’t depend on a “false representation” or any representation, for that matter. Ultimately, the majority concludes that § 523(a)(2)(A) isn’t limited to “inducement-based” frauds; a “false representation has never been a required element” of “actual fraud”; and, thus, “actual fraud” can include fraudulent conveyances.

Our takeaway on the “actual fraud” question

To be sure, the Supreme Court granted certiorari on the limited issue of whether the term “actual fraud,” as used in § 523(a)(2)(A), requires a misrepresentation. Indeed, the Supreme Court sensed a sufficient split between the Fifth and Seventh Circuits on that precise issue. Additionally, much of the discussion and commentary leading-up to the decision focused on that question. For example, see here and here. Finally, but for Part B of the decision (which I’ll focus on in tomorrow’s post), the majority decision, right or wrong, articulates that limited issue, addresses that limited issue, and, still arguably decides just that issue.

Thus, one might expect that I’d devote this part of the post to evaluating whether the majority decided that limited issue correctly. That is, did the Supreme Court err in holding that a misrepresentation is not a required element of “actual fraud” under § 523(a)(2)(A)? However, if I’ve learned one thing about blogging about Supreme Court opinions, it is that opinions are a dime a dozen. From our standpoint as practitioners, however, does it really matter? It is now the law of the land that “actual fraud” doesn’t require a misrepresentation. Unlike other recent Supreme Court cases where the core holdings might leave room for discussions about scope (e.g., Baker Botts v. ASARCO), Part A of Husky is clear: misrepresentations aren’t required, period.

In short, if answering the “Did they get it right?” question is not essential to communicating the potential impact of a Supreme Court decision, then we’d just as soon leave that question to those who specialize in and are better-equipped for answering academic questions. For example, in his amicus brief, Eric Brunstad argued, rather convincingly, that equating the culpability required for “actual fraud” and for “actual intent” to “hinder, delay, or defraud” is not only inappropriate, but also expands § 523(a)(2)(A) in a dangerous way. However, his argument merely represents a studied conclusion that differs from the majority’s studied conclusion. Both conclusions flow from the same question: What does common law tell us? It just so happens that answering that question is the exclusive purview of the Supreme Court, whether acting as 8 or acting as 9.

For us as practitioners, while we like the debate and intellectual combat, the question is now decided.

Conclusion

In short, I’ll let those with more perspective and more time weigh-in on whether the majority decided the “actual fraud” question correctly in Part A. However, I’m still very interested in whether, notwithstanding Part A, the majority decision might impact our practice area in ways that exceed the Circuit split.  That (i.e., Part B) will be the subject of the next post. Reserving the right to change my mind on further reflection, my initial reaction to Part B is that the majority, in seeking to overcome Justice Thomas’ dissent, begins to reach. As I’ll discuss in the next post, Part B is a straightforward and correct response to Ritz’ arguments on appeal. However, finding a more formidable foe in Justice Thomas, the majority starts to color outside the lines of an otherwise precise and defensible decision. As a result, even the best of the practitioners studying the decision might find themselves confused without additional effort. Thus, I’m punting ’til next time!

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[1]  Commenting on the March 1, 2016 Husky oral argument, the ABI’s Bill Rochelle remarked that “I very much miss Justice Scalia and his laser-like analysis of statutory language. It is remarkable how different oral argument is without him on the bench and without his insistence on a careful reading of the statute.” Not only are Bill’s remarks fitting in light of the above photo, but they also might explain a little about the now 8 justice Court’s Husky v. Ritz decision.

[2] The Supreme Court’s terminology is behind the times. Not that the Court would care, but in Georgia, for example, these causes of action are now voidable transfers under the new Model Act passed last year. In deference to the Court (and most of the other states that have not adopted the Uniform Voidable Transfer Act, we will use the term “fraudulent transfer” and “fraudulent conveyance.” For more info, here’s a panel discussion that Dave participated in in 2014.

Last month, Judge Laura Grandy, a bankruptcy judge in the Southern District of Illinois, entered confirmation opinion in STC, Inc.’s Chapter 11 case. The opinion is noteworthy for 2 reasons. First, it amounts to an excellent treatise on the Section 1129 confirmation requirements. Second, I’m honored that Judge Grandy cited in her opinion the American Bankruptcy Institute Journal article that I co-wrote with Richard Gaudet of HDH Advisors: “Zero Times Something is Still Zero: Adapting Till to Unsecured Creditors.” We’ll hit the high points, but we recommend that you read the opinion for yourself.

Background

STC, Inc. is a business in McLeansboro, Illinois that designs, manufactures, and tests custom transformers, specialty electronics, and magnetic components used in various industries, including the aerospace, military, and marine industries. In particular, STC designs and manufactures components for the “EMTRAC System,” a public safety system that improves response times and reduces traffic accidents for first responders. In 2010, GTT, a long-time competitor of STC, sued STC and other defendants in a patent infringement suit in Minnesota on account of STC’s production of the EMTRAC System.

(this EMTRAC video is for geeks only)

Ultimately, the jury sided with GTT. The total award against STC, inclusive of damages for willful infringement and pre-judgment interest, was a little over $8.9 million. Unable to stay enforcement of the judgment on appeal in the Federal Circuit, STC filed its Chapter 11 bankruptcy case. Following the resolution of all issues on appeal, an unsuccessful petition for certiorari by STC, and direction from the Court of Appeals, the District Court reduced the judgment against STC to around $6.4 million. With those issues resolved, confirmation of STC’s Chapter 11 plan could proceed.

STC’s “Creditor Trust” plan structure is rather interesting.  The Trustee for the Creditor Trust was to receive 99% of STC’s equity. STC’s sole-shareholder, Mr. Cross, was to receive the remaining 1% in exchange for a $58,815 payment. With that structure in place, STC was to make an initial $800,00 payment to the Creditor Trust. The Trustee would then allocate that payment over the various classes, including GTT’s class. Going forward, GTT would receive 9 annual payments out of the STC-funded Creditor Trust of $752,172 each (consisting of principal and interest at 3%). With each timely payment, Mr. Cross would receive 11% of the equity in STC  from the Trust (i.e., 9 times 11% = 99%). If STC missed a payment, then the 11% would go to GTT, instead.

Not surprisingly, GTT was the lone hold-out and objected on a host of grounds, including on Till v. SCS Credit Corp, 541 U.S. 465 (2004) grounds.

Various Non-Till Confirmation Issues

GTT objected on non-Till grounds: (i) class gerrymandering; (ii) artificial impairment and lack of of good faith; and (iii) feasibility.

With respect to gerrymandering, Judge Grandy evaluated whether STC had separated Class 3 (general unsecured claims) and Class 4 (GTT’s unsecured claim) to engineer an accepting impaired class in violation of § 1122. As a reminder, § 1122 doesn’t prohibit separate classification, per se. Rather, it merely requires that claims or interests in a particular class be “substantially similar” to each other. Ultimately, Judge Grandy respected STC’s classification according to the Seventh Circuit’s 3-part test which emphasizes whether (i) the claimants have “significantly different legal rights”; (ii) the debtor has a “legitimate business reason” for the separate classification; and (iii) the claimants have “sufficiently different interests” in the plan. STC passed the test.

With respect to artificial impairment, Judge Grandy evaluated whether STC (who had adequate funds on hand to pay Class 3 unsecured claims in full) had “artificially impaired” Class 3 by only proposing to pay Class 3 claimants 75% of their claims. Judge Grandy held that there was no artificial impairment. Her analysis focused on “good faith” under § 1129(a)(3). That is, she found that there was a reasonable likelihood that STC’s proposed treatment would “achieve a result consistent with the objectives and purposes of the Bankruptcy Code.”

With respect to feasibility, Judge Grandy evaluated whether the plan was feasible under § 1129(a)(11) such that confirmation would “not likely be followed by liquidation, or the need for further financial reorganization”? In pertinent part, she reminds us that the debtor only has the burden of establishing a “reasonable assurance of commercial viability” (as opposed to showing that the plan is “guaranteed to succeed”).  The feasibility question in STC came down to a “battle of experts.” STC’s expert came out on top, with Judge Grandy viewing very favorably the plan’s likelihood of success. Although the feasibility analysis is very fact-intensive, we encourage you to read it as a reminder of the plan proponent’s feasibility burden and the importance of evidence.

Till-Related Confirmation Issues

We’ve blogged about Till a number of times before and, thus, will not bear down too hard in this post. Instead, we’ll focus on the most interesting part of STC as it relates to Till. That is, STC is interesting because it has Judge Grandy applying Till‘s formula approach to an unsecured claim rather than to a secured claim. What is the appropriate rate of interest on an unsecured claim? Judge Grandy explains that, in “determining the risk on an unsecured claim, the Court believes that it is necessary to consider what GTT would recover in a chapter 7 liquidation proceeding.”

In a nutshell, that was the gist of Richard’s and my January 2016 Till article. And Judge Grandy was nice enough to cite our article. Specifically, we concluded in our article that the “best interests of creditors” test (i.e., the liquidation analysis) is the “starting point for determining whether an unsecured creditor is entitled to risk-based compensation under Till.” We then concluded that, “if the “liquidation analysis projects a dividend for an unsecured creditor, then the Till rate should compensate the creditor for the time value of money and the risk of default.” However, “if the liquidation analysis does not project a dividend for an unsecured creditor, then the Till rate should compensate the creditor for the time value of money, only, without compensation for the risk of default.”

Humbly, I submit that Judge Grandy’s analysis illustrates our suggested approach. First,  she points out that STC’s “undisputed liquidation value” is around $1.7 million. In other words, under the “best interests of creditors test,” GTT would, if STC were liquidated, receive $1.7 million (26% of its claim). Therefore, (i) the liquidation analysis in STC projected a dividend for GTT and, thus, (ii) GTT was entitled, under Till, to be compensated for the time value of money and the risk of default on that dividend. Indeed, Judge Grandy concludes that “the only risk that GTT has is the liquidation value of $1.7 million.”

Concluding that GTT was entitled to risk compensation, too, Judge Grandy then considers the Till risk-adjustment factors. Those factors include the circumstances of the estate, nature of the security,  duration and feasibility of the plan, etc. In particular, Judge Grandy emphasizes that GTT was projected to receive, in the first plan year alone, “almost the entire liquidation value.” She also emphasizes that GTT was to receive 3% interest on its entire $9 million claim, not just the $1.7 million liquidation value that was at risk. She also concluded that GTT’s claim was, “effectively,” secured by 99% of STC’s equity via the Creditor Trust. Finally, she incorporated her favorable findings on feasibility and the like. In other words, the plan more than compensated GTT.

With those considerations in mind, Judge Grandy concluded that (i) the risk of nonpayment was “minimal”; (ii) the rate “was beyond any efficient market rate or prime rate”; (iii) GTT was to receive interest on the portion of its claim that was at risk (i.e., the $1.7 million) and the “portion of its claim that is not at risk”; and (iv) GTT would even receive “interest on interest” (i.e., 3% interest on its over $1.3 million in pre-petition judgment interest). Thus, Judge Grandy concluded that the “interest rate of 3% adequately compensates GTT for the ‘time value of money’ component, as well as the risk component.”

Conclusion

When we submitted our ABI article, there was a only small handful of cases, at most, wherein bankruptcy courts had applied Till to unsecured claims. Not only does Judge Grandy’s STC opinion provide an excellent Section 1129 treatise on the most common confirmation objections, but it also provides additional precedent for the application of Till to unsecured claims. And, if we do so say ourselves, Judge Grandy’s emphasis on the liquidation analysis is dead-on. Finally, it’s also nice to see Richard’s (and other experts’) language to describe the elements of an interest rate gain make it into a legal opinion.

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After an unplanned, exactly one month hiatus, we’re back! This long overdue post comes to you from Point Clear, Alabama, the site of the 2016 11th Circuit Judicial Conference, an event that brings together all of the federal judges in Georgia, Alabama, and Florida (i.e., the U.S. Marshals’ least favorite project every 2 years). Lest the conference appear more exclusive than it really is, 28 U.S.C. § 333  mandates that common folks like me get to attend. That is, the “court of appeals for each circuit shall provide by its rules for representation and active participation at such conference by members of the bar of such circuit.” Thus, my former colleague (who is now a judge) and his wife were nice enough to make Jessica and me their “plus two.”

To be sure, this isn’t your typical riveting bankruptcy seminar. Instead of keeping you on the edge of your seat with case updates on dischargeability actions, DIP financing, and lien avoidance–you know, the good stuff–they entertain you with “boring stuff” (i.e., topics that your spouse might actually find interesting if she wasn’t off shopping–more on that in a minute). Seriously, it really is bizarre how bankruptcy seminars warp our perceptions of what’s interesting.

For example, Beverly Hills attorney Don Burris gave a fantastic (and, believe it or not, knee-slapping) presentation called “Tragedy to Triumph – Reflections on Litigating Looted Art Collections.” He and his partner, Randy Schoenberg, are famous for their “successful pursuit of art works and other assets stolen by the Nazi authorities before and during World War II.” Specifically, they litigated successfully Altmann v. Republic of Austria, 541 U.S. 677 (2004), wherein a 6-3 Supreme Court decision resulted in the Austrian Government being ordered to return (and actually returning) to their client priceless paintings by Gustav Klimt.

You might know this story by its movie title, “Woman in Gold”:

https://youtu.be/9bx3KTGBEaI

(Don still hasn’t gotten over the fact that actor Ryan Reynolds played the part of his law partner, Randy Schoenberg.)

Anyway, funding for this blog depends on it having something to do with bankruptcy. Thus, I’ll conclude by reporting that the Conference Committee was gracious enough to offer a “Bankruptcy Breakout” session in the “Lagoon Room.” It was a neat opportunity for bankruptcy judges and lawyers to chat about bankruptcy issues while waiting for Justice Clarence Thomas (who was preceded by a K-9 unit and a U.S. Marshal or two) to make his way over to our breakout session. I must say that His Honor was perfectly affable, a great sport, and without any pomp or circumstance, as some brave (audacious?) judges (including our very own Judge Bonapfel) took Justice Thomas to task on various wrinkles in recent Supreme Court bankruptcy opinions. He readily admitted what we’ve always suspected: There’s a certain level of bias at the Court against bankruptcy cases. However, he was happy to learn that the Court occasionally gets one right by “blind luck.”

That’s all for now–I’m being summoned by Mrs. Bury for breakfast. We’ll get back on track in May with regular posts.

P.S. Speaking of Jessica, I have some words of wisdom for those who drag their spouses to destination conferences: Let them shop! Point in fact: Jessica and my colleague’s wife were in town shopping and ran into and chatted-up a nice lady who was also attending the conference. Later that evening, they invited her and her unassuming husband to join us for dinner at our Macon, Georgia table. We had a delightful conversation with them about the adventures of raising two daughters and the like. The crazy part is that I only learned this morning from Google that, earlier this year, her very humble husband (who I won’t name) was widely-reported by the New York Times, CNN, SCOTUSBlog, etc. as being one of President Obama’s top choices to replace Justice Scalia on the Supreme Court. Who knew?!

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(Replica Civil War Cannon at the Grand Marriott at 6:30 a.m CST)

RealWorld

Every once in a while, we encounter a case that forces us to ponder the potential breadth of the bankruptcy discharge. In re Lombard Flats, LLC, a Northern District of California case from March 23, 2016, is such a case. In short, the court held that an alter ego claim against a Chapter 11 debtor that is based on pre-petition facts and claims is included in the bankruptcy discharge by operation of § 1141(d) and § 524(a). As an aside, we almost missed the second most interesting aspect of Lombard Flats: Its connection to 1990s pop culture and the genesis of reality television! Enjoy.

Factual Background

Lombard Flats started out as a typical Chapter 11 case. The debtor’s principal asset was a “three flat” apartment building in San Francisco located at 949-953 Lombard Street. My colleague Dave tells me that Wikipedia told him that 949 Lombard Street is none other than the location used by the cast of 1994’s “The Real World: San Francisco” (i.e., the Pedro and Puck season). Located in the Russian Hill neighborhood, it’s one block east of the “most crooked street in the world.” Apparently, a tipped candle caused the building to burn in 2000, with $2 million in damage. Mr. Eng, the debtor’s principal, owned the property from 1985 to 2009, at which point he transferred the building to Lombard Flats.

But back to the bankruptcy (which, since you are reading this blog, is probably more important to you anyway). The debtor’s plan proposed to pay the major secured creditor in full and pay the remainder of the debtor’s income to another secured creditor. The remaining creditors were unsecured and were discharged under the plan. The bankruptcy court confirmed the plan on July 19, 2010, entered the final decree on May 23, 2011, and closed the case on June 3, 2011. However, in 2013, Cheuk Yan, with his son Demas Yan as his attorney, sued Lombard Flats, Mr. Eng, Mr. Eng’s relatives, and their closely-held companies in state court.

Specifically, Mr. Yan sought to collect on at least 3 promissory notes that Mr. Eng had issued to Mr. Yan. He also asserted that Mr. Eng had fraudulently conveyed the apartment building to Lombard Flats after issuing the notes, liened-up the building with debt, and then caused the bankruptcy filing. Mr. Yan obtained a default judgment. However, Lombard Flats moved the bankruptcy court for an order of contempt on the theory that the claim against Lombard Flats violated the discharge injunction. Granting the motion, the bankruptcy court ordered Mr. Yan and his son (the attorney) to vacate the default judgment or face contempt.

In apparent response to the order of contempt, Mr. Yan transferred his claim against Mr. Eng and Lombard Flats to Legal Recovery, LLC. His son then filed a second action against Mr. Eng and Lombard Flats on behalf of Legal Recovery. In the second action, Legal Recovery asserted breach of contract and fraudulent transfer allegations against Mr. Eng, only, but also alleged that Lombard Flats was an alter ego of Mr. Eng. Therefore, Legal Recovery sought joint and several recovery from Mr. Eng and Lombard Flats. Of course, the debtor filed, and the bankruptcy court granted, another motion for contempt. Specifically, the court found Demas Yan in contempt and ordered him to pay Lombard Flats’ attorneys’ fees.

Mr. Yan appealed to the district court on two, intertwined grounds. First, he argued that the bankruptcy court lacked subject matter jurisdiction to order the dismissal of the state court action against the debtor based on the alter ego doctrine. Second, he argued that the alter ego claim was not included in Lombard Flats’ discharge. The first argument depended on that second argument. That is, if the alter ego allegation was not included in the discharge, then the bankruptcy court would have no ability to enforce the discharge injunction of 11 U.S.C. § 524(a)(2) on account of that claim.

District Court Decision

The district court started with 11 U.S.C. § 524(a). Under that section, a discharge “voids any judgment” as to “a determination of the personal liability of the debtor with respect to any debt” and “operates as an injunction against” the collection of “any such debt as the personal liability of the debtor.” This pairs nicely with the language of § 1141(d)(1), which states that an order confirming the Chapter 11 plan “discharges the debtor from any debt that arose before the date of such confirmation . . . whether or not (i) a proof of the claim based on such debt is filed or deemed filed under Section 501 of this title; (ii) such claim is allowed under Section 502 of this title; or (iii) the holder of such claim has accepted the plan.”

The district court then considered whether an alter ego theory is a “claim” subject to discharge. The familiar definition of “claim” in § 101(5) is that a claim is a “right to payment,” including “disputed” and “equitable” rights as well as “rights to an equitable remedy for breach of performance if such breach gives rise to a right to payment.” We would point out that, although the court did not articulate the connection between a “debt” and a “claim,” § 101(12) defines “debt” as “liability on a claim.”

The district court dismissed the fact that the alter ego does not create an independent cause of action against the debtor by noting, correctly, that § 101(5)’s definition focuses on whether a “right to payment” arises, not whether a cause of action is available. That is true whether the “right to payment” is a legal cause of action, an equitable remedy, or a disputed allegation. Thus, “characterizing the alter ego theory as a ‘judgment collection remedy,’ rather than a claim for substantive relief, does not escape enforcement of the discharge.”

Mr. Yan’s final attempt at escaping the discharge was to argue that the alter ego claim was not established pre-petition. For discharge purposes, though, a claim arises at the time of the events giving rise to the claim, not at the time that the plaintiff is first able to file suit on the claim. As the court points out, under the Ninth Circuit’s “fair contemplation” test, “a claim arises when a claimant can fairly or reasonably contemplate the claim’s existence even if a cause of action has not yet accrued under nonbankruptcy law.”

The district court also pointed out that a contingent claim for breach of contract arises at the time of contracting, not at the time of breach. Thus, even without the breach of contract, a contingent claim for breach of contract against Mr. Eng was fairly contemplated pre-petition. Because the contractual relationship, the breach of that contract by Mr. Eng, and the facts that formed the basis for the alter ego claim all occurred pre-petition, the alter ego claim was fairly contemplated and, thus, discharged under § 524.

In determining when the alter ego claim arose, the district court addressed Mr. Yan’s reliance on In re Conseco Life Ins., 2005 WL 2203150 (C.D. Cal. Apr. 13, 2005). Whereas the Conseco plaintiffs alleged post-petition conduct that supported an alter ego claim and a breach of contract against a post-confirmation entity, Mr. Yan’s allegations all involved pre-petition conduct by Mr. Eng and Lombard Flats. Therefore, the alter ego claim was fairly contemplated pre-petition.

Conclusion

While straightforward and unsurprising, the district court’s analysis serves as an excellent reminder that the bankruptcy discharge is very broad. The district court’s focus on the discharge of any “right to payment” under § 101(5) reemphasizes, to us at least, that the discharge received in bankruptcy eliminates a creditor’s “right to payment” regardless of how the creditor attempts to style that right in an attempt to avoid the discharge injunction. While basic, this injunction forms the heart of the Bankruptcy Code and is worthy of periodic review. Lombard Flats does so in a worthwhile manner, with a nostalgic backstory to boot.

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East Texas drilling

This will be a placeholder post for the Baker Botts, L.L.P. v. ASARCO, LLC timeline. On March 17, Delaware’s Judge Shannon formally adopted in his New Gulf Resources Chapter 11 case Judge Walrath’s Baker Botts opinion in Delaware’s Boomerang Tube Chapter 11 case. We’ve been covering Baker Botts and the fee-defense cost issue since June 2015 when the U.S. Supreme Court held that bankruptcy professionals may not recover fee-defense costs incurred in “defending” their fee applications. And as we discussed back in February, Judge Walrath was the first of the Delaware bankruptcy judges to weigh-in on Baker Botts. Specifically, she held that neither § 328(a) of the Bankruptcy Code, nor a retention agreement provides a sufficient Baker Botts workaround.

In New Gulf, the debtors moved to employ Baker Botts as counsel under § 327(a). Unlike the Boomerang Tube application, the New Gulf application is rather exotic. Pointing out that it was charging hourly rates that were 10-15% lower than usual, Baker Botts proposed that it be paid a “Fee Premium” to account for bankruptcy payment risk equal to 10% of its billings during the case, with two conditions: (i) the fee would accrue during the case, but not be payable until the court approved the final fee application and (ii) the court must determine that Baker Botts incurred “material” fee-defense costs. However, if the court determined that Baker Botts incurred material fee-defense costs, then Baker Botts would earn the Fee Premium “regardless of the outcome of the objection.”

On February 1, Judge Shannon entered an initial opinion letter suggesting that he was inclined to reject the Fee Premium. However, he permitted Baker Botts to file another brief on March 2, 2016. In its brief, Baker Botts insisted that it was not seeking compensation for fee-defense. Rather, it was merely seeking a payment risk premium. Although it suggested that the premium merely brought its hourly rates in line with the market, Baker Botts conditioned the premium on the incurrence of material fee-defense costs. As the U.S. Trustee had put it, the premium is a “direct attack on ASARCO, repackaged.”

In his March 17 final opinion letter, Judge Shannon explained that “I stand by my earlier determination” that Baker Botts’ proposal “runs afoul of the holdings in Asarco and Boomerang Tube.” It was a “creative approach,” but there was no “meaningful distinction” between the New Gulf and Boomerang.

Therefore, we now have 3 cases rejecting attempted Baker Botts workarounds:

In re Boomerang Tube, LLC; In re New Gulf Resources, LLC; and Samson Resources Corporation.

Conclusion

Rather than adding more commentary of our own, we’ll conclude by pointing you to the excellent Basis Points blog. Specifically, Evan Flaschen and Chelsea Dal Corso address the March 17 letter, and are somewhat colorful in their growing impatience with these failed attempts to avoid Baker Botts. Here’s their blog entry from March 18: Enough With the Fees-on-Fees Already: ASARCO Really Means What It Says.

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Garland-Financials

(Photo by Diego M. Radzinschi/The National Law Journal)

On Wednesday, President Obama nominated Merrick Garland, Chief Judge of the U.S. Court of Appeals for the D.C. Circuit, to fill Justice Antonin Scalia’s recently vacant seat on the U.S. Supreme Court. Although much has been written over the last 2 days about Judge Garland’s prior decisions, nothing has been written about his bankruptcy decisions. Suspicious, right? Something’s up, and I’m going to get to the bottom of it. I’ll be right back. Gotta do some quick research.

In the meantime, check out this White House promo video for Judge Garland. Spoiler Alert: Still not a word about bankruptcy.

(Did Wes Anderson handle the font selection? Nice.)

Okay, I’m back. Yeah, apparently, Judge Garland has never authored a bankruptcy opinion. Mighty convenient if you ask me. Clearly, then, the bigger story is that Judge Garland just hates bankruptcy law. In such a prolific Circuit for bankruptcy appeals, what else could be the explanation? Alright, you got me: Other than the Federal Circuit, the D.C. Circuit is the least prolific Circuit Court for bankruptcy appeals. In fact, since Judge Garland’s appointment in 1997, the D.C. Circuit has, according to LexisNexis, issued only 38 bankruptcy-related decisions. Of those, Judge Garland was on the panel in maybe 11 of them. And out of those 11, one is interesting, one is important, four are pretty routine, and rest are garden variety per curiam decisions.

Sri1SEC v. Sec. Investor Prot. Corp., 758 F.3d 357 (D.C. Cir. 2014) is interesting for two reasons. First, Judge Sri Srinivasan wrote the opinion. Of course, most reported that President Obama had narrowed his appointee list down to 2 by Tuesday: Garland and Srinivasan. Therefore, the SIPC decision gives us the two of them on a bankruptcy-esque panel together. For the oral argument audio, click here. Second, it’s interesting to see Judge Srinivasan borrow “substantive consolidation” concepts from bankruptcy law for application in a SIPC case and, in the process, rely so heavily on Collier in making his case.

 

NextWave Pers. Communs., Inc. v. FCC, 254 F.3d 130 (D.C. Cir. 2001) is, of course, the biggie. Although Judge Tatel wrote the opinion for the panel, NextWave is one of only a handful of Judge Garland’s panel decisions that the Supreme Court has chosen to review. And as we reminded you last month in our review of the late Justice Scalia’s opinions, Justice Scalia wrote the NextWave opinion for the Court. So there you have it, an epic showdown between President Obama’s sort of liberal appointee and the famously-conservative justice that he might replace! Well, no, not exactly. Justice Scalia actually affirmed Judge Garland’s decision. Rather, Justice Breyer was the lone dissenter in NextWave.

The remainder of Judge Garland’s bankruptcy panel opinions are either pretty routine (e.g., who has standing to appeal as a party-in-interest; appeals that are mooted by 363 sale closings; respecting a bankruptcy court’s factual findings on a Chapter 13 dismissal; etc.) or reflect a Circuit Court’s (ruthless?) talent for throwing out bankruptcy appeals before they even get started.

Conclusion

The bottom line is that President Obama has foiled my not so clever attempt to provide a Scalia/Garland bookend on this blog. Therefore, notwithstanding my snarky title, we really have no idea what Judge Garland thinks about bankruptcy law. Although your opinion of him very well might boil down to your own politics, Judge Garland is, by most accounts, a brilliant, capable, and serious judge. Presidents on both sides of the aisle tend to get that part right.

And perhaps therein lies the answer: Judge Garland has all of the hallmarks of a typical (I didn’t say ideal or even desirable) nominee. He’s white. He’s male. He’s middle-aged (or elderly to those who are under 30). He’s Harvard-educated. He was on the Harvard Law Review. He enjoyed two prestigious clerkships–one with conservative Second Circuit Judge Henry Friendly and another with Supreme Court Justice William Brennan (to some, the “Liberal Lion”). He earned his partner stripe in just four years at Arnold & Porter, one of D.C.’s finest firms. And he played very prominent roles in the Department of Justice.

Thus, it might be perfectly reasonable to assume that bankruptcy probably isn’t Judge Garland’s thing. Indeed, we’ve blogged before about the Supreme Court’s arguable distaste for bankruptcy. Therefore, in our little practice area, Judge Garland might be right at home on the Court. Of course, only time and politics will determine whether it even matters what Judge Garland thinks about bankruptcy. Check back in 90 days to 4 years to see how well this post has aged.

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Disclaimer:  This is a poor attempt to lighten a serious issue. And these are my views, only, and do not reflect the views of my colleagues.