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It’s Not Final, and That’s Final: The Ninth Circuit’s Gugliuzza Decision

April 11, 2017

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appellate court concept with gavel. 3D rendering

As we have noted in another post, Non-Final Finality: Does One Interlocutory Issue Resolved in a Bankruptcy Court Order Render All Issues Addressed in the Order Non-Appealable?, not all orders in bankruptcy cases are immediately appealable as a matter of right.  Only those orders deemed sufficiently “final” may be appealed without additional court authorization.  See 28 U.S.C. § 158(a)(3) (interlocutory order may be appealed only with leave of the court).  Appeals from “final” bankruptcy-court orders usually are first heard by a United States district court or a bankruptcy appellate panel (a “BAP”), which have jurisdiction “to hear appeals from final judgments, orders, and decrees” from bankruptcy courts.  Id. § 158(a)(1).

What happens when a district court or a BAP properly exercises appellate jurisdiction over a bankruptcy court’s order, and ultimately remands the matter back to the bankruptcy court for further fact finding?  Is the district court or BAP’s appellate mandate sufficiently final to appeal as a matter of right to the Circuit Court of Appeals?  The Ninth Circuit Court of Appeals recently wrestled with this question in In re Gugliuzza, Case No. 15-55510 (9th Cir. Mar. 24, 2017).

Bullard v. Blue Hills Bank

In Bullard v. Blue Hills Bank, the United States Supreme Court held that a bankruptcy court’s order is final only if it “alters the status quo and fixes the rights and obligations of the parties.”  Bullard v. Blue Hills Bank, 135 S. Ct. 1686, 1689 (2015).  An order denying plan confirmation generally does not satisfy this standard, as long as it leaves the debtor free to propose another plan, because “[t]he parties’ rights and obligations remain unsettled” and the “possibility of discharge lives on.”  Id. at 1693.  In the Supreme Court’s view, “final” simply “does not describe this state of affairs.”  Id.

The Court also observed that every “climb up the appellate ladder and slide down the chute can take more than a year.”  Id.  Given this reality, it would “not make much sense to define the pertinent proceeding so narrowly that the requirement of finality would do little work as a meaningful constraint on the availability of appellate review.”  Id.

Despite providing relative clarity on the non-finality of orders denying plan confirmation, Bullard did not create a new set of bright-line rules.  Rather, it attempted to provide relative guideposts for the rules of finality, which the Court acknowledged “are different in bankruptcy.”  Id. at 1692.  Whether Bullard actually provided meaningful overall clarity remains subject to debate.  Furthermore, Bullard did not directly address the finality of a district court or BAP’s intermediate appellate ruling when the mandate remands a matter back to bankruptcy court.

The Ninth Circuit’s Prior Decisions:  In Conflict with Bullard?

The Ninth Circuit Court of Appeals recently wrestled with the apparent tension between Bullard and the Ninth Circuit’s earlier decision of In re Bonner Mall Partnership, 2 F.3d 899 (9th Cir. 1993).  In Bonner Mall, the Ninth Circuit held that, under certain circumstances, it could exercise jurisdiction over an appeal of a decision by a district court sitting in an appellate capacity “even though a district court has remanded a matter [to the bankruptcy court] for factual findings on a central issue.”  Under Bonner Mall, a district court’s appellate ruling is sufficiently final, despite a remand, if the central issue “is legal in nature and its resolution either 1) could dispose of the case or proceeding and obviate the need for factfinding; or 2) would materially aid the bankruptcy court in reaching its disposition on remand.”  Bonner Mall, 2 F.3d at 904.

Later, in the post-Bullard decision of Landmark Fence, the Ninth Circuit questioned whether the “flexible approach” to finality remained valid after BullardIn re Landmark Fence, 801 F.3d 1099, 1103 n.1 (9th Cir. 2015).  The court went so far as to observe that the “flexible test is arguably in conflict with the Supreme Court’s decision in Connecticut National Bank v. Germain, 503 U.S. 249, 253 (1992),” as well as BullardId.  The Ninth Circuit declined to reconcile the apparent doctrinal conflict, however, because even the flexible approach was “stretched beyond its breaking point” by the appeal in that case, which involved “a district court order that includ[ed] a remand to the bankruptcy court with explicit instructions to engage in ‘further fact-finding.’”  Id. at 1101.

In evaluating appellate jurisdiction over district court order in that case, the court analyzed four factors:  “(1) the need to avoid piecemeal litigation; (2) judicial efficiency; (3) the systemic interest in preserving the bankruptcy court’s role as the finder of fact; and (4) whether delaying review would cause either party irreparable harm.”  Id. at 1102.  The Ninth Circuit ultimately dismissed the appeal, observing that when “an intermediate appellate court remands a case to the bankruptcy court, the appellate process likely will be much shorter if we decline jurisdiction and await ultimate review of all the combined issues.”  Id. at 1103.

In re Gugliuzza:  A New Per Se Rule?

Against this backdrop, in Gugliuzza, the Ninth Circuit considered whether a district court’s order was sufficiently final to confer appellate jurisdiction under 28 U.S.C. § 158(d)(1), when the order affirmed in part and reversed in part a bankruptcy court’s grant of summary judgment, and remanded a discrete issue to the bankruptcy court for further fact finding.  The appeal arose from an adversary proceeding, in which the Federal Trade Commission (“FTC”) obtained a judgment of non-dischargeability against the debtor under 11 U.S.C. § 523(a)(2)(A), on a motion for summary judgment.  The debtor appealed the judgment to the district court, which affirmed in part, reversed in part, and remanded for factual findings on one of the counts asserted by the FTC.

The debtor appealed the district court order to the Ninth Circuit, arguing that despite the remand, the district court’s ruling was immediately appealable under Bonner Mall and its progeny.  The debtor argued that under Bonner Mall, the Ninth Circuit could exercise appellate jurisdiction because the appeal raised “purely legal issues” and a decision could materially aid the bankruptcy court in its decision-making process on a central issue in the case.

The FTC, by contrast, argued that Bullard and Landmark Fence required dismissal of the appeal, so that the bankruptcy court could promptly consider the issue on remand.  The Ninth Circuit agreed, holding that the Bullard and Landmark Fence decisions “clearly limit the applicability of the Bonner Mall line of cases.”  Bullard established that orders may be considered “final” for purposes of Section 158(d) “only when they ‘finally dispose of [a] discrete dispute[] within the larger case.’”  A decision that “remands a case for further fact-finding will rarely have this degree of finality, unless the remand order is limited to ministerial tasks.”

Thus, to the extent Bullard did not already do so, the Gugliuzza decision effectively overrules Bonner Mall and its progeny.  In addition, although the Ninth Circuit professed consistency between its remaining “longstanding precedent” and Bullard, the Gugliuzza decision arguably creates a new bright-line rule that alters, or at least simplifies, the four-factor test for finality previously employed in Landmark Fence and other decisions.  That rule may be summarized as follows:  A decision that remands a case for further fact-finding is not final under 28 U.S.C. § 158(d) unless the remand order is limited to purely ministerial tasks.

Gugliuzza appears to bring additional clarity to a narrow set of cases involving remand orders at the intermediate appellate level.  It remains to be seen whether the Ninth Circuit and other courts will ultimately revise or replace their “flexible standard” tests in other contexts.  Bankruptcy and appellate practitioners should carefully consider finality issues with every bankruptcy court order and at every stage of a bankruptcy appeal, and would be wise to keep an eye on this evolving doctrine.

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Non-Final Finality: Does One Interlocutory Issue Resolved in a Bankruptcy Court Order Render All Issues Addressed in the Order Non-Appealable?

August 22, 2016

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appellate court concept with gavel. 3D rendering

As the Supreme Court recently reminded us in Bullard v. Blue Hills Bank, not all orders in bankruptcy cases are immediately appealable as a matter of right.  Only those orders deemed sufficiently “final” may be appealed without leave under 28 U.S.C. § 158(a).  In light of the numerous parties and controversies involved in a typical bankruptcy case, determining whether an order is “final” can be complicated affair.  Thus, finality in bankruptcy is a “flexible standard” applied to discrete disputes that arise within the larger case. See generally 14 Wright, Miller & Cooper, Federal Practice and Procedure § 3926.2 (collecting examples of final and non-final orders).  That flexibility, however, has led to disparate results.

In In re Wolff, B.A.P. No. CO-16-016 (B.A.P. 10th Cir. Jul. 18, 2016), the Tenth Circuit Bankruptcy Appellate Panel (the “BAP”) dismissed an appeal filed by debtors Deris and Cheryl Wolff (the “Debtors”) on the grounds that the appeal was taken from an order that was interlocutory, and thus, non-appealable absent leave.  That order resolved two issues, one of which was interlocutory and the other of which ordinarily would be entitled to immediate appellate review.  The Wolff decision is an interesting example of what can occur when a single bankruptcy-court order resolves a typically final matter in connection with a non-final one.

An Order Determining Property of the Estate Is Interlocutory?

In Wolff, the Debtors filed a voluntary chapter 13 case, but their case was later converted to chapter 7.  The Debtors’ schedules listed two parcels of real property as assets, but the Debtors failed to claim either property as exempt.  The chapter 7 trustee filed two separate motions seeking approval to retain real estate brokers to market the properties.  The Debtors objected to the motion as to the first property and filed a motion for reconsideration of the order granting retention of the broker as to the second property.  In both the objection and the motion to reconsider, the Debtors argued that the properties could not be sold because they were not property of the bankruptcy estate, and that any post-petition appreciation in value belonged to the Debtors rather than the estate.

The bankruptcy court entered an order overruling the objection, denying the motion for reconsideration, and approving the trustee’s retention of a real estate broker to market and sell both properties. The bankruptcy court rejected the Debtors’ arguments that the properties were not part of the estate because 11 U.S.C. § 348(f)(1) provides that when a case is converted from chapter 13 to chapter 7, “property of the estate in the converted case shall consist of property of the estate, as of the date of the filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion.”  Because the two parcels of real property were scheduled as estate property on the date of filing, they remained estate property upon conversion.  Moreover, the Debtors’ failure to claim any exemptions relating to the properties was binding upon them, and was ultimately inapposite, as the court concluded that the trustee could sell the property even if the exemption had been claimed.  The Debtors appealed.

On appeal, the BAP considered whether the order was interlocutory because it involved the employment of a broker, or whether the bankruptcy court’s ruling on property of the estate rendered the entire order final for appeal purposes. The BAP reasoned that an interlocutory order is one that constitutes part of the “process” of a bankruptcy case but does not otherwise substantively alter the rights of the parties.

Despite the ruling regarding property of the estate, the BAP concluded that the order was not final and appealable as a matter of right. Sales of estate property in a chapter 7 case involve a two-step process, according to the BAP.  First, the trustee must retain a broker with court approval.  Second, only after that broker has marketed the property in question, the trustee must file a separate motion for approval of the sale.  In this case, the bankruptcy court’s order represented only the first step in the process.  The BAP concluded that the Debtors’ rights were not substantively affected by the order because any decision as to the sale of the properties would require a separate motion, notice, and hearing.  “As a result,” concluded the BAP, “Appellants’ rights in the Colorado and Nebraska Properties, and any equity associated therewith, are not yet altered.”  The BAP also indicated that the Debtors would be able to seek review of “prior intermediate orders” if an order approving a sale were eventually entered.

Analysis and Conclusion

The Wolff decision is puzzling.  It certainly did not help the Debtors that they failed to claim the real property as exempt, and that their substantive arguments on the property-of-the-estate issue appeared to be weak.  Still, it is difficult to conceive of an order more “final” than one determining that an asset is property of the estate within the meaning of section 541 of the Bankruptcy Code.  Under the Wolff decision, such a determination may be deemed non-final if it is tied to a matter (e.g., retention of a broker) typically the subject of interlocutory orders.  Crafty litigants could use such a rule to deprive affected parties of immediate appellate review, even with respect to key issues if they are included in an order resolving other, interlocutory matters.

Moreover, the BAP failed to consider the impact of its ruling on the value of the properties. No rational buyer will bid as much when they learn that their bid could be held up in litigation, and appeals, over whether the property can be sold at all.  Buyers will discount their price for the likely attendant risk, and the fact that they may be “on hold” for months or years of litigation and appeals over a threshold issue.  If that threshold issue had been resolved, much of the cloud would be lifted over the property, and buyers obviously tend to bid more for a certainty.

In Wolff, the BAP appears to have justified the inclusion of a section 541 finding in a broker’s retention order on the rationale that if an asset “is not property of the estate, generally there would be no reason for a trustee to retain a broker to sell the property and the bankruptcy court would not approve a sale.”  But that somewhat circular reasoning does not consider the procedurally proper (and arguably more orderly) possibility of resolving the threshold question—whether the real estate was property of the estate—in an adversary proceeding and deferring the motion to retain a broker until after resolution of that fundamental question.[1]  As a middle ground, the court perhaps could have approved the broker’s retention conditionally, pending a ruling on property of the estate.  In fairness, the Debtors do not appear to have raised these possibilities, nor did they insist that resolution of a section 541 issue requires a properly filed adversary proceeding.  Had they done so, the result may have been quite different.

As the Wolff decision demonstrates, litigants in bankruptcy cases would be wise to identify important issues that a debtor, trustee, or other adverse party might attempt to bootstrap into a non-final order.  In particular, litigants should identify and zealously guard those matters subject to adversary-proceeding requirements under Federal Rule of Bankruptcy Procedure 7001.  Absent resolution of “final” matters in separate proceedings and orders, litigants could find themselves forced to await appellate review on key issues until far later in a bankruptcy case, when subsequent events could weaken the relevance of their appeal or simply render the appeal moot.

[1]    Contested issues regarding property of the estate generally require an adversary proceeding and all of the procedural safeguards associated therewith. See Fed. R. Bankr. P. 7001(2).

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Improper Use of Contract Attorneys, Failure to Disclose Terms – This Case Has It All.

July 18, 2016

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business concept/dropping coins

Estate professionals are under continued scrutiny. Unlike other professionals, getting paid is not simply a matter of sending a bill.  The bankruptcy court, appropriately so, closely oversees the amount and timing of payment of estate professional fees.  And proper disclosure under the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) is critical for all estate professionals.

Recently, in In re Wilkerson, Case No. 14-00582, Docket Entry No. 127 (Bankr. D.D.C. Jun. 13, 2016), the Bankruptcy Court declined to award a significant portion of attorneys’ fees and expenses to counsel for a chapter 13 debtor due to counsel’s failure to disclose the work being done by a contract attorney under Bankruptcy Rule 2016(b).  This lack of disclosure infected other portions of counsel’s fee application as well.  The court bound counsel to his initial Rule 2016 statement wherein he designated the representation as a “flat fee” arrangement.  Thus, bankruptcy counsel was partially precluding from amending the representation to charge by the hour except with respect to one “extraordinary” matter, as a sanction for his failure to adequately disclose the use of the contract attorney, and failure to disclose a separate retainer agreement with the debtor.

Use Of A Contract Attorney Requires Additional Disclosures – And You May Be Limited To What You Pay The Contract Attorney, Without Upcharge.

Debtor’s counsel employed a contract attorney to assist with a bankruptcy appeal. Counsel hired the contract attorney at a rate of $65 per hour, but charged the estate $300 per hour for the work she completed.  The chapter 13 trustee objected to the fees for the contract attorney because (i) it constituted an impermissible fee sharing arrangement under 11 U.S.C. § 504(a); (ii) debtor’s counsel failed to disclose in its Bankruptcy Rule 2016 statement that the contract attorney would be representing the Debtor; and (iii) charging the estate $300 per hour for her work was impermissible “up-billing.”

The court rejected the first argument, finding that the contract attorney arrangement was not a fee sharing arrangement under Section 504(a) because debtor’s counsel was obligated to pay $65 per hour to the contract attorney regardless of whether he was able to recover such compensation from the bankruptcy court.

As to the second issue, the court ruled that debtor’s counsel violated Bankruptcy Rule 2016(b) by failing to disclose the contract attorney’s involvement. This rule does not require the disclosure of the use of a “regular associate” as defined by Bankruptcy Rule 9001(10); however, the court found that the contract attorney did not meet the definition of a “regular associate.”  While the court left open the possibility that a contract attorney could possibly be considered a regular associate of a firm under Bankruptcy Rule 9001(10), this contract attorney did not meet the definition because her employment with the firm was “sporadic” and “not on a regular basis,” despite that this attorney worked with debtor’s counsel “fairly often,” including in 4-5 cases over the past year.  Also, the contract attorney had her own single-shingle firm that the court considered her to be “regularly” involved with, and she only assisted debtor’s counsel from time to time.  As such, the failure to disclose the engagement of the contract attorney was a violation of Bankruptcy Rule 2016(b).  (We note that compliance with the US Trustee’s form fee application for large cases requires disclosure of hours by contract attorneys and staff attorneys, see pages 22 and 28 of this document, so you may as well disclose the existence of any contract attorneys or staff attorneys up front for that reason as well.)

As a corollary, the court limited the recovery of attorneys’ fees associated with the contract attorney’s work to the $65 per hour that she was actually compensated by debtor’s counsel. Counsel’s argument that $300 was the prevailing rate for her services was rejected.  The court found that such rationale would only hold if the contract attorney were an attorney within debtor’s counsel’s firm.  However, because counsel “dealt with her as an independent contractor, [and] incurred none of the expenses that would be associated with an attorney employed in his firm,” he ultimately “failed to carry his burden of proving that he incurred any meaningful extra cost beyond the $65 per hour” paid to the contract attorney.

Parties May Be Precluded From Changing A Representation From Flat Fee To Hourly Depending.

Lastly, the court in part held counsel to the flat fee arrangement disclosed in his initial Bankruptcy Rule 2016(b) statement, which designated the representation of the debtor as a “flat fee” arrangement. Counsel filed an amended Rule 2016 statement setting forth a changed agreement with the debtor to an hourly representation on the grounds that the work completed in the case far exceeded the original amount of work anticipated when the flat fee arrangement was first established, largely resulting from the appeal for which the contract attorney was engaged.

While generally a court may permit an attorney to amend its Rule 2016 statement to reflect a change in the agreement as to the payment of attorneys’ fees, the court stated that holding counsel to its original fee arrangement in this case would be an appropriate sanction for his failure to adequately disclose his compensation arrangement with the debtor. In particular, not only did counsel suffer from the failure of disclosures as set forth above, but he also failed to disclose a retainer arrangement with the debtor.  That said, the court did allow additional compensation for elements of the fee application relating to the appeal, as they derived from an “unsettled” area of law, and those fees could not have been reasonably anticipated in a typical chapter 13 representation.  (We note as well that under ASARCO, discussed in The Bankruptcy Cave at length here and here and here, counsel would also not be entitled to be paid for its fees in litigating all these fee issues – that is another strong incentive to get the disclosures right the first time!)

Conclusion.

The Bankruptcy Code and Bankruptcy Rules set forth myriad important requirements of which attorneys and parties-in-interest must be mindful when pursuing their rights in a bankruptcy court. This case is an important reminder for any estate professional to think very hard about anything unusual about the engagement, and how to tailor and expand the required disclosures up front, or promptly upon any change in circumstances, in order to avoid a loss of fees (and face).

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When Going “All In” Pays Off: The Third Circuit Upholds The Decision of the Bankruptcy Court in In re Trump Entertainment Resorts, Inc.

April 11, 2016

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In an appeal certified directly from the Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) to the Court of Appeals, the Third Circuit issued a ruling upholding Judge Kevin Gross’s decision that a chapter 11 debtor-employer may reject the continuing terms and conditions of a collective bargaining agreement (“CBA”) under 11 U.S.C. § 1113, despite that the CBA expired post-petition.

The Bankruptcy Court’s Decision

In December 2014, the Bankruptcy Cave first reported on the Bankruptcy Court’s decision in In re Trump Entertainment Resorts, Inc. (the “Bankruptcy Opinion”).  The controversy centered around whether provisions of the National Labor Relations Act (“NLRA”) that maintain the status quo of an expired CBA during negotiations for a new CBA mean that the expired CBA still exists as a contract that can be “rejected” under section 1113 of the Bankruptcy Code.  The Bankruptcy Opinion held in the affirmative – the Debtors could reject the expired CBA because section 1113 failed to distinguish between expired and unexpired CBAs.  The Bankruptcy Opinion was largely driven by practical factual considerations – the Union had engaged in “stiff-arm” negotiation tactics that left the Debtors with few choices, and absent the rejection of the expired CBA, the Debtors faced a complete shut-down, the loss of thousands of jobs, and the shuttering of the business.  The Debtors went “all in” on this poker hand, it was rejection or bust; the Bankruptcy Court agreed with the Debtors.

The Appeal

On appeal, In re Trump Entertainment Resorts, Case No. 14-4807 (3d Cir. Jan. 15, 2016), the Union centered its argument on a parallel to section 365, arguing that because a debtor may not assume or reject an expired executory contract under section 365, it also may not reject an expired CBA under section 1113.  However, the Third Circuit noted that due to the NLRA, the obligations of the expired CBA continue to burden the debtor (unlike that of a traditional executory contract).  In addition, Congress failed to include in section 1113 a distinction between expired or unexpired CBAs, and otherwise failed to address the continuing effect such agreements may have upon a debtor.  To that end, the court opined that Congress must have considered the overlapping impact of these federal statutory regimes.  The interpretation that permits a debtor to reject an expired CBA, held the Third Circuit, best balances a debtor’s ability to proceed through the protracted NLRA process with some speed, while still protecting workers by obligating the estate to honor the CBA’s provisions until there is a rejection.

The Third Circuit also noted the “exigencies” the Trump Debtors faced, which were significant factors in the Bankruptcy Opinion.  The Third Circuit noted that as a policy matter, it is preferable to preserve jobs through rejection rather than face the permanent loss of positions, and an entire business, by requiring debtors to continue to abide by the terms of an onerous CBA.

Analysis and Conclusion

Following the appeal, our initial analysis of the implications of this case appears to hold true.  The Third Circuit’s interpretation of section 1113 may be a boon to a would-be debtor that is laden with burdensome labor obligations, and is nearing the expiration of a CBA.  While outside bankruptcy a company would normally be required to bargain to impasse (a very time consuming endeavor), in bankruptcy court a company may be able to short-circuit this process and obtain rejection of the CBA, even where it expired post-petition.  As explained by the Bankruptcy Court and the Third Circuit, the ability of debtors to reorganize and emerge as operating companies, which is arguably the primary purpose of chapter 11, supports this interpretation of section 1113.

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Earth to Creditors: Triangular Payment Arrangements May Constitute “Reasonably Equivalent Value”

September 23, 2015

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Satellite Orbiting Earth.

The Eleventh Circuit Court of Appeals recently clarified the meaning of “reasonably equivalent value” in a complex fraudulent transfer case.  Its decision in In re PSN USA, Inc., Case No. 14-15352 (11th Cir. Sept. 4, 2015), provides particular insight on fraudulent transfers in the context of parent-subsidiary and other triangular payment arrangements.  The Eleventh Circuit held that even though the debtor, a cable television channel, was not a party to the underlying satellite services contract at issue, payments made from the debtor to the satellite services company pursuant to its parent company’s contracts constituted “reasonably equivalent value” and could not be avoided as constructive fraudulent transfers.

PSN USA, Inc. (the “Debtor”) operated the PSN Channel, a cable television station that broadcasted live and recorded sporting events throughout Latin America.  Pan America Sports Network International (“PSNI”) was a holding company that wholly owned the Debtor.  PSNI contracted with cable and satellite operators, who, in turn, offered and distributed the PSN Channel to subscribers in South America and the Caribbean.  PSNI paid a fee to the Debtor to operate the PSN Channel.  Although the Debtor was not a party to these cable and satellite contracts, the network’s policy and practice required the Debtor to cover all production expenses, including paying PSNI’s contractual obligations to cable and satellite operators.

Consistent with this arrangement, PSNI entered into several contracts with Intelsat Corporation and Intelsat International Systems, LLC (collectively, “Intelsat”) to broadcast the PSN Channel.  Between 2000 and 2002, the Debtor made a total of $3 million in payments to Intelsat under these contracts.  During this period, the Debtor became insolvent and, in March 2002, filed a voluntary bankruptcy petition.

Six years later, the PSN Liquidating Trust (the “Trust”) filed an adversary complaint against Intelsat alleging that the payments from the Debtor were recoverable as constructive fraudulent transfers pursuant to section 548 of the Bankruptcy Code and the Florida Uniform Fraudulent Transfer Act.  See 11 U.S.C. § 518(a)(1)(B) & (ii)(I); Fla. Stat. § 726.105(1)(b).  The Trust argued that the payments were avoidable fraudulent transfers because the Debtor was not a party to the satellite contracts, did not own the satellite services, and did not benefit from them.  Essentially, the Trust took the position that the Debtor received less than reasonably equivalent value in exchange for the transfers at issue.  According to the Trust, payment or assumption of a third party’s debt by an insolvent entity is per se a fraudulent transfer because it necessarily lacks adequate consideration.

The Eleventh Circuit Court of Appeals, however, rejected a per se approach and concluded that payments made to fulfill contractual obligations of third parties may not be fraudulent transfers where an economic benefit is directly or indirectly conferred upon the transferor.  In this case, although the Debtor was not a party to the satellite contracts of its parent company, the Debtor derived a benefit from those contracts.  Specifically, the satellite services permitted the Debtor to operate the PSN Channel, and the Debtor earned a service fee from PSNI from that operation.  This indirect benefit to the Debtor through PSNI was sufficient to satisfy the “reasonably equivalent value” requirement, and the Eleventh Circuit affirmed the bankruptcy court’s order that the Trust could not avoid the transfers.

As parent-subsidiary and other affiliate relationships are increasingly common, the shrewd practitioner needs to be aware of the potential virtues and pitfalls of triangular payment relationships, which almost certainly will be called into question as fraudulent transfers in the event of an insolvency.

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Rolling the Dice on Collective Bargaining Agreements in Bankruptcy: A Lesson From In re Trump Entertainment Resorts, Inc.

December 7, 2014

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In In re Trump Entertainment Resorts, Inc., a bankruptcy case currently pending before the United States Bankruptcy Court for the District of Delaware at Case No. 14-12103, the union at a famous Atlantic City casino made a bet on its ability to “hold up” the casino’s bankruptcy process and force hard line negotiations on an expired collective bargaining agreement. Ultimately, this gamble did not pay off, as the Honorable Judge Kevin Gross held that the casino was permitted to reject the expired collective bargaining agreement as an “executory contract” under the Bankruptcy Code. Put succinctly, the union’s negotiation tactics resulted in the loss of all benefits under the collective bargaining agreement for union members

While the holding in Trump is predicated on extreme factual circumstances, it serves as a reminder that parties seeking to “stiff-arm” negotiations may face serious repercussions, particularly in the context of bankruptcy.

Introduction

The circuits are split on the issue of whether a bankruptcy court retains jurisdiction to consider a motion to reject an expired collective bargaining agreement under 11 U.S.C. § 1113(c), or if a bankruptcy court lacks jurisdiction because the only duties following the expiration of a collective bargaining agreement are statutory (specifically, arising under the National Labor Relations Act (“NLRA”)), and thus, fall outside a bankruptcy court’s powers to accept or reject such agreements under section 1113. Weighing in on this issue, on October 20, 2014, Judge Gross entered an opinion (“Opinion”) in the Trump bankruptcy case finding that the Court retained jurisdiction to approve the rejection of an expired collective bargaining agreement under section 1113(c).

Facts

The Debtors, which include affiliates Trump Entertainment Resorts, Inc. and Trump Taj Mahal Associates, LLC (“Taj Mahal”) filed for bankruptcy protection on September 9, 2014, and shortly thereafter, on September 26, 2014, filed a motion (“Motion”) seeking to reject the collective bargaining agreement (“CBA”) between Taj Mahal and UNITE HERE Local 54 (“Union”) on the grounds that the affiliated Debtors would be forced to liquidate if the estates were not permitted to reject the CBA.

The Debtors operated two casinos, including the Taj Mahal Casino Hotel on the Atlantic City boardwalk. The Court characterized the Debtors’ financial situation as “desperate,” with EBITDA falling from $32 million to negative $6.1 million in 2013, and with the last twelve months EBITDA of negative $25.7 million as of June 30, 2014. Opinion, pp.2-3. At the time of the Motion, the Debtors only had enough cash to operate for two months and were unable to obtain debtor-in-possession financing.

Prior to bringing the Motion, the Debtors made various efforts to negotiate the terms of the CBA with the Union, which “stiff-armed” the Debtors and engaged in a “program of misinformation” designed to drive customers away from the Taj Mahal Casino. Opinion, p.7. The rejection of the CBA offered the Debtors a chance to save $14.6 million per year in payments thereunder, which, along with a handful of other concessions, would enable the Debtors to remain operational. Absent the rejection of the CBA, the Debtors would be forced to shut down by October 20, 2014, liquidate all assets, and lay off over 3,000 employees. Thus, the Debtors’ reorganization was “dependent on rejection of the CBA.” Opinion, p.8.

Analysis

When a collective bargaining agreement expires, the NLRA provides that an employer must maintain the status quo of the prior agreement while negotiating the terms of a new collective bargaining agreement. Under the Bankruptcy Code, a debtor’s ability to accept or reject a collective bargaining agreement is governed by section 1113. Courts have split on the issue of whether section 1113 applies “in a situation where a collective bargaining agreement has expired but the terms of the agreement remain in effect by virtue of the employer’s status quo obligations under the NLRA.” Opinion, p.10 (collecting cases).

In Trump, the Union argued that since the CBA had expired and the Debtors’ only continuing liabilities thereunder were statutory (e.g., imposed by the NLRA) rather than contractual, the expired CBA was no longer an “executory contract” that the Debtors were able to accept or reject under section 1113. The Court rejected the Union’s reading of section 1113, and found that both the language and legislative history of the provision established that the Court may enter an order rejecting the obligations under a CBA that continue in effect due to the NLRA in the wake of an expired collective bargaining agreement. Opinion, p.11. The Court also noted that the Union’s reading of section 1113 made “little sense,” and created an “illogical result” in which the Debtors would be forced to liquidate and all employees (including Union members) would lose their jobs. As such, the CBA would be of no effect.

Finally, the Court stated that there is little reason to distinguish between an expired and unexpired collective bargaining agreement, as the distinction would merely give labor unions the “power to hold up a debtor’s bankruptcy case.” Opinion, p.18. This “hold-up power . . . wholly ignores the policy and bargaining power balances Congress struck in Section 1113 and exalts form over substance.” Id. Given these factors, the Court found that it had jurisdiction under section 1113(c) to consider the Motion, which it ultimately granted.

Practical Implications

While the ruling in the Trump case seems to be driven largely by extreme facts (e.g., the reality of a complete shut-down absent the rejection of the CBA, and a Union that was unwilling to negotiate), the Opinion eliminates any distinction between an expired and unexpired collective bargaining agreement in bankruptcy. This holding may operate to shift the balance of negotiating power to debtors. In jurisdictions following this holding, bankruptcy may prove a particularly attractive option for a company that is heavily laden with union obligations and is facing difficult negotiations, as it enables the employer to short-cut its negotiation obligations under the NLRA, which otherwise requires the parties to negotiate to an impasse. Thus, parties seeking to agree to the terms of a collective bargaining agreement that is near expiration would be wise to factor this bankruptcy-effect on NLRA regulations as a risk in pushing off or shirking negotiation responsibilities.

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A debtor’s “increasing” burden of proof in the face of a motion for relief from stay

October 6, 2014

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In Ryerson, the court held that a debtor’s burden of showing a successful reorganization changes depending on the timing in the case. The court found that early in the case, a debtor must show that reorganization is “plausible,” near the expiration of the exclusivity period a debtor must show that reorganization is “probable,” and, after expiration of the exclusivity period, the debtor must show reorganization is “assured.”

I. Short Factual Background.

In 2003, the debtor, a real estate developer, used funds from a line of a credit to purchase acres of contiguous lakefront land on Lake Coeur d’Alene in Idaho. The debtor’s obligations under the line of credit were restated and evidenced by three promissory notes secured by liens on the property. In 2013, the debtor defaulted on his obligations and filed for chapter 11 relief less than two weeks prior to the scheduled foreclosure sale for the property. Twenty-six days after the petition date, the lender requested relief from the automatic stay under Section 362(d)(2) to pursue foreclosure on the property.

II. Legal Discussion.

The court first examined the value of the property and the various claims against the property to determine if the debtor lacked equity. The court found that after taking into considering the lender’s claim, various judgment liens, and claims for unpaid real property taxes, the debtor lacked equity in the property.

The court cited United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 375-76 (1988) for the proposition that after the party seeking relief from the automatic stay demonstrates the debtor lacks equity in the property, the burden then shifted to the debtor to show both a “reasonable possibility of successful reorganization within a reasonable time” and “if there is conceivably to be an effective reorganization, this property will needed for it.” Id. Although acknowledging that a relief stay hearing should not be converted into a confirmation hearing, the court stated that the “effective reorganization is a moving target, which is more difficult to attain as the chapter 11 case progresses” and that the “debtor’s burden increases from showing a successful reorganization is ‘plausible’ early in the case, to showing reorganization is ‘probable’ near the expiration of the exclusivity period, and finally to showing reorganization is ‘assured’ after the exclusivity period expires.” In re Ryerson, 2014 WL 642876, at *7 (quoting In re Sun Valley Newspapers, Inc., 171 B.R. 71, 75 (B.A.P. 9th Cir. 1994)).

In deciding which standard to apply, the “plausible” standard—reorganization is “plausible” early in the case—the “probable” standard—reorganization is “probable” near the expiration of the exclusivity period—or the “assured” standard—after the exclusivity period expired, reorganization must be “assured”—the court noted that the lender had filed its relief stay motion only twenty-six days after the petition date, but by the time the court heard the motion, the exclusivity period had expired and the debtor had filed a plan of reorganization. The court held, however, that the debtor had not carried its burden even under the least stringent “reorganization is plausible” standard.

The proposed plan of reorganization failed to address key issues, including, among other things, the lender’s ability to credit bid and the logistics of payment of claims from the sale of the property in question while simultaneously attempting to reserve funds to later attack lender’s claim. Additionally, the proposed plan was predicated on using proceeds from the sale of the property to pay other creditors; however, the evidence established that the property would not generate value beyond the amount of the secured claims.

III. Conclusion.

This case will be helpful in the representation of lenders, particularly in single asset real estate cases where the debtor under Section 362(d)(3) must either begin making adequate protection payments or file a plan of reorganization that has a reasonable likelihood of being confirmed within a reasonable time, because it holds that further along in a bankruptcy case, it becomes more difficult for a debtor to demonstrate the likelihood of a successful reorganization.

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