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Some Much Needed Transparency Required on Liquidating Trustees, Liquidating Trusts, Plan Documents, and Other Post-Confirmation Matters

July 10, 2016

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We at The Bankruptcy Cave applaud the recent ruling by Judge Whipple of the Bankruptcy Court for the Northern District of Ohio, seeking to make the post-confirmation parties, processes, and procedures far more transparent. In In re Affordable Med Scrubs, LLC,[1] Judge Whipple declined to approve a disclosure statement for a secured creditor’s liquidating plan.  The key deficiencies were as follows:

 

  1. Disclosure Must be Provided about the Liquidating Trustee: While the secured creditor’s disclosure statement did state who the liquidating trustee would be, it provided no disclosures about the putative trustee’s connections to key creditors and other parties in interest. We applaud this effort to require disclosures about a proposed liquidating trustee or plan administrator. The selection of a liquidating trustee or plan administrator is a murky process – at best, it is based on some vague (and undisclosed) considerations of pricing and experience of the individual or company that will serve in this role.  At worst, selection of a liquidating trustee or plan administrator may reek of “payola,” favors being returned, or other completely inappropriate (and also undisclosed) factors.  It is not much to ask, at all, for any proposed post-confirmation parties to make a full disclosure under Bankruptcy Rules 2014 and 2016.

 

  1. The Same Disclosure Must be Made About any “Plan Oversight Committee”: See above – the same rules apply to Oversight Committees or other parties involved in supervising post-confirmation actions.

 

  1. Better Disclosure of Litigation Claims Against Key Parties: The Affordable Med Scrubs disclosure statement also did not clearly deal with potential claims against the largest creditor (which is not very surprising, as the largest creditor was the party submitting the disclosure statement).  References, cross-references, and unclear descriptions of claims don’t help anyone – plan proponents should carefully and plainly describe in one place in the disclosure statement what they know about various claims, and whether they plan on pursuing them or recommending that the liquidating trustee pursue them (or not pursue them).  No one should be surprised later that a claim is brought, or that a claim against a key party is not brought by the Liquidating Trustee (see above, in relation to the risk that side-deals may be involved in selection of Liquidating Trustees or Oversight Committees).[2]

 

  1. The Liquidating Trust Agreement and Other Key Documents Should be Filed with the Disclosure Statement: We at The Bankruptcy Cave are increasingly annoyed with the massive dump of “plan documents” being filed 5-10 days before confirmation.  The Affordable Med Scrubs court was not pleased with the failure of the parties to file the proposed Liquidating Trust agreement with the disclosure statement.  This is particularly important as such agreement often has key terms on the authority of the liquidating trustee, fees paid to the liquidating trustee and his or her professionals, and other items about which creditors should be aware (some or all of which, such as post-confirmation professional fees, may be shielded from future court or creditor scrutiny altogether).

 

This is an important case on issues that are not typically addressed. We look forward to a raising of the bar in our collective practices to require more disclosure of post-confirmation parties, how they came to be chosen and their connections with creditors and other parties in interest, and expected post-confirmation events and claims.

[1]           Case No. 15-33448, Bankr. N.D. Ohio, Order Disapproving Disclosure Statement, Docket No. 267 (July 5, 2016).

 

[2]           We don’t intend to imply, at all, that anything improper was going on among the parties in the Affordable Med Scrubs case – many of the deficiencies the court notes with the disclosure statement could simply be oversight, or a desire for expediency.  The Affordable Med Scrubs court does not even hint at any impropriety, and we didn’t see any in the facts at all – just a lack of disclosure.  But we have seen other cases in which substantial litigation claims are not brought, or settled for small amounts, as to creditors that had a major role in selecting the parties that will control those very same post-confirmation events.

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The A++, Guaranteed to Go Smoothly and Make You Look Like You Do This All the Time, Timeline and Checklist to Prepare to Take a Deposition

June 16, 2016

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Editor’s Note:  If you would like a copy of this document in MS Word (we know the font on this blog is hard on the eyes, we are working on it I swear, but in the meantime we are happy to send you our forms or checklists in Word), then please feel free to contact either of the authors, mark.duedall@bryancave.com or leah.fiorenza@bryancave.com.  And if you find this helpful, please check out the other “A++ Forms and Resources” we have posted to the blog, using the “Categories” drop down menu at the main page or clicking here and here.  Coming up next week:  another comprehensive checklist for preparing and filing a complaint.

The Master Deposition Timeline and Checklist

Two Weeks before Issuing the Subpoena (if you are issuing a subpoena to a non-party)

  • Please remember to run conflicts on every witness before you issue a subpoena to them. Failure to do so can be a very serious problem for you, and your Firm; it is a real problem to subpoena a client.

One Week before Issuing the Subpoena / Notice of Deposition

  • Request the check for the subpoena in advance of the date you intend to serve the subpoena. The check should include both mileage (round trip) and the witness fee.
  • Note recent changes to Federal Rule 45:
  • A subpoena must be issued from the district where the deposition will be held or where the production of documents will be made.
  • Make your court reporter arrangements now, especially if it is an out-of-town deposition. Do not call another law firm or whomever you know in that town the day before issuing the subpoena asking for a room – do this well in advance of finalizing the subpoena.
    • N.B.  If anyone ever calls you asking if they can use a conference room for a deposition in a case they are working on, your Firm likely has very strict policies on this. At an absolute minimum, you must run and clear conflicts on every party to your colleague’s case, and on the witness and his / her affiliation. (It would not do at all to host a deposition for someone that is suing a client of your Firm.) Then, call your office manager or office managing partner and obtain his or her express permission.
  • We have had great nationwide success using Will Ward of Courtroom Sciences Inc., 877-784-0004 (work), 706?581-6293 (cell), wward@courtroomsciences.com. He can arrange a court reporter anywhere in the country, conference rooms out of town, interpreters, etc.
  • However, determine whether your client requires a certain court reporting company and, if so, use that company!

Things to do on the Saturday or Sunday before the deposition (this really needs to be done on a weekend – you need several hours, uninterrupted, to complete this): 

  • Prepare (and put in order) all exhibits for the deposition. 
    • Your exhibits should include, at a minimum:
      • The subpoena or notice of deposition (almost always, this is exhibit 1, and starts the deposition).
      • Copies of any discovery responses certified or signed by the deponent. It is very important that you ask the deponent if s/he reviewed, approved, and then signed off on the answers. Many times, s/he did not, just signing at the direction of an attorney, or s/he only reviewed the responses in a cursory fashion. This is very important to cover in the deposition.
  • Labeling Exhibits
    • Avoid duplicative or confusing labels.
    • Think about using them at trial; try not to have labels change, (although numbers may, as that is somewhat unavoidable).
    • Check local rules or any applicable scheduling or discovery order; otherwise, do it the way it makes sense to you.
    • Think about future depositions, clarity, and simplicity.
  • Is there anything else that you need as a resource for the deposition (we suggest you bring a separate notebook containing each of these):

Things to do two days before the deposition:

  • Finalize your exhibit folders or binders!
  • Finalize your exhibit folders or binders!!
  • Please, we are begging you, at least two days before the deposition, finalize your exhibit folders or binders!!! 
    • In other words, you really cannot wait until the day before the deposition to finalize your exhibits. You will need multiple sets (see below), and the day before should be final prep, not hunting down documents and integrating them into your deposition plan and questioning.
    • This is especially true is the deposition is out of town. It is impossible to guarantee that your full exhibit sets will arrive by 8 am the morning of the deposition. The only other options, carrying multiple sets of your exhibits (you need at least four – see below) on the plane, is not advisable.
  • If the deposition is out of town, send all copies off by overnight mail to a trusted soul at the location of the deposition, except your master set that you carry with you. Note – you are sending these out two (2) days in advance of the deposition.
    • Number of copies: at least four.
      • Deponent;
      • Court reporter (optional, but highly recommended);
      • Your master set; and
      • A complete set for the attorney defending the deposition.
  • Keep exhibits orderly and accessible.  Methods vary by preference (e.g., binders, folders), but choose a method that works for you and that you have tried in advance in other depositions or with a colleague.
  • Binders truly are preferable; pulling documents out of folders, and circulating them to all parties, will really interrupt your flow and slow you down.
    • The only problem with binders is that you may not use some of the items in the binders, and the deponent or the other side will wonder why. Let them wonder. We still think flipping documents in a binder is far easier than taking out a folder, getting copies, and the attendant delay of circulating its contents to everyone. 

Things to do the day before the deposition:

  • Have your secretary re-verify that:
    • the court reporter is coming.
    • all conference room arrangements are complete, including drinks (including a break out room if you want one for yourself and client, and/or for the other side).
    • the names of all parties attending (including the court reporter) are entered into building security.
    • N.B. It is not customary to order lunch for anyone, people usually go out on their own.

Matters of Form During the Deposition

  • Beware of letting documents control the deposition so much that they impede quality testimony and/or constrain your ability to interrogate the witness.
  • Beware of letting documents become a distraction or a waste of time.
  • The court reporter is referred to as “Mr. Court Reporter” or “Ms. Court Reporter.”
  • Provide the court reporter with a list of names and/or words that are hard to spell, that you expect will come up during a deposition.
  • Take a break every single hour, no matter what.
  • Be careful with the use of pronouns. Using pronouns can often make a statement unclear and it can make quoting from the transcript more difficult and less clear. If you can, don’t ever use pronouns at all, always “Ms. Smith” or “Steve” or other proper names.
  • Go off the record absolutely as much as you need to, to clarify things, head off conflict or inappropriate behavior, re-instruct the witness (if s/he keeps talking over you or not waiting for you to finish, a constant problem), or deal with other matters.
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High Court Broadens the Definition of “Actual Fraud” under Section 523(a)(2)(A)

May 17, 2016

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The Supreme Court’s Decision:

On May 16, 2016, in Husky International Electronics, Inc. v. Daniel Lee Ritz, Jr., Case No. 15-145, the Supreme Court held that the term “actual fraud” in § 523(a)(2)(A) of the Bankruptcy Code encompasses fraudulent conveyance schemes, even if the scheme does not involve a false representation to the creditor.  In reversing the judgment of the Fifth Circuit, the Supreme Court’s ruling settled a split among the circuits regarding whether “actual fraud” under § 523(a)(2)(A) requires a misrepresentation or misleading omission to the creditor. Compare In re Ritz, 787 F.3d 312 (5th Cir. 2015) with McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000), and Sauer V. Lawson, 791 F.3d 214 (1st Cir. 2015).

The Appeal:

On March 1, 2016, the Supreme Court heard arguments as to whether the “actual fraud” exception to discharge under § 523(a)(2)(A) applied narrowly (i.e. only when the debtor has made a false representation) or broadly (i.e. in situations where the debtor did not make a misrepresentation but entered into a scheme that was intended to defraud a creditor).

Between 2003 and 2007, Husky International Electronics, Inc. (Husky) sold and delivered electronic equipment worth approximately $164,000 to Chrysalis Manufacturing Corp. (Chrysalis).  Chrysalis failed to pay for the goods it purchased on credit.  While this debt was outstanding, between 2006 and 2007, Daniel Ritz (Ritz), a director and partial owner of Chrysalis, transferred funds from Chrysalis to various other ventures in which he owned stock.  In 2009, Husky sued Ritz seeking to hold him personally responsible for payment on the outstanding debt based on the allegation that Ritz’ transfers of Chrysalis’ funds were “actual fraud” and Ritz was therefore liable under a Texas statute.  Ritz then filed his own Chapter 7 bankruptcy petition, and Husky filed an adversary proceeding to have the debt declared nondischargeable under § 523 of the Bankruptcy Code on the basis that the same transfers constituted “actual fraud” under the exception to discharge in § 523(a)(2)(A).  Ritz argued that because he didn’t make a false misrepresentation to Husky, the debt should not be excepted from discharge.  The bankruptcy court ruled that Husky had failed to prove “actual fraud,” by false representation.  Husky appealed to the district court, which affirmed the bankruptcy court’s determination.  Likewise, the U.S. Court of Appeals for the Fifth Circuit also affirmed the lower court judgments and held that the debt was dischargeable, because, in its view, “actual fraud” requires a misrepresentation from the debtor to the creditor.

Analysis and Conclusion:

Justice Sotomayor, writing for the eight justice majority, concluded that the common-law term “actual fraud” is broad enough to incorporate forms of fraud that may not include a misrepresentation, such as a fraudulent conveyance.  At common law, fraudulent conveyances do not require a misrepresentation from a debtor to a creditor.  The Supreme Court also rejected Ritz’ argument that this interpretation of “actual fraud” renders § 523(a)(2)(A) redundant of other subsections of § 523 and of § 727(a)(2).  The Supreme Court noted that although there is overlap between each of these sections and § 523(a)(2)(A), there is also meaningful distinction and that it could “see no reason to craft an artificial definition of ‘actual fraud’ merely to avoid narrow redundancies that appear unavoidable.”  The Supreme Court also rejected Ritz’ argument, which was adopted by Justice Thomas’ dissent, that § 523(a)(2)(A) requires that the debt be “obtained by . . . actual fraud” and therefore the fraud must occur at the inception of the credit transaction.  The Supreme Court distinguished the dissent’s conclusion, and the prior precedent upon which it relies, on the basis that a reliance requirement is imposed only when the fraud is perpetrated through a misrepresentation to the creditor, which was not the case here.

This case potentially opens an avenue for creditors to defensively use a fraudulent transfer scheme that is outside of the one year limitation in § 727(a)(2) to prevent discharge of their claim.  As the Supreme Court noted, “Section 727(a)(2) is broader than § 523(a)(2)(A) in scope—preventing an offending debtor from discharging all debt in bankruptcy.  But it is narrower than § 523(a)(2)(A) in timing—applying only if the debtor fraudulently conveys assets in the year preceding the bankruptcy filing.  In short, while § 727(a)(2) is a blunt remedy for actions that hinder the entire bankruptcy process, § 523(a)(2)(A) is a tailored remedy for behavior connected to specific debts.”

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ASARCO’s Revenge: Do Estate Professionals Now Have to Charge the Same Fees to an Estate or Committee that They Would Charge a Similar Client in an Out-of-Court Matter?

May 16, 2016

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Either from our prior posts here and here, or from the great posts from Stone and Baxter’s Plan Proponent blog or from Bracewell’s Basis Points blog, we all know the Supreme Court’s holding in ASARCO[1]/: a strict interpretation of Section 330(a) of the Bankruptcy Code[2]/ allows professionals to charge for the preparation of a fee application per Section 330(a)(6).  But as there is no express statutory authority to charge the estate for defense of a fee application, the “American rule” prevails, requiring professionals to bear their own defense costs if a third party objects to the fees.[3]/

The cases following Asarco have all been sad days for bankruptcy professionals.  As we have written, the Delaware Bankruptcy Court has rejected all arguments that Section 328 of the Bankruptcy Code, which allows the Court to approve reasonable contractual terms, could allow a contractual term (instead of Section 330(a)(6)) requiring the estate to bear the costs of defending a fee application.[4]/  Moreover, estate professionals cannot charge a fee of $X if there is no fee objection, and then an “upcharge” to $X plus $Y more if there is a fee objection.[5]/

The New Gulf Resources “upcharge” argument had the benefit of candor – it was precisely geared to prevent expensive fee disputes that punish innocent estate professionals who would not be paid for defending their fee applications.  Judge Shannon acknowledged the “creative approach” but ruled there was no meaningful distinction between a “Fee Premium” upcharge and the attempted use of Section 328 that was rejected by Judge Walrath in In re Boomerang Tube, Inc.[6]/

But what about a more circuitous way around ASARCO?  That is, a pre-petition fee structure of X, and a post-petition fee structure that charges more?  The post-petition fee structure is not geared toward preventing fee disputes, but rather, simply compensates the professional more for all the problems of representing a company (or committee) in bankruptcy: delays in getting paid, holdbacks that seemingly last forever, risk of non-payment, and, of course, the risk of fee dispute.  You readers, and we at the Bankruptcy Cave, know all too well that while representing an estate fiduciary is a wonderful experience, the months (years?) of nail-biting as to whether or how much you will be paid is a serious problem.

But do we instead have ASARCO’s revenge?  That is, if New Gulf Resources rejects an upcharge in the event of a fee challenge, do ASARCO/New Gulf Resources extend to prevent an overall, generalized, non-specific increase in rates or a higher fee structure simply due to the fact of bankruptcy?  We are about to see this play out in the In re SunEdison bankruptcy case.

In SunEdison, debtor’s counsel had a pre-petition engagement letter providing the client with substantial percentage discounts as fees crossed certain hurdles.[7]/  However, upon filing for bankruptcy, a new engagement letter was written, charging the same hourly rates but eliminating the discounts.[8]/  The Office of the U.S. Trustee has hinted that it will cry foul, although noting that its objections may wait for the fee application stage, instead of requiring resolution at the time of approval of the retention application.[9]/  At least for now, the court has approved the retention of debtor’s counsel at the stated rates.[10]/

The U.S. Trustee’s objection has some appeal, we must say.  If New Gulf Resources rejects an upcharge solely for fee objections, then how can an upcharge for any reason (or for no reason) be permissible simply due to the debtor filing for bankruptcy?  At the same time, the U.S. Trustee’s approach concerns us greatly.

There are ample reasons to charge an estate fiduciary more than you would charge in the pre-petition period, or in an out-of-court workout, due to the added risks to estate professionals in bankruptcy.[11]/  Some of those are described above – the lack of a bankruptcy filing means you get paid on a schedule you and your client work out, not a schedule dictated by Section 331 and your local practice.  Holdbacks are not customary outside bankruptcy. Hearings are not required to be paid.  Clients will sometimes do you a solid and pay before year end, while courts move at their own pace.  In addition, rather than having to satisfy the complaints and queries of many creditors, interested parties, or the Court (as you must in bankruptcy), outside of bankruptcy you only have to satisfy the client (and perhaps a lender that must approve expenditures) of the value and good purpose behind your services.  And finally, assisting the client in a workout could lead to future work from that client, meriting a discount or alternative fee arrangement.

Inside bankruptcy, however, the debtor or committee will rarely be a future customer – a modern, hell-bent for leather, 363 sale case almost always mean your client is gone for good once the case is over.  This is not the stuff that warrants discounts, and so we fully understand the position of debtor’s counsel in In re SunEdison.

This is a serious issue, and a potentially slippery slope.  The position of the U.S. Trustee in In re SunEdison is a few dangerous steps away from arguing that the debtor (or committee) is entitled to “most favored nation” pricing from your law firm or advisory firm.  Section 330 of the Bankruptcy Code requires bankruptcy fees to be commensurate with non-bankruptcy fees.  But “commensurate” does not mean “identical,” by any means.

We will be watching this unfold, real time, in In re SunEdison, and then get back to you.  In the meantime, if you sign up a distressed client, and offer it a discount, alternative fee, or other financial accommodation, expect the Office of the U.S. Trustee to argue that such structure must carry through a bankruptcy case as well, despite the enhanced payment risks and ongoing payment delay that in-court engagements entail.

[1]/          Baker Botts v. ASARCO, 135 S. Ct. 2158 (2015).

[2]/          11 U.S.C. § 330(a).

[3]/          ASARCO, 135 S. Ct. at 2164-65.

[4]/          See, e.g., In re Boomerang Tube, Inc., Case No. 15–11247, 2016 WL 385933 *4 (Bankr. D. Del. Jan. 29, 2016) (holding, committee professionals cannot include 328 terms in an engagement agreement that side-step ASARCO); In re Samson Resources Corp., Case No. 15-11934 (CSS), letter opinion dated Feb. 8, 2016, at Docket No. 641 (holding, debtor professionals can’t do this either).

[5]/          In re New Gulf Resources, LLC, Case No. 15-12566, letter opinion dated March 16, 2016, at Docket No. 395 (acknowledging “creative approach” but rejecting “Fee Premium” upcharge in retention agreement) (Bankr. D. Del. Mar. 16, 2016); id. at Order dated March 21, 2016, at Docket No. 408 (Bankr. D. Del. Mar. 21, 2016) (order denying same).

[6]/          In re New Gulf Resources, LLC, Case No. 15-12566, letter opinion dated March 16, 2016, at Docket No. 395.

[7]/          In re SunEdison, Inc., Case No. 16-10992, Reservation of Rights by United States Trustee, at Docket No. 196 (Bankr. S.D.N.Y. May 5, 2016).

[8]/          Id.

[9]/          Id.

[10]/         Id. at Order Authorizing Employment and Retention of Debtor’s Counsel, at Docket No. 260 (Bankr. S.D.N.Y. May 12, 2016)

[11]/         But see, e.g., Burgess v. Klenske (In re Manoa Fin. Co., Inc.), 853 F.2d 687, 690 (9th Cir. 1988) (“Congress did not intend to authorize higher compensation than attorneys would receive for comparable non-bankruptcy services”).

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Preference Defendants, Rejoice! Services Billed in a Lump Sum Can Be Allocated Per Diem, for Your New Value Defense

May 4, 2016

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Preference actions are, for the most part, insanity. We won’t go on a tirade here. But recently, a ruling brings common sense to the “new value” defense.

Specifically, all bankruptcy lawyers know that any “new value” must come after the allegedly preferential transfer. This can be problematic for service providers, especially services provided daily, or over time. The debtor may, for instance, pay a prior invoice on April 10, and then file for bankruptcy on April 20, or 30, before the service provider generates an invoice for all of April’s services. A crafty trustee may thus argue that there is no evidence of new value provided after April 10, and hence no new value defense.

The recent case of Levin v. Verizon Business Global, LLC (In re OneStar Long Distance, Inc.), 3:15-cv-00049 (S.D. Ind. March 28, 2016) is a perfect example of this. The defendant provided telecommunications services to the debtor, some at fixed monthly charges and some based on the debtor’s actual usage. The debtor made $300,000 in payments to the service provider in mid-December, and then filed for bankruptcy in late December, before a December bill could be rendered. The evidence was clear that the December bill would have been over $1.1 million, but the trustee alleged that the service provider had to go further, and break down this huge bill, covering millions of transactions, into what was actually provided each day. (We note as well that the transactions in question took place in 2003 – this case is still going on a baker’s dozen years later – pretty hard to nail down evidence of this type after such a delay.)

The court rejected this, wisely. It used a per diem approach, meaning the debtor had received about $35,000 of new value each and every day ($1.1 million divided by 31 days equals about $35,000). Thus, nine days after the $300,000 in payments at issue, over $315,000 of new value would be provided (that is, 9 multiplied by the per diem estimate of $35,000), resulting in a complete defense.

(The court did note that if the Trustee could show the services had been cut off, or some other evidence to show that the $1.1 million in December services were very front-loaded, and hence before the payments, and not after, the result might be different. There was no such evidence here.)

We applaud this logical approach. The burden of proof for any affirmative defense lies with the defendant, but to require a defendant providing regular, daily services to show the exact day and minute for every dollar of value over a given month is really too much. Let’s all sleep better tonight, until we come across the next preference opinion that makes our blood boil (like those cases holding that post-petition payment of a Section 503(b)(9) claim reduces the vendor’s new value defense, even though these were the very creditors providing goods on credit that were trying to help the debtor stay out of bankruptcy, and even though the tense of Section 547(c)(4)(B) makes it clear that post-petition payments don’t count at all in the new value analysis, and even though . . . ok, enough ranting, read this and this if want to ignore the good feelings of this blog post and get back to preference law insanity.)

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7th Circuit Disrupts Commercial Certainty in Lease Terminations; Landlords, We Hate That You Have to Read this Blog Post

May 3, 2016

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There are many tenants that are, shall we say, “problem children.” They pay late, open late, breach, junk up your strip or building, threaten, the works. Sometimes, the landlord finds it easier just to reach a lease termination agreement with such a tenant, with the parties walking away with a mutual release. If the lease is below market, or the landlord is really motivated to move this tenant along, the landlord even provides some “keys money” to terminate the lease.

This normal practice may now be turned on its head. In a recent opinion, the Seventh Circuit ruled that a pre-bankruptcy lease termination was a “transfer” under the Bankruptcy Code. Because it was a “transfer,” if the tenant did not receive “reasonably equivalent value” for the value of the lease (such as where the tenant alleges it was a below market lease, which could have been assigned in bankruptcy for cash, or even for more cash than the tenant/debtor received), then the landlord can be sued. The damages? The difference between that which the ne’er-do-well tenant received (even if that amount is $0) and the amount that the tenant’s expert witness says could have been received had the lease not been terminated, and the debtor had instead assigned it to a third party during the bankruptcy in an open sale process.[1] In re Great Lakes Quick Lube LP, 2016 WL 930298 (7th Cir. March 11, 2016).

The Seventh’s Circuit’s opinion in Quick Lube is very problematic because it ignores:

First, Section 8(e)(1) of the Uniform Fraudulent Transfer Act, which states a transfer is not voidable if it “results from . . . termination of a lease upon default by the debtor when the termination is pursuant to the lease and applicable law.”  Indeed, the drafters of this uniform law, promulgated all the way back in 1984, noted in their commentary (see page 32 of this link) that Section 8(e)(i) of UFTA was intended to “reject[] the rule adopted in Darby v. Atkinson (In re Farris), 415 F.Supp. 33, 39-41 (W.D. Okla. 1976), that termination of a lease on default in accordance with its terms and applicable law may constitute a fraudulent transfer.”

Second, as Judge Markell once noted, the much wiser approach to transactions of this type is that “a noncollusive termination of a lease is not a transfer at all” and hence cannot be avoided by mischievous debtors and their hired guns experts. See here for the full opinion.

Third, Section 365(c)(3) of the Bankruptcy Code provides that the “trustee … may not assume or assign any … unexpired lease of the debtor … if … such lease . . . has been terminated under applicable nonbankrupty law prior to” the bankruptcy case. See 11 U.S.C. § 365(c)(3). That is, if a properly terminated lease cannot be assumed or assigned in bankruptcy by one very specific section of the Code, then how can its pre-bankruptcy termination be voided due to a generic separate section of the Code? The Seventh Circuit side-stepped this argument too in Quick Lube, by saying the debtor and its creditors simply wanted the value of the lease and not the actual lease itself. That’s a tautology – how can there be value in a lease that no longer exists?

Finally, and most importantly, this entire line of reasoning ignores the need for certainty in commercial transactions involving lease transactions.   So what do we do?

First, be aware of this decision, and make the client aware if it is ever negotiating over a lease termination with a tenant, especially a financially troubled tenant. There are no foolproof workarounds to this decision, and so the client needs to be fully aware of this risk. Maybe it is just easier to declare a default and go through a dispossessory, if weeks (months?) of careful negotiation over termination can be up-ended by a later litigation against the landlord to pay for the “actual value” of the lease?

Second, thoroughly document in the termination agreement the benefits the tenant is receiving. Bankruptcy trustees and creditors like easy cases, not hard ones. If they can see more benefit that the tenant received in the termination agreement, or clearly spelled out provisions showing the tenant’s ability to forego late fees, attorneys’ fees, ongoing rent, other charges, and the like through the lease termination, a litigious trustee may think twice.

Third, if a lease termination is accompanied by any “keys money,” make sure it is paid to the actual tenant, and not any affiliate. A sure-fire path to litigation begins with paying the wrong tenant or an affiliate, instead of the actual obligor on the lease. (This is fundamental, we know, but we have seen unsuspecting parties many times be persuaded to pay a parent company, or affiliate.)

The Seventh Circuit has long been a leading court on bankruptcy issues. We at The Bankruptcy Cave will continue to monitor this decision, which we think, unfortunately, is going to be used often in the upcoming downturn.

[1]           Recall that a lease’s anti-assignment provisions are worthless to a landlord in a tenant’s bankruptcy case. See 11 U.S.C. § 365(f) (“. . . notwithstanding a provision in an . . . unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such . . . lease . . .”). Of course, 1984’s “shopping center” amendments to the Bankruptcy Code prohibit an assignment that disrupts the tenant mix or balance in the shopping center, would substantially reduce percentage rent, or that violates any radius or use provision in the lease. See 11 U.S.C. § 365(b)(3).  (A great discussion of the “shopping center” amendments to the Bankruptcy Code in practice can be found here.)  But still, the nullification of anti-assignment clauses in bankruptcy make leases far more valuable in the bankruptcy case than they would be outside of bankruptcy.

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Snooze Alert (but you really have to read this) – Bankruptcy Forms and Various Dollar Amounts Changing on April 1

March 29, 2016

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On April 1, a bevy of dollar amounts set forth in the Bankruptcy Code will change. Some of these are quite important to substantive relief, and others are quite important to making sure you don’t look bad in front of the client or your favorite (least favorite?) judge. We have Section 104 of the Bankruptcy Code to thank for this malpractice-inducing enterprise, which we enjoy every three years. See 11 U.S.C. § 104 (a) (“On April 1, 1998, and at each 3-year interval ending on April 1 thereafter, each dollar amount in effect under sections . . . shall be adjusted . . . .”).

At some point in the careers of the contributors to The Bankruptcy Cave, we would love to speak to the legislative scribes who meticulously cross-referenced all of BAPCPA’s new dollar figures to Section 104, but still managed to give us the hanging paragraph of Section 1325 (see the oldie but goodie by our good friend Steve Jakubowksi, one of the original bankruptcy bloggers, right here), and also possibly eliminated the absolute priority rule from individual Chapter 11 cases, as our Bryan Cave colleagues have written.  (On that point, see also the great recent post on absolute priority in individual chapter 11s by our friends at Stone & Baxter, at the Plan Proponent blog.)  But let us not digress or unduly criticize, that is not why you are here today.

The helpful souls from the Federal Register published a super-handy list (including a chart!) of all Bankruptcy Code dollar figures that are changing on April 1 pursuant to Section 104.  You can see it here.

In addition, these revised dollar amounts create changes in the corresponding bankruptcy forms. Here is a great link, including to pdfs of the revised forms.

Like we said, this is a snoozer, but kind of important.

–Your friends at the Bankruptcy Cave.

 

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The A++ Forms and Resources: Handling the No-Show Deposition

March 25, 2016

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Editor’s Note:  Here at The Bankruptcy Cave, we love insolvency stuff; we eat it for breakfast and dream about it at night.  (We are not kidding.)  Sometimes that includes credit-related litigation, and so we keep our pre-trial, trial, and appellate skills honed.  To that end, here is a very helpful cheat sheet we prepared and which we bring with us to every deposition, just in case.  (Your author Leah even got to enjoy a no-show deposition in Chicago last year; she created a perfect record using the below.)  Feel free to use it, and if it is handier to have a Word version, email one of the authors.  We will update the post later to make it download-able, but the rudimentary blogging skills of your new editor prevent that now, alas.

Editor’s Note 2:  If you like practice tips and cheat sheets like this, see also Mark and Leah’s “The A++, Super Comprehensive, Don’t Ever Start Anywhere Else Set of Opening Questions, Introductory Matters, and Document Inquiries for Taking a Deposition,” posted Aug 2015 here on the Bankruptcy Cave.  And coming soon, “The A++, Super Comprehensive, Way to Ensure ‘The Client Just Called and Said He or She Was Completely Prepared and the Deposition Went Great,’ Checklist and Key Items to Prepare Your Witness, Defend a Deposition, and Not Lose the Case.”

Without further ado, today’s post . . .

The Nonappearance (i.e., “No-Show”) Deposition Script

Instructions:

  1. Always bring a copy of this to every deposition – you sometimes do not know that you are going to have a “no-show” deposition.
  2. If you think you may have a no-show, bring with you exhibit copies of all email and letter correspondence with the other side from the previous days, most importantly including any email or letter to the other side telling them that the deposition is going forward, and you expect them to be in attendance. As set forth below, those should be entered into the record with the reporter.

Begin Script:

My name is [_______] and I am joined by [name of anyone else attending deposition with you], and I/we represent the [___________]. This is to be the Rule 30 / 30(b)(6) / 45 deposition of ___________ taken pursuant to Rule 30 / 30(b)(6) / 45 of the Federal Rules of Civil Procedure in Civil Case Number __________ pending in _____________________. [Alternatively, for Georgia cases, or conform to your applicable state laws or rules, “This is to be the deposition of ______ taken pursuant to Sections 9-11-26 and 9-11-30 [or 9-11-45] of the Official Code of Georgia in Civil Action Number ______ pending in the _______ Court of _______ County, Georgia.”]

It is now [time] on [date] and the representative for ________________ [or name person], has not appeared. In addition, counsel for the deponent is not here. We will go off the record for 20 minutes to give the deponent and his/hers/its counsel a bit more time [or so you can call the other side].

It is now [time] and the deponent and his/her/its counsel have not appeared.  [If you sent them an email or called them during the break, which is not required but maybe you do it anyway if you think the other side will try to come up with some excuse later, then put on the record what you did, and the response, if any.] Before marking _________ exhibits, I will provide a concise summary of what has happened in the days leading up to this deposition.

[Provide Concise Summary, noting precisely (i) when you served your notice, and (ii) how you served it. If you had communication with deponent’s counsel (or just the deponent, if the deponent is not represented), you should state the nature of the communications and the purported reasons, if any, for the nonappearance.]

And now, I would like to enter a few exhibits into the record.

Index of Deposition Exhibits

Tab Exhibit Description
1. (Is a true and correct copy of the ) Notice of Deposition
2. (Is a true and correct copy of a) Proof of Service
3. [Email or letters from you re: you better not no-show]
4.  [Other written stuff to get into the record to show the harm of the no-show, if you want and had a sense the no-show was likely.]
5.

 

It is now approximately [time] and the deponent and counsel for the deponent still not appearing, this deposition is suspended due to nonappearance. [Mark and Leah prefer “suspended,” as then the original notice or subpoena is still valid, if discovery periods are expiring you may not need to extend (although check your local rules on this, folks), and you will have the argument that this is a “break” in a deposition that makes the intervening communications between opposing counsel and client fully discoverable and not subject to the privilege.][1] This will conclude today’s transcript.

 

[1] See David S. Wachen and George Hovanec, Can We Talk? Nationwide Survey Reveals Wide Range Of Practices Governing Communication With Witnesses While Defending Their Deposition, published by the Section of Litigation of the American Bar Association (Undated), available on file with the authors.

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Delaware Bankruptcy Court Holds, Twice: “ASARCO is Here to Stay” (But Your Authors Have Hatched Another Plan; Read Below!)

March 10, 2016

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You may recall the holding and analysis of ASARCO [1]/ from Jay’s previous post, here. At bottom, ASARCO  followed a strict interpretation of Section 330(a) of the Bankruptcy Code,[2]/ holding that professionals are allowed to charge certain fees for the preparation  of a fee application per Section 330(a)(6). But as there is no express statutory authority to charge the estate for defense  of a fee application, the “American rule” prevails, requiring professionals to bear their own defense costs if a third party objects to the fees.[3]/

The efforts to get around ASARCO  are well underway, primarily in the venue of the Delaware Bankruptcy Court. So far, the score is ASARCO  (two wins), to frustrated estate professionals (zero). And, even as your authors were writing this post, there is another means underway, using the “upcharge” principal – the hourly rates will be $x if no one objects to the fees, but 10% more than $x if someone does object to the professional fees. This bevy of cases, and our own proposed solution, are discussed below.

The first effort to side-step ASARCO  was In re Boomerang Tube.[4]/ In that case, certain creditors’ committee professionals argued that their engagement letters required, as a contractual  matter, the payment of fee application defense costs. Because Section 328 of the Bankruptcy Code allows the approval of any “reasonable term[] and condition[] of employment,”[5]/ the Court could avoid ASARCO’s  limited reading of Section 330(a), the professionals argued. The Boomerang Tube  Court, via Judge Walrath, rejected that. First, the Court held that an engagement letter is a contract between a professional and its client (here, a creditors’ committee), yet the professional fee defense provision seeks to bind the estate – and under Section 330 of the Code, there is no authority for the estate to be forced to cover such costs.[6]/ Moreover, the Boomerang Tube  Court held, any argument that similar market-based provisions are permitted in bankruptcy cases — such as exculpation and indemnity clauses for estate financial advisors and investment bankers[7]/ — must yield to the more specific ruling of ASARCO, which rejected a market-based approach to reasonableness.[8]/

A few weeks later came In re Samson Resources.  In that case, the Delaware Bankruptcy Court, this time through Judge Sontchi, agreed that Boomerang Tube’s  analysis would apply equally to debtor professionals, and not just committee professionals.[9]/

Not to be dissuaded, a third effort is underway in Delaware (and this time Judge Shannon gets to weigh in). In that case,[10]/ debtors’ counsel is not seeking to use Section 328 to assert that fee application defense costs can be allowed. Instead, debtors’ counsel argues that estate professionals should be allowed to charge one rate if there is no objection to the fees, but then also a 10% premium if there is an objection. In short, it is an upcharge, like substituting a yummy Caesar salad at your fav bistro for the wilted garden salad it usually serves you.[11]/ Your authors love  the creativity, but have their doubts that this will work; stay tuned.[12]/

Anyway, now that we have seen what unique ideas don’t  work, your authors have another! (Let it not be said that we just blog about goings-on in the esoteric world of restructuring – we are here to solve  problems, not just describe them!) And the idea is this – if a professional thinks it may be subject to second-guessing later in the case from disgruntled creditors, then don’t wait until the end of the case to seek allowance. Instead, smoke out those objectors, while the case is ongoing. Thus, once a discrete portion of the case is done – such as first days, a 363 sale, a major piece of litigation, perhaps even the first round of exclusivity and stability of the case – seek final  allowance of the fees and expenses incurred for that portion of the case. If an objection is raised, you still cover your own costs, but at least then you can learn it early, adjust your case strategy, and perhaps get a ruling from a judge directing such malcontents to stand down, lest their own positions in the case come under attack.

We know this is a weird option. But it is no weirder than trying to use Section 328’s generality to get around Section 330’s specificity, or seeking to impose an upcharge to recover fees which ASARCO  says you cannot get. Let the arguments continue further!

[1]/          Baker Botts v. ASARCO, 135 S. Ct. 2158 (2015).

[2]/          11 U.S.C. § 330(a).

[3]/          ASARCO, 135 S. Ct. at 2164-65.

[4]/          In re Boomerang Tube, Inc., Case No. 15–11247, 2016 WL 385933 (Bankr. D. Del. Jan. 29, 2016).

[5]/          11 U.S.C. § 329(a).

[6]/          In re Boomerang Tube, Inc., 2016 WL 385933 at *4. The Court also noted that the result is the same if the professional incurs fees to defend its fees, or if the costs to defend a fee application are set forth as expenses (such as where the professional hires another professional to defend its fees). Id. at *8.

[7]/          See, e.g., In re United Artists Theatre Co., 315 F.3d 217. 234 (3d Cir. 2003) (permitting tailored financial advisor indemnity provisions in bankruptcy cases, based on market evidence that such provisions are customary outside of bankruptcy).

[8]/          In re Boomerang Tube, Inc., 2016 WL 385933 at *7. This is concerning to your authors – does this mean exculpation and indemnity clauses for FAs and IBS, long the norm in most courts under United Artists and many other cases, could be in doubt? Wow.

[9]/          In re Samson Resources Corp., Case No. 15-11934 (CSS), letter opinion dated Feb. 8, 2016, at Docket No. 641.

[10]/         In re New Gulf Resources, LLC, Case No. 15-12566 (BLS), Brief in Support of Retention Application, dated March 2, 2016, at Docket No. 344.

[11]/         The foregoing sentence was brought to you by Mark Duedall.

[12]/         And aside from loving the creativity, we also sympathize with Baker Botts, and other estate professionals (like our beloved Bryan Cave!), that face the risk of objections to fees from disgruntled creditors with an axe to grind. The facts of ASARCO  (in which the estate professional was Baker Botts) are worth noting again here – an incredibly complicated case, in which the estate had to sue its parent company for very serious matters. The suit was successful to the tune of at least $7 billion, and creditors were paid in full – an amazing result. When Baker Botts filed its fee application and sought a fee enhancement, the parent company which Baker Botts sued was right there ready to object to virtually everything about the fees. ASARCO  is an unfair result, and a poster child for the mischief that results when cranky creditors object to fees. That being said, ASARCO  is now the law, and will remain so absent Congressional action (unlikely) or a creative lower court ruling (unlikely too). So deal with it we must.

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