Bankruptcy Litigation Blog

Thanks to Francis Pileggi, Delaware's premier blogger, for kindly alerting me to Nelson v. Emerson, 2008 WL 1961150 (Del. Ch., 5/6/08), in which Vice Chancellor Strine issued a well-crafted discourse on the interplay between Delaware's law governing corporate fiduciaries and federal bankruptcy law governing their conduct.  Francis wrote a long post quoting extensively from Vice Chancellor Strine's opinion, which I strongly recommend you first read, and will not repeat here.

Briefly, in this case, the company's former officer, director, and shareholder, wearing his tough guy hat as the company's major secured creditor, unsuccessfully challenged the company's bankruptcy filing in Chicago, with Bankruptcy Judge Jack B. Schmetterer issuing a lengthy opinion finding that (i) the former insider's claims should be only partially recharacterized as equity, but not equitably subordinated, and (ii) most importantly for purposes of this post, the debtor's chapter 11 filing was not in bad faith because there was a business to reorganize and the filing was a "rational reaction" to the creditor's threat to foreclose on debtor's business assets.  Repository Technologies, Inc. v. Nelson (In re Repository Technologies, Inc.), 363 B.R 868 (Bankr. N.D. Ill. 2007) (pdf). 

District Court Judge Amy St. Eve, who's had one of the more interesting years as federal judge while overseeing the Tony Rezko and Lord Conrad Black of Crossharbour trials, heard the appeal in her spare time, and affirmed Judge Schmetterer's decision in its entirety.  Nelson v. Repository Technologies, Inc., 381 B.R. 852 (N.D. Ill. 2008) (pdf).  This opinion itself is worth reading for its reminder that "[b]ankruptcy is not a 'free-for-all' equity balancing act" and that dicta is defined by the Seventh Circuit (see my previous post entitled, Judge Posner's "Dictum" on "Dicta") as what a court "says" not what it "holds."  Id. at 867, 873.  As regards the latter point, Judge St. Eve concluded, "Nelson's argument that the Bankruptcy Court's language is dictum is defeated by his own motion requesting a finding of bad faith in support of dismissing [Repository]'s bankruptcy case."  Id., 381 B.R. at 873. 

After Judge St. Eve had ruled, Nelson backtracked and recrafted his theory of the case as a breach of fiduciary duty case instead of a bad faith bankruptcy case and filed a complaint in Delaware Chancery Court asserting that management breached its fiduciary duties to the corporation by filing bankruptcy in bad faith.  Adopting the standards for claim preclusion from the 7th Circuit, not Delaware (which were noted to be essentially the same as the 7th Circuit's), Vice Chancellor Strine held that Nelson was collaterally estopped from asserting a breach of duty claim based on management's alleged bad faith in filing the bankruptcy petition because, in the first instance, Judge St. Eve had already ruled in the district court case that Judge Schmetterer's finding on the bad faith issue was not "dicta."  As an aside, one has to wonder whether Nelson miscalculated by first having the District Court, not the Chancery Court, decide whether Judge Schmetterer's ruling was dicta.  Indeed, Judge St. Eve's own ruling looks a bit like dicta itself, since that ruling on dicta really wasn't essential to affirming Judge Schmetterer's decision.  But once she was asked to decide whether it was in fact dicta, and she did so decide, then Nelson was most definitely bound by that result.

Still, Vice Chancellor Strine covered his bases by not relying exclusively upon Judge St. Eve's holding that Judge Schmetterer ruling wasn't dicta, and instead undertook his own independent analysis of Judge Schmetterer's decision, drawing the following important two conclusions:

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In advance of her coming to Chicago on May 1 to speak at this upcoming all day symposium sponsored by the CLLA and DePaul's Business & Commercial Law Journal, America's BAPCPA guru, Cathy Vance, Vice President of Research & Policy and Associate General Counsel of Development Specialists, Inc., has graciously agreed to again guest blog.

Last year, in her first guest post, Cathy reflected on BAPCPA's unruly landscape at the close of its "terrible two's." This year, as BAPCPA closes a less rambunctious third year, Cathy looks at a post-BAPCPA bankruptcy rule change enacted on December 1, 2007 to address, in Rule 6003, the potential for overreaching in the blizzard of "first-day" papers filed at the outset of a case. The new rule requires a showing of "immediate and irreparable harm" if an order retaining professionals, using or selling assets outside of the ordinary course, or assuming or assigning executory contracts or unexpired leases is to be entered on less than 20 days' notice after the filing of the case. Cathy surveys the litigation and literary landscape on what constitutes "immediate and irreparable harm" and, because she's a guru, "speculate[s] about the [new rule's] effects until live controversies emerge that are decided by the courts."

Thanks again for blogging Cathy! Your post last year broke this blog's single and three-day records for page views, and hasn't been matched since. May the next year be a good one for you! 

Finally, thanks to Bankruptcy Court Decisions, home of the ever-resourceful Kate Colangelo, for permission to reprint the article of former Chief Judge Spector, cited by Cathy below.

So without further ado, heeeeeeerrrrrreeee's Cathy! ........

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6/16/08 Update:  Here's a link to my post on the Court's decision reversing the 11th Circuit's decision. 

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Bankruptcy lawyers and bloggers eyeing the Supreme Court's docket this term had to be concerned at the absence of any bankruptcy cases on the Court's docket after two straight banner years of bankruptcy decision-making.  Thankfully, the Court on Friday granted the State of Florida's cert. petition in State of Florida v. Piccadilly Cafeterias, Inc., Case No. 07-312.  

The issue facing the Court is one that has split the circuits, and asks: 

Does Code section 1146, which exempts sales under a confirmed plan from state and transfer taxes, apply to pre-confirmation sales of assets under Section 363? 

At first blush, the answer seems obvious given that Section 1146 on its face is limited to transfers "under a plan confirmed under section 1129 of this title."  But just to show you how creative bankruptcy lawyers—and judges—can get, the Eleventh Circuit agreed with the argument that the Section 1146 exemption "may apply to those pre-confirmation transfers that are necessary to the consummation of a confirmed plan of reorganization, which, at the very least, requires that there be some nexus between the pre-confirmation transfer and the confirmed plan."  State of Florida Dept. of Rev. v. Piccadilly Cafeterias, Inc. (In re Piccadilly Cafeterias, Inc.), 484 F.3d 1299, 1304 (11th Cir. 2007) (emphasis in original).  In so holding, the Eleventh Circuit disagreed with the holding of the Third Circuit in In re Hechinger Inv. Co. of Del., Inc., 335 F.3d 243 (3d Cir. 2003), which concluded that "the most natural reading of the phrase 'under a plan confirmed' in 11 U.S.C. § 1146(c) is 'authorized' by such a plan" and held that the § 1146(c) exemption does not apply to pre-confirmation transfers."  Id. at 252-254.

One small problem for the respondents, and Bingham McCutcheon's Eric Brunstad, who represents the respondent-debtor; that is, Hechinger was decided by none other than then-Judge, now-Justice Alito, the author of the two latest bankruptcy opinions decided by the Supreme Court (i.e., Travelers & Marrama).  I think that it's fair to say that reversal of the Eleventh Circuit's decision is about as safe a bet as you'll find.

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Note:  The inset picture is a famous pre-Revolutionary War political cartoon depicting "Bostonians paying the excise-man by tarring and feathering."  Ahh, the good ol' days!

And thanks again to the many well-wishers on the birth of my twin boys, now 10 weeks old, who clearly prefer bottles to blogging.

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One thing is certain, no two fraternal twins are alike.  And Zachary Spencer, yanked out feet first at an equally healthy 6 lbs. 6 oz. five minutes after his brother Dave (and none too happy about having lost the territory seized from his escaping brother), is as unlike his brother Dave as are many of the famous twins on this list.  While Dave cried, Zack cooed.  While Dave gulped, Zack nibbled.  While Dave screamed his head off, Zack lay pensive, eyes wide open, fingers perched thoughtfully on his chin.  But both share this: they are miracles and blessings for which we are most grateful!

This final twin post of the day contains my "Picks of the Month" for July 2007, and is dedicated to my second newborn son, Zack, whose picture is also from about two weeks ago.  Thanks again to everyone for their double "mazel tovs"!

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It's always gratifying to learn that bankruptcy legends read this blog.  Lynn LoPucki is one of those people. 

Last night I opened an email I received from Professor LoPucki letting me know that he and my (not-so-old) old law school professor, Doug Baird, would be duking it out at the University of Chicago Faculty Law Blog over issues raised in Professor LoPucki's recent paper (written with empiricist Joseph W. Doherty) entitled Bankruptcy Fire Sales, 106 Mich. L.R. 1 (2007).  The article was posted on SSRN last April, accompanied by the following abstract:

For more than two decades, scholars working from an economic perspective have criticized the bankruptcy reorganization process and sought to replace it with market mechanisms. In 2002, Professors Douglas G. Baird and Robert K. Rasmussen asserted in The End of Bankruptcy (pdf), an article published in the Stanford Law Review, that improvements in the market for large, public companies had rendered reorganization obsolete.  Going concern value could be captured through sale.

This article reports the results of an empirical study comparing the recoveries in bankruptcy sales of large public companies in the period 2000-2004 with the recoveries in bankruptcy reorganizations during the same period.  We find that, controlling for company values reported at case commencement, pre-filing operating profits, and post-filing operating profits, the recoveries in reorganization cases are more than double the recoveries from going concern sales.  We attribute the low recoveries in sale cases to continuing market illiquidity and the corruption of the bankruptcy process by competition among bankruptcy courts for large, public company cases.

We also find that bankruptcy recoveries are higher in years when merger and acquisition activity is higher for reasons other than high stock prices.  Lastly, we find that bankruptcy recoveries are higher when debt capacity in the debtor's industry is lower – the opposite effect predicted by Professors Andrei Shleifer & Robert W. Vishny in their landmark article in 1992 [entitled Liquidation Values and Debt Capacity: A Market Equilibrium Approach, 47 J. Fin. 1343 (1992)].

This "H2H"--as the U of C Law Blog calls the "head to head" grudge match--is sure to be a classic, as Professors LoPucki and Baird have been sparring over bankruptcy's most fundamental questions since 1990, when Professor LoPucki first challenged Professor Baird's "faith" in the free market's ability to properly value a company's worth in chapter 11.  See LoPucki, Bargaining Over Equity's Share in the Bankruptcy Reorganization of Large, Publicly Held Companies, 139 U. Penn. L. Rev. 125 (1990).  Their ongoing debate remains central to bankruptcy jurisprudence, as noted in this last post, with recent opinions by the Seventh Circuit's Judge Cudahy (while sitting by designation as a Third Circuit judge in VFB LLC v. Campbell Soup Co.) and Judge James M. Peck (in the Iridium bankruptcy) suggesting that judges, by placing a heavy burden of proving market folly on the party challenging the market's indication of value, are beginning to share Professor Baird's faith in free market valuations.

Professor LoPucki also took issue early on with the idea that chapter 11 should be eliminated and companies forced instead to liquidate expeditiously in chapter 7, an idea he attributes first to a 1986 article by Professor Baird (and Professor Baird's former writing partner, Thomas H. Jackson).  See LoPucki, Strange Visions in a Strange World:  A Reply to Professor Bradley and Rosenzweig, 91 Mich L. Rev. 79 n.2 (1992); and LoPucki & Whitford, Corporate Governance in the Bankruptcy Reorganization of Large, Publicly Held Companies, 141 Univ. Pa. L. Rev. 669 (1993).

Professor LoPucki stepped up the rhetoric in the debate in 1994, paying Professor Baird this back-handed compliment at an interdisciplinary conference at Wash. U. Law School:  "Without the unrealistic work done by Baird and Jackson during the 1980s, bankruptcy scholarship might not have gone beyond the relatively shallow analysis produced by doctrinalism in the 1970s."  See LoPucki, Reorganization Realities, Methodological Realities, and the Paradigm Dominance Game, 72 Wash. U. L. Q. 1307, 1312 (1994).

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