U.S. COURT OF APPEALS FOR THE THIRD CIRCUIT

Communications With And Documents Created By The General Legal Department Of A Corporate Family May Not Be Subject To The Attorney-Client Privilege In A Later Dispute Between A Parent And Its Past Subsidiaries

A Shipment Term In An Executory Contract Was A “Material And Economically Significant” Term Such That It Had To Be Complied With In Order For The Contract To Be Assumed And Assigned

Third Circuit Court Of Appeals Decides Issue Of First Impression: The Bankruptcy Court’s Interpretation Of A Confirmed Plan Is Subject To Review For Abuse Of Discretion, Unless The Review Involves Purely A Question Of Law, In Which Case The Issue Is Subject To De Novo Review

U.S. BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

A Corporate Officer’s Claim For Advancement Of Fees And Indemnification Was Not Subject To Disallowance Under Section 502(e)(1)(B) Of The Bankruptcy Code

Breach Of A Critical Vendor Agreement By The Vendor Entitles The Debtor To Recovery Of The Critical Vendor Payment

Committee Professionals Are Entitled To Compensation For Work Performed That Is Consistent With The Committee’s Fiduciary Duties; Rates Charged By New York And San Francisco Professionals Were Not Excessive; Administrative Work Performed By Paralegals Is Compensable

Bankruptcy Court Has Jurisdiction To Determine The Amount Of A Worker’s Compensation Claim That Was Assumed By A Purchaser Under An Asset Purchase Agreement Notwithstanding That The Estate Had No Liability To The Claimant

U.S. COURT OF APPEALS FOR THE THIRD CIRCUIT

Teleglobe Communs. Corp. v. BCE, Inc. (In re Teleglobe Communs. Corp.), 493 F.3d 345 (3d Cir. July 17, 2007) (Ambro, J.)

In litigation between former members of a corporate family, a dispute arose over whether certain documents were subject to the attorney-client privilege and, as a result, were not discoverable. The documents at issue were all created by or communications with the corporate family’s general legal department while all of the litigants were members of corporate family. However, at the time of the litigation, certain entities were no longer members of the corporate family. Because the dispute implicated the co-client (or joint client) privilege, its exceptions, its scope and a lawyer’s ethical obligations, the Court of Appeals embarked on a thorough background discussion of various legal concepts related thereto. After reviewing and clarifying these legal concepts, the Court of Appeals determined that the district court’s factual findings did not support extinguishing the parent’s privilege. Therefore, the Court of Appeals vacated the district court’s order compelling production and remanded the case to the district court for further proceedings.

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A Shipment Term In An Executory Contract Was A “Material And Economically Significant” Term Such That It Had To Be Complied With In Order For The Contract To Be Assumed And Assigned

In re Fleming Cos., 499 F.3d 300 (3d Cir. Aug. 22, 2007) (Chagares, J.)

During the debtor’s bankruptcy, the debtor sold certain assets, including the rights to designate assignees of supply contracts and property leases. After the sale, the purchaser designated an assignee for a contract that required shipment of products from a specific facility, mainly the debtor’s facility in Tulsa, Oklahoma. Shortly before the motion to assign the contract was filed, the debtor filed a motion to reject the lease associated with the Tulsa facility at the direction of the contract-assignee. As a result, it was impossible for the assignee to comply with the shipment term of the contract. On this basis, the counterparty to the contract filed an objection to the assignment motion and argued that the assignee could not provide adequate assurance of future performance because it could not (and admittedly would not) ship from the Tulsa facility. In response, the assignee asserted that it would ship from another facility in Oklahoma, which would not materially impact the counterparty’s rights. The bankruptcy court held that the assignee could not provide adequate assurance of future performance and denied the motion. The district court affirmed.

On appeal, the Court of Appeals affirmed. The Court of Appeals found that the shipment term was a “material and economically significant” term of the contract. As such, the Court held that because it was impossible for the assignee to ship from the Tulsa facility — the lease for the Tulsa facility had been rejected — the assignee could not provide adequate assurance of future performance. The Court of Appeals also rejected the argument that the shipment term was an anti-assignment clause. In reaching this conclusion, the Court recognized that there is a fine line between a burdensome obligation and a de facto restriction on assignment. In part due to the assignee’s decision to have the lease for the Tulsa facility rejected, the court found that the shipment term was more akin to a burdensome obligation.

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In re Shenango Group Inc., 501 F.3d 338 (3d Cir. Sep. 6, 2007) (Smith, J.)

In Shenango, the United States Court of Appeals for the Third Circuit addressed an issue of first impression in this Circuit: the standard of review to be applied when reviewing a bankruptcy court’s interpretation of its own order. In evaluating the issue, the Court of Appeals noted that an appellate court must distinguish between reviewing a bankruptcy court’s application of principles of law and reviewing a bankruptcy court’s actual interpretation of an ambiguous provision in its own order. Ultimately, the Court of Appeals held that a bankruptcy court’s interpretation of its own order should be reviewed for an abuse of discretion, except that when the appellate court’s review involves purely a question of law, the appellate court must review the order de novo. Turning to the matters at issue in the case, the Court of Appeals conducted an initial de novo inquiry to determine whether the debtor’s plan of reorganization — a bankruptcy court’s order — was ambiguous. If the plan was ambiguous, the Court of Appeals held that an appellate court should defer to the bankruptcy court’s interpretation of the plan, unless the interpretation was unreasonable under the circumstances, i.e., an abuse of discretion. Because the Court of Appeals found that the plan at issue was ambiguous and the bankruptcy court’s interpretation of the plan was not unreasonable, the court affirmed the bankruptcy court’s decision.

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U.S. BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE

A Corporate Officer’s Claim For Advancement Of Fees And Indemnification Was Not Subject To Disallowance Under Section 502(e)(1)(B) Of The Bankruptcy Code

In re RNI Wind Down Corp., 369 B.R. 174 (Bankr. D. Del. Jul. 9, 2007) (Sontchi, J.)

A former officer of the debtor filed a claim for indemnification and advancement of his defense costs incurred in a civil SEC lawsuit consistent with the provisions of the debtor’s articles of incorporation. The plan administrator filed an objection that sought to disallow the claim, pursuant to section 502(e)(1)(B) of the Bankruptcy Code, as a contingent claim for reimbursement of debt. The bankruptcy court held that the plan administrator failed to satisfy its burden under section 502(e)(1)(B) of the Bankruptcy Code, which requires proof that the claim is a (i) contingent claim (ii) for reimbursement of a debt (iii) for which the debtor and the claimant are co-liable. Taking the elements out of order, the court first found that the claim was for indemnification, and accordingly, the second element was satisfied. With respect to the remaining elements — the first and third elements — the court held that the elements were not satisfied. Specifically, the court held that the claim was not contingent because the officer’s right to pre-indemnification advancement of fees and expenses presently existed. Although the amount of the claim was unknown, the claim was not contingent; instead, it was unliquidated. Finally, because there was no risk of the debtor having to make a double payment, the third element was not satisfied. Accordingly, the claim objection was overruled.

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Breach Of A Critical Vendor Agreement By The Vendor Entitles The Debtor To Recovery Of The Critical Vendor Payment

In re Meridian Auto. Systems-Composites Operations, Inc., 372 B.R. 710 (Bankr. D. Del. Aug. 23, 2007) (Walrath, C.J.)

Early in the debtor’s case, the bankruptcy court entered an order authorizing the debtor to make payments to critical vendors. Under the order, any vendor that received a payment was required to continue to provide goods/services to the debtor post-petition on customary trade terms, including price, in effect within 120 days of the petition date. During the case, a vendor (i) refused to provide goods, (ii) twice demanded price increases, (iii) attempted to negotiate a waiver of any preference claims, and (iv) failed to timely ship sufficient quantities of goods. After the debtor’s plan was confirmed, the post-confirmation debtor filed a motion to compel the vendor’s compliance with the terms of the critical vendor order by disgorging the critical vendor payment it had received early in the case. The bankruptcy court granted the motion and held that the vendor’s conduct, including its attempts to renegotiate price terms, was a breach of the critical vendor order. The vendor asserted multiple defenses, including that the trade agreement was assumed under the plan. The court rejected this defense because the agreement was no longer executory as of the effective date of the plan. After rejecting all remaining defenses, the bankruptcy court ordered the vendor to disgorge the critical vendor payment.

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In re 14605, Inc., No. 05-11910, 2007 Bankr. LEXIS 3147 (Bankr. D. Del. Sep. 19, 2007) (Walrath, C.J.)

The reorganized debtor and its parent/lender objected to the final fee applications of certain professionals of the official committee of unsecured creditors on the bases that (1) the work done by the committee's professionals was excessive, unnecessary, and duplicative (2) the hourly rates charged by certain of the Committee’s professionals were excessive, (3) fees for the preparation of the professionals' fee applications are not compensable, (4) the committee’s professionals overstaffed the case, and (5) several of the professionals were billing for purely administrative or clerical work. The bankruptcy court overruled the objection and allowed the fees in full. In overruling the objection, the bankruptcy court held as follows: (i) fees associated with investigating the validity of claims of a parent/lender are compensable and consistent with the fiduciary duties of committee professionals; (ii) fees associated with participating in a 363 sale process, including analysis of the deal, negotiation with the buyer and attempts to attract additional buyers, are compensable; (iii) fees associated with reviewing the pool of claims are compensable because committee professionals have a fiduciary duty to review the claims to determine the extent of recovery in a case; (iv) the rates charged by the committee’s professionals (based in New York and San Francisco) were market rate, were comparable to rates charged by the debtor’s professionals, and were not excessive for a complex case; (v) fees associated with preparing fee applications, as well as fees associated with defending fee objections, are compensable; (vi) when a case is sufficiently complex, a certain amount of intra-office conferencing is necessary in order to coordinate tasks; and (vii) fees associated with work performed by paralegals will not be reduced merely because the work is administrative (reviewing/distributing pleadings) in nature.

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In re TWA Inc. Post Confirmation Estate, 2007 Bankr. LEXIS 3182 (Bankr. D. Del. Sep. 21, 2007) (Walsh, J.)

The claimant, a former employee of the debtor, filed a proof of claim against the debtor to recover worker’s compensation benefits. However, because the claim filed against the debtor was not the debtor’s obligation, the claim was expunged. Shortly thereafter, the claimant filed a motion against American Airlines — the purchaser of the debtor’s assets — to compel payment of the worker’s compensation benefits. Although American did not contest its obligation to pay the claim, assuming it was valid, it contested the court’s subject matter jurisdiction, arguing the court was without jurisdiction to determine the exact amount of compensation owed because the issue was not a core proceeding.

The court rejected American’s argument and found that the matter fell under 28 U.S.C. § 157(b)(2)(B) (allowance or disallowance of claims against the estate) and section 157(b)(2)(N) (orders approving the sale of property). With respect to section 157(b)(2)(B), the court reasoned that although the claimant’s request for relief was against American, and not the debtor’s estate, the request was the product of a claim against the debtor’s estate. With respect to 157(b)(2)(N), the court relied on its earlier decision (which decision was affirmed by the district court and the Third Circuit Court of Appeals) with respect to a similarly situated employee, in which the court found that pursuant to the asset purchase agreement, American assumed the debtor’s obligation to pay worker’s compensation benefits and determined the amount.

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This update is intended for informational purposes only and should not be considered legal advice. Please consult an attorney regarding your specific situation. Receipt of this update does not constitute an attorney-client relationship.