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For Whom the Bell Tolls: Obligations and Risks of Third-party Witnesses under Rule 2004 Examinations.

November 27, 2016

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Two recent Bankruptcy Court cases both remind and illustrate the power and risks presented by discovery of facts and documents under Bankruptcy Rule 2004, showing that it can compel third parties to provide information to support later litigation against them or cause them to lose their 5th Amendment right against self-incrimination.

  • In re Great Lakes Comnet, Inc.[1]/ (a copy of the case is here: great-lakes-comnet-inc), the Bankruptcy Court for the Western District of Michigan held that the Committee of Unsecured Creditors was entitled to conduct a Rule 2004 examination of a third-party company while explicitly recognizing that the intent of the examination was to prepare for and inform the committee regarding later litigation against the third-party.
  • In re Mavashev[2]/ (a copy of the case is here: in-re-mavashev), the Bankruptcy Court for the Eastern District of New York held that a third-party witness would not be prejudiced by any self-incrimination in the act of producing a document central to what was very likely a criminal transaction in association with the debtor, and further that such witness had waived his privilege against self-incrimination by prior, limited testimony in the Rule 2004 examination.

Discovery of facts

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Preliminary Injunctions in Bankruptcy Courts: Can a Litigant Get a Second Opinion?

November 27, 2016

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District courts can hear an appeal from any interlocutory order, as long as they agree to accept the appeal.  28 U.S.C. § 158(a)(3).  Final judgments, orders and decrees are always immediately appealable.  28 U.S.C. § 158(a)(1).  Certain interlocutory orders, such as orders increasing or reducing the exclusive time periods for a debtor to file and obtain acceptance of a plan for reorganization under Chapter 11 are also immediately appealable.  28 U.S.C. § 158(a)(2).  Other interlocutory orders are appealable only “with leave of the court.”  Preliminary injunctions are interlocutory orders that fall into the last category.

The timing and process for perfecting an appeal of a preliminary injunction is not certain.  Recently, Judge James Zagel in the Northern District of Illinois declined to grant leave to appeal a preliminary injunction entered in the bankruptcy court, finding the debtor had no automatic right to appeal.  Gilman v. Goldberg (In re Goldberg), Case No. 16 CV 6993 (N.D. Ill. October 17, 2016) (J. Zagel) (a link to the case is here: in-re-goldberg).  Generally, leave to take an interlocutory appeal is granted for the same reasons that an interlocutory appeal to the court of appeals may be taken from an order of

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Creditors Beware: Fifth Circuit Court of Appeals Expands Purview Of Potential FDCPA Violations And Furthers Circuit Split

October 23, 2016

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In Daugherty v. Convergent Outsourcing, Inc., No. 15-20392 (5th Cir. Sept. 8, 2016) the Fifth Circuit Court of Appeals recently joined the circuit split interpreting the Fair Debt Collections Practices Act (“FDCPA”) in a way that further limits debts collectors.

Under the FDCPA the term “debt collectors” is not limited to those collecting debts for others –  certain creditors collecting debts directly owed to them can be bound by the FDCPA.   This statute prohibits debt collectors from using “false, deceptive, or misleading representation or means in connection with the collection of any debt.”  A debt collector who violates the FDCPA can be forced to pay actual damages, costs, reasonable attorney’s fees and up to $1,000 of additional damages if the plaintiff is an individual or up to $500,000 or one percent of the debt collector’s net worth in a class action.

In Daugherty, the Fifth Circuit considered whether a collection letter for a time-barred debt which contained a discounted “settlement offer” but which was silent as to the unenforceability of the debt and did not threaten litigation could mislead an unsophisticated consumer to believe that the debt could be enforceable in court and thus violate the FDCPA.

There,

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Executive Compensation Under Section 503(c) – The Sports Authority Story

October 18, 2016

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A recent, and highly publicized, decision from the case formerly known as Sports Authority, In re TSA WD Holdings, Inc. et al., Case No. 16-10527 (MFW), Bankr. D. Del. (Docket #2863, Aug. 31, 2016), allowed the defunct company to pay three unnamed senior executives $1.425 million in “incentive pay” to remain with the company and oversee its liquidation.[i]  Judge Mary Walrath granted Sports Authority’s[ii] Motion for Order (A) Approving Modified Executive Incentive Program and Authorizing Payments Thereunder and (B) Authorizing the Debtors to File the Unredacted Modified Key Employee Incentive Program Under Seal (Docket #2746) (the “EIP Motion,” a copy of which is here) over the strenuous objection of the U.S. Trustee (Docket #2809) (the “UST Objection,” a copy of which is here), and only after she had denied a similar from the Debtors request a month earlier.  More importantly, Judge Walrath authorized the incentive payments in a case where Sports Authority’s primary assets had already been liquidated, Debtors would almost certainly pay nothing to unsecured creditors, and the estate may or may not be administratively insolvent.  The Sports Authority example is informative for three reasons: 1) it demonstrates how a company that needs

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California Court Rejects “Sham Guarantee” Defense

Editor’s Note:  Bank Bryan Cave is going into its ninth year as one of the nation’s leading blogs on financial institution regulatory, M&A, securities, and litigation issues.  Here’s a recent post on Bryan Cave’s successful work for the California Bankers Association (“CBA”), headed up by Joseph Poppen of BC’s San Francisco office.

 

Bryan Cave LLP recently served as counsel for amicus curiae California Bankers Association (“CBA”) and helped score a victory in an important California appellate case of great interest to the banking industry, LSREF2 Clover Property 4 LLC v. Festival Retail Fund 1 357 N. Beverly Drive LP (Second District, California Court of Appeal case number B259937) (Link to the opinion is here).

The trial court had ruled that the guarantor of a commercial loan was excused from performance on the grounds that the guaranty was a “sham,” structured by the lender to circumvent California’s anti-deficiency laws.  The guarantor essentially argued that there was no legal separation between it and the borrower because it was the borrower’s “alter ego,” and as support they identified evidence that the two entities failed to observe basic corporate formalities.  According to the guarantor, it should be

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Madoff Continues On: Recent Tax Court Case Rules on Treatment of Madoff Account

Editor’s Note:  Our colleagues in Bryan Cave’s Private Client practice are on the cutting edge of tax matters, estate administration, challenging end-of-life matters, and other issues of estate and family law.  This area of law evolves at just about the speed of light.  Their leading blog, Life, Death, and Taxes demonstrates a commitment to thought leadership in this area, and we at The Bankruptcy Cave were excited to see this discussion of a recent Madoff-related ruling.  Kudos to Stacie Rottenstreich and Karin Barkhorn from Bryan Cave’s New York Private Client group for this interesting writeup.

In a recent Tax Court decision, Harry H. Falk, and Steven P. Heller, Co-Executors, v. Commissioner of the Internal Revenue, the United States Tax Court ruled that in the case of the Madoff Ponzi scheme, an estate which paid estate tax on Madoff assets which subsequently have become worthless can claim a theft deduction.

James Heller, a New York state decedent, died in January 2008 owning a 99% interest in James Heller Family, LLC (the “LLC”).  The only asset held by the LLC was an account with Bernard L. Madoff Investment Securities, LLC.  In November

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Proposed New Local Rules for the Southern District of New York

The United States Bankruptcy Court for the Southern District of New York recently announced proposed amendments to its local rules.  The proposed amendments will not take effect until December 1, 2016, but we could not wait to take a peek at the future of practice in the Southern District.  (And for those of you who are rules junkies, here and here are prior posts on FRBP changes applying to all courts, from earlier this year.)

The future looks largely like the present—do not expect wholesale changes or many new rules.  The most significant changes clarify procedures such as motions to redact identifying or confidential information and reorder the rules governing notices of presentment.  Comments will be accepted until November 14, 2016, so it is possible additional changes could be made.  Here are some of the most significant changes:

L.R. 1002-1(b) will be added, which will require, if practicable, advance notice to the clerk’s office and the U.S. Trustee of impending chapter 11 or chapter 15 filings and first day motions requiring immediate relief.

L.R. 2002-2 will be repealed, but it isn’t going away. See the note accompanying L.R. 9074-1(c) below.

L.R. 3011-1 will be added.  It requires all

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This Just In – Supreme Court to Provide Clarity on Whether Collection of Time-Barred Debts in Bankruptcy Violates the Fair Debt Collection Practices Act.

October 11, 2016

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jabez-stoneWe all remember The Devil and Daniel Webster – the Devil comes to collect a seven year old debt (secured by Jabez Stone’s soul), only to be foiled by the great trial lawyer Daniel Webster – thanks to a skilled litigator, the old debt is forgiven!

But that isn’t the only example of years’ old debt becoming a real matter of contention.  Earlier today, the Supreme Court granted certiorari on an issue that (a) is pretty important in the world of consumer debt collection, and (b) makes some folks pretty darn furious. The issue is this:  if you file a proof of claim in a bankruptcy case, and you know such claim is barred by the applicable statute of limitations, are you committing a “misleading” or “unfair” practice under the Fair Debt Collection Practices Act (FDCPA)?  (Coverage of the case and copies of the briefs can be found here, on the SCOTUSBlog.)

Who does this?  There are lots of funds out there that purchase charged-off consumer debt.  Some of that debt is quite old.  John Oliver has spoken extensively about this industry on his show – here’s a link

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Defending A Preference Action – Can You Setoff Post-Petition Amounts Owed by the Debtor Against Your Preference Liability?

September 21, 2016

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All bankruptcy lawyers (and most long-suffering trade creditors) know that creditors who receive payments from a debtor within the “preference period” – 90 days before a voluntary bankruptcy case was filed, or 1 year if the creditor is an “insider” of the debtor – are at risk of lawsuit to return those payments to the bankruptcy estate. Pre-petition claims the creditor hold are no automatic defense.  However, the Bankruptcy Court for the District of Delaware recently ruled, as a matter of first impression in that Court, that an allowed post-petition claim of the creditor can be used to set off the creditor’s preference liability. See Official Comm. of Unsecured Creditors of Quantum Foods, LLC v. Tyson Foods, Inc. (In re Quantum Foods, LLC), 2016 WL 4011727 (Bankr. D. Del. Jul. 25, 2016).  Here is a copy of the case.

The background of the case is simple. The Unsecured Creditors Committee filed various preference actions.  In the Quantum Foods preference case, the Committee sought to avoid and recover over $13 million in pre-petition transfers to two related Defendants.  The Defendants claimed, among other defenses, a right to set off a previously allowed administrative expense claim for $2.6 million

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