(with other decisions from lower courts)
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Prepared and Edited By:
Christopher W. Peercpeer@hahnlaw.com
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Practice Chairs:
Lawrence E. Oscarleoscar@hahnlaw.com
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Daniel A. DeMarco
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*The author would like to recognize the significant contributions from Elisa T. Young, law student at the Moritz School of Law - Ohio State University
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.
Please contact the author with any questions on the material provided in this update.
Included Cases
(click on link to view case summary)
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUITLAW FIRM REPRESENTING SOLE OWNER OF A CHAPTER 11 CORPORATE DEBTOR SEEKING COMPENSATION FROM ESTATE FOR REPRESENTATION OF OWNER RESULTING FROM SUBSTANTIAL CONTRIBUTION MUST ESTABLISH THAT FEES AND EXPENSES ARE DISCERNABLE FROM FEES AND EXPENSES REQUESTED FOR WORK PERFORMED FOR THE DEBTOR ITSELF - Gorski v. Eisen (In re Hendricks Commerce Park, LLC)
BANKRUPTCY APPELLATE PANEL FOR THE SIXTH CIRCUIT
CLAIMS FROM GOVERNMENTAL AGENCY FOR REIMBURSEMENT OF UNEMPLOYMENT OBLIGATIONS ARE NOT A “TAX” CLAIM ENTITLED TO PRIORITY UNDER THE BANKRUPTCY CODE - Michigan Unemployment Ins. Agency v. Boyd (In re Albion Health Systems)
WHEN ANALYZING WHETHER A TRANSFER WAS CONSTRUCTIVELY FRAUDULENT UNDER STATE OR BANKRUPTCY LAW, IT IS INAPPROPRIATE TO ANALYZE THE “BADGES OF FRAUD” NECESSARY FOR A FINDING OF ACTUAL FRAUD - Haynes v. Holstein (In re Crescent Communities, Inc.)
AVOIDANCE OF SENIOR CREDITOR’S LIEN POSITION DOES NOT AUTOMATICALLY PRMOTE UNDERSECURED JUNIOR CREDITORS INTO A SECURED POSITION BECAUSE THE AVOIDED INTEREST IS PRESERVED FOR THE BENEFIT OF THE ESTATE; JUNIOR SECURED CREDITOR’S RELIANCE ON ITS ASSUMED POSITION AS A SECURED CREDITOR PROVES TO BE FATAL FLAW WHEN SUCH JUNIOR CREDITOR FAILS TO FILE PROOF OF CLAIM - Castle Nursing Homes, Inc. v. Ransier (In re Sullivan)
UNITED STATES BANKRUPTCY COURTS WITHIN THE SIXTH CIRCUIT
IN OHIO, DIRECTORS HAVE NO DISTINCT LEGAL OBLIGATION TO CREDITORS SEPARATE FROM THE CORPORATE ENTITY AS A WHOLE, EVEN WHEN A CORPORATION HAS REACHED THE POINT OF INSOLVENCY; FURTHER, DEEPENING INSOLVENCY IS NOT RECOGNIZED AS A CAUSE OF ACTION IN OHIO - Liquidating Trustee of the Amcast Unsecured Creditor Liquidating Trust v. Baker (In re Amcast Industrial Corp.)
MODIFICATION OF RETIREE BENEFITS PURSUANT TO BANKRUPTCY CODE SECTION 1114 REQUIRES THE DEBTOR TO ESTABLISH THAT THE MODIFICATIONS ARE NECESSARY TO ALLOW THE ESTATE TO EFFECTUATE A PLAN OF REORGANIZATION - In re SAI Holdings Ltd.
PURCHASER OF SUBSTANTIALLY ALL ASSETS OF CHAPTER 11 DEBTOR IS NOT ENTITLED TO “HOLD BACK” DEFERRED PAYMENT FOR ASSET PURCHASE WHEN “HOLD BACK” PROVISIONS ARE TRIGGERED BY PURCHASER’S OWN ANTICIPATORY REPUDIATION - Medi-Care Orthopedic & Hosp. Equip, Inc. v. Health II of Ohio, LLC, (In re Medi-Care Orthopedic & Hosp. Equip., Inc.)
PAYMENT OF REASONABLE ATTORNEYS’ FEES THAT HAVE ACCRUED WILL BE UPHELD ACCORDING TO THE TERMS OF THE UNDERLYING AGREEMENT AND/OR APPLICABLE STATE LAW; PROSPECTIVE FEES FOR ANTICIPATED ACTIONS ARE DISFAVORED AS UNDETERMINABLE - Orix PLC Houston Venture v. Victor (In re Jillian’s Entertainment Holdings)
FEE EXAMINER CAN BE APPOINTED AT THE DISCRETION OF AND FOR THE BENEFIT OF THE COURT; FEE EXAMINER IS DIFFERENT FROM AN EXAMINER APPOINTED PURSUANT TO SECTION 1104 - In re Collins & Aikman Corp.
ALLEGATION THAT DEBTOR PURCHASED PRODUCTS FROM CANADIAN ENTITY WAS NOT ENOUGH TO ESTABLISH PERSONAL JURISDICTION OF THE COURT OVER CANADIAN ENTITY - Frenz v. Roycom Ltd. (In re Thermoview Indus., Inc.)
RETAINAGE FUNDS HELD BY GENERAL CONTRACTOR ARE NOT PROPERTY OF A DEBTOR SUB-CONTRACTOR’S ESTATE; GENERAL CONTRACTOR HAD DUTY UNDER TERMS OF CONTRACT WITH OWNER TO OBTAIN LIEN RELEASES, AND SUCH ACTIONS DO NOT CREATE PREFERENCE - Rieser v. Brownmor Co. (In re Pyper Const. Co.)
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CASE SUMMARIES
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT
LAW FIRM REPRESENTING SOLE OWNER OF A CHAPTER 11 CORPORATE DEBTOR SEEKING COMPENSATION FROM ESTATE FOR REPRESENTATION OF OWNER RESULTING FROM SUBSTANTIAL CONTRIBUTION MUST ESTABLISH THAT FEES AND EXPENSES ARE DISCERNABLE FROM FEES AND EXPENSES REQUESTED FOR WORK PERFORMED FOR THE DEBTOR ITSELF
Gorski v. Eisen (In re Hendricks Commerce Park, LLC), 2007 U.S. App. LEXIS 10959 (6th Cir. May 7, 2007) (Gibbons, J.)
A three judge panel for the Sixth Circuit affirmed the decisions of both the Bankruptcy Appellate Panel and the Bankruptcy Court that, although the sole equity holder of a Chapter 11 debtor may seek to have his counsel be paid as an administrative claimant from estate funds on the basis that his individual counsel provided a “substantial contribution” to the estate, recordation and identification of such “contributions” must be distinct from services performed for the Chapter 11 debtor. Because the Bankruptcy Court found that it could not discern fees requested for services provided to the equity holder from fees requested for services provided to the debtor in the law firm’s time reports, no basis existed upon which to base an award of administrative expenses to the law firm.
Early in the case, the debtor sought retention of, and received authority to retain counsel. The equity holder had his own separate counsel. About one year into the term of the case, the debtor sought to have the equity holder’s counsel also retained as counsel of record for the debtor. This request was denied by the Bankruptcy Court. All indications from that point forward were that, notwithstanding denial of retention, the counsel for the equity holder fundamentally served also as counsel for the debtor. This provision of services was apparent when the equity holder filed its motion to have its counsel’s fees treated as administrative expenses due to the alleged substantial contribution made to the debtor’s bankruptcy case. The Panel affirmed the finding that an award of administrative expense priority could be appropriate for fees for services the firm provided to the equity holder, but not for services provided to the debtor. Unfortunately for the firm, its time records did not sufficiently identify when it performed services for the equity holder rather than the debtor, and accordingly, all fees were denied any administrative expense classification.
Practice Pointer: As an initial matter, service providers participating in matters where fees may come before a court or tribunal should take precaution to ensure that services for different parties are not merged. More importantly in a Bankruptcy matter, firms and practitioners should be certain not to provide services to estates unless their retention has been approved.
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BANKRUPTCY APPELLATE PANEL FOR THE SIXTH CIRCUIT
CLAIMS FROM GOVERNMENTAL AGENCY FOR REIMBURSEMENT OF UNEMPLOYMENT OBLIGATIONS ARE NOT A “TAX” CLAIM ENTITLED TO PRIORITY UNDER THE BANKRUPTCY CODE
Michigan Unemployment Ins. Agency v. Boyd (In re Albion Health Systems), 2007 Bankr. LEXIS 244 (B.A.P. 6th Cir. Feb. 2, 2007) (Whipple, J.)
In what the Bankruptcy Appellate Panel for the Sixth Circuit considered a “close decision”, the three judge Panel affirmed the holding of the Bankruptcy Court for the Western District of Michigan that claims held by Michigan’s Unemployment Trust Fund for reimbursements from the debtor resulting from payments made to former employees of the debtor are not taxes entitled to priority under the Bankruptcy Code’s priority schemes and in fact should be classified as general prepetition unsecured claims. In so holding, the Panel re-affirmed that Congress intended tax “priorities” are for taxes and not other claims that may appear like taxes, such as excise taxes or reimbursements.
Prepetition, this non-profit debtor had agreed to make reimbursement payments to the Michigan Unemployment Trust for funds expended by the Trust on account of former employees of the debtor. Being a distressed entity, the debtor incurred significant lay-offs before entering into Chapter 11 and the Trust responded to the claims of these laid-off workers. Accordingly, the Trust sought its reimbursements from the debtor and claimed that such payments were entitled to tax priority as an excise tax under the Bankruptcy Code’s priority schemes. The Panel followed both Supreme Court authority that excise taxes are penalties not entitled to tax priority and the prevailing trend in circuit courts nationwide that reimbursements are not taxes to reach its conclusion that the Bankruptcy Court had reached the correct answer that reimbursements to a governmental agency for unemployment expenditures of the agency are not claims entitled to priority treatment.
Practice Pointer: When representing a debtor or a committee and evaluating the character of claims for priority (or other) status, take a second look and make certain that the claims asserting a priority interest really deserve such classification. The basis for priority status may be stricter than originally expected.
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WHEN ANALYZING WHETHER A TRANSFER WAS CONSTRUCTIVELY FRAUDULENT UNDER STATE OR BANKRUPTCY LAW, IT IS INAPPROPRIATE TO ANALYZE THE “BADGES OF FRAUD” NECESSARY FOR A FINDING OF ACTUAL FRAUD
Haynes v. Holstein (In re Crescent Communities, Inc.), 2007 Bankr. LEXIS 488 (B.A.P. 6th Cir. Feb. 22, 2007) (Scott, J.)
The Bankruptcy Appellate Panel for the Sixth Circuit reversed the decision of the Bankruptcy Court for the Southern District of Ohio because the Bankruptcy Court analyzed whether “actual fraud” existed by evaluating whether the facts supported a finding that the badges of fraud existed (i.e., insider transactions and other indicia of active participation in a fraud), and then using such analysis to support a conclusion that the transfer was “constructively fraudulent” although no finding that the transfer was made for less than reasonably equivalent value was made (an essential component of finding the existence of constructive fraud under either Section 548 of the Bankruptcy Code or Ohio law).
The Chapter 7 trustee in this case sought to have a prepetition foreclosure sale of debtor property reversed on the sole basis that the purchaser of the property was the alleged beneficiary of a constructively fraudulent transfer that occurred within four years of the debtor filing for Chapter 7 protection. According to the recitation of facts, the Trustee did not include allegations that actual fraud occurred. In this case, the purchaser bought the real property, at foreclosure sale, for a price of $210,000 (appraisal price of $240,000). Notwithstanding the fact that three years had passed, the Trustee alleged that if the transfer were avoided, it would have a sale for the property in excess of $550,000. In its analysis the Bankruptcy Court included an analysis of the “badges of fraud” leading to a conclusion that actual fraud had occurred and that the transfer should be avoided. The Panel said such analysis should not have been performed, and because no evidence was produced proving that the debtor received less than reasonably equivalent value, the ruling of the Bankruptcy Court was reversed. As an aside, the Panel commented that the results of a state foreclosure sale serve as evidence that the parties exchanged reasonably equivalent value.
Practice Pointer: When pursuing a cause of action for fraudulent transfer, whether in Ohio state court or in Bankruptcy Court, consider all avenues to a holding that the transfer should be avoided before filing. Failure to plead a method for effective relief may retard a Court’s ability to grant your client(s) the relief sought.
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AVOIDANCE OF SENIOR CREDITOR’S LIEN POSITION DOES NOT AUTOMATICALLY PROMOTE UNDERSECURED JUNIOR CREDITORS INTO A SECURED POSITION BECAUSE THE AVOIDED INTEREST IS PRESERVED FOR THE BENEFIT OF THE ESTATE; JUNIOR SECURED CREDITOR’S RELIANCE ON ITS ASSUMED POSITION AS A SECURED CREDITOR PROVES TO BE FATAL FLAW WHEN SUCH JUNIOR CREDITOR FAILS TO FILE PROOF OF CLAIM
Castle Nursing Homes, Inc. v. Ransier (In re Sullivan), 2007 Bankr. LEXIS 1008 (B.A.P. 6th Cir. April 4, 2007) (Whipple, J.)
The Bankruptcy Appellate Panel for the Sixth Circuit affirmed the decision of the Bankruptcy Court for the Southern District of Ohio in that (1) a creditor holding a junior secured position will not jump immediately to a more senior secured position when the senior secured claimholder’s position is avoided because of the preservation for the estate provisions of the Bankruptcy Code; and (2) such junior creditor proceeds at its own peril by failing to file a proof of claim in the debtor’s bankruptcy case. Due to the confluence of these events, the junior creditor essentially experienced no recovery from the debtor’s estate on its claim of approximately $630,000.
In this case, the junior creditor obtained a judgment lien against the debtor in the amount of approximately $630,000. Prior to filing its judgment lien, the debtor executed a mortgage on certain real property to his father in the amount of $165,000. For undiscussed reasons, the trustee for the debtor’s estate had the mortgage avoided, and the Court applied Section 551 of the Bankruptcy Code to allow the estate to stand in the shoes of the debtor’s father, as mortgage holder ? a position of priority over the junior lien creditor claimholder. The costs of administering the estate and other estate claims (with properly filed proofs of claim) exceeded the amounts recovered for the real property, thus using all of the assets subject to the security interest that the estate received due to the preservation under Section 551, rendering the junior creditor’s claim wholly unsecured and entitled to no recovery from the assets of the estate, other than its representative share of distribution as a general unsecured creditor.
However, relying on its assertion that it was a secured creditor, the junior creditor chose to not file a proof of claim in this case. Accordingly, the junior creditor received no distribution because it was held that the creditor’s failure to file a proof of claim waived its rights to distribution.
Practice Pointer: When representing creditors in general, and certainly when representing creditors in a non-priority secured position, the filing of a Proof of Claim is an essential protective step that must be completed to avoid an unfortunate event limiting recovery.
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UNITED STATES BANKRUPTCY COURTS WITHIN THE SIXTH CIRCUIT
IN OHIO, DIRECTORS HAVE NO DISTINCT LEGAL OBLIGATION TO CREDITORS, SEPARATE FROM THE CORPORATE ENTITY AS A WHOLE, EVEN WHEN A CORPORATION HAS REACHED THE POINT OF INSOLVENCY; FURTHER, DEEPENING INSOLVENCY IS NOT RECOGNIZED AS A CAUSE OF ACTION IN OHIO
Liquidating Trustee of the Amcast Unsecured Creditor Liquidating Trust v. Baker (In re Amcast Industrial Corp.), 2007 Bankr. LEXIS 692 (Bankr. S.D. Ohio March 12, 2007) (Walter, J.)
Applying Ohio law, the Bankruptcy Court for the Southern District of Ohio held that the commonly considered principal that the duties of directors and officers of a corporation shift from shareholders to creditors upon insolvency may not be as concrete as once believed. In addition, the Court confirmed that although “deepening insolvency” may give rise to a cause of action or to a measure of damages in some parts of the country, such is not the case in Ohio. Accordingly, the Bankruptcy Court dismissed all claims relating to either fiduciary duties allegedly owed to creditors and/or deepening insolvency.
In Amcast, the liquidating trustee of the debtor brought claims alleging that the directors and officers, among other things, caused the debtor to waste assets in dereliction of their duties to creditors of an insolvent entity and by delaying remedial actions (i.e., seeking Chapter 11 protection) that caused the debtor’s insolvency to deepen leading to lesser recovery for creditors. The alleged breaches of fiduciary duty included asset transfers which ultimately shielded assets from the reach of creditors (e.g., an accelerated transfer of non-qualified retirement plan assets from a corporate held rabbi trust to the beneficiary of that trust - an officer). Ultimately, the Bankruptcy Court analyzed the current Ohio statutory corporate law. The Bankruptcy Court held that under Section 1701.59(E) of the Ohio Revised Code, although directors and officers may consider the interests of creditors and other parties, such consideration is optional by statute, and “directors owe their fiduciary obligation directly to the corporation and its shareholders, not to any creditors of the corporation.” In Ohio, officer liability is derivative of director liability.
In addition, the Court also discussed the current evolution of the doctrine of “deepening insolvency.” It was recognized that the doctrine of deepening insolvency is unevenly applied across the nation, and that disagreements exist not only between circuit courts, but within circuit courts. Given this backdrop, the Amcast court determined that it was not inclined to guess how Ohio courts would treat deepening insolvency, and for the moment, it cannot be considered as an independent cause of action.
Practice Pointer: If the Amcast case is construed as broadly as possible, it could lead to an end of the concept that a debtor entity needs to consider its creditors as it teeters into insolvency. Such a broad application (which may not ultimately occur) could result in a further shift in management advice from “consider your creditors” to “consider only those creditors you need to survive.” In converse, when consulting with creditor clients, involuntary bankruptcies may come back into fashion as a method to force debtors to consider all their creditors a little more evenly.
Relation to Other Courts: The Amcast case appears to be reflective of a trend being seen across the country, including in certain leading Courts addressing issues of corporate governance and obligations. In particular the Delaware Supreme Court reached a similar conclusion applying Delaware law in the North American Catholic Educational Programming Fdn., Inc. v. Gheewalla case decided in May 2007.
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MODIFICATION OF RETIREE BENEFITS PURSUANT TO BANKRUPTCY CODE SECTION 1114 REQUIRES THE DEBTOR TO ESTABLISH THAT THE MODIFICATIONS ARE NECESSARY TO ALLOW THE ESTATE TO EFFECTUATE A PLAN OF REORGANIZATION
In re SAI Holdings Ltd., 2007 Bankr. LEXIS 1051 (Bankr. N.D. Ohio March 26, 2007) (Whipple, J.)
The Bankruptcy Court denied the debtor’s motion to terminate certain retiree benefits pursuant to Section 1114 of the Bankruptcy Code. Although it acknowledged that payments to retirees were likely entitled to administrative expense priority, the court held that it was difficult to determine whether or not the termination/modification of the retiree benefits was necessary to accommodate confirmation of a Chapter 11 plan when there was no plan proposed. Accordingly, the court could not conclude that the debtor would be unable to propose a plan if the retiree benefits were not terminated.
The debtor sought Bankruptcy Court approval to terminate a retiree benefit plan ostensibly to allow the debtor to avoid certain administrative expenses that would become due and owing upon confirmation of its plan of reorganization. In its explanation, the Court dispelled any belief that a plan of liquidation would nullify the debtor’s attempt for modification of retiree benefits by confirming that Section 1114’s language is silent to the issue of reorganization or liquidation. Upon a showing of necessity to achieve confirmation, whether for reorganization or liquidation, modification could be approved. However, in this case, the debtor failed to show the anticipated results from an anticipated asset sale or any quantitative analysis of how the accrual of retiree benefits would make confirmation of any proposed plan impossible. Without a showing of such analysis for the Court to consider, the Court denied the debtor’s request.
Practice Pointer: When advising a debtor who has benefit or legacy costs that would be covered by Section 1114 of the Bankruptcy Code, it is advisable to develop a strategy in advance that is both convincing and illustrative of the benefits conveyed by modification or termination.
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PURCHASER OF SUBSTANTIALLY ALL ASSETS OF CHAPTER 11 DEBTOR IS NOT ENTITLED TO “HOLD BACK” DEFERRED PAYMENT FOR ASSET PURCHASE WHEN “HOLD BACK” PROVISIONS ARE TRIGGERED BY PURCHASER’S OWN ANTICIPATORY REPUDIATION
Medi-Care Orthopedic & Hosp. Equip, Inc. v. Health II of Ohio, LLC, (In re Medi-Care Orthopedic & Hosp. Equip., Inc.), 2007 Bankr. LEXIS 1298 (Bankr. N.D. Ohio April 3, 2007) (Whipple, J.)
The Bankruptcy Court for the Northern District of Ohio found that the purchaser of substantially all of a Chapter 11 debtor’s assets was not entitled to retain any amounts of a contractually agreed to hold back when the alleged breach giving rise to application of the hold back provisions was caused by the anticipatory repudiation of the purchaser. The Bankruptcy Court held that the seller’s affiliate (and lessor of real property to the purchaser) did not breach the lease terms because abandonment of the leases only occurred after receiving notification that the purchaser was vacating the leased premises, a deemed anticipatory repudiation.
The purchaser refused to pay the hold back amount of $620,000 to the debtor to complete the purchaser’s obligations under the purchase agreement. It claimed that the debtor’s former president (and lessor of certain real property housing the purchaser) breached the terms of the real estate leases and that the purchaser suffered lost business from the conduct of the debtor. The court found that the purchaser was not entitled to retain the hold back amount because Ohio law enforces the doctrine of anticipatory repudiation to relieve the non-repudiating party from further obligations. In addition, the agreement required the purchaser to give timely notice in writing of any claimed breach and to afford the debtor a reasonable opportunity to cure any such real breach. Purchaser did not provide such notice or a reasonable opportunity to cure. Thus, the Bankruptcy Court held that president did not breach any lease terms, which might enable the purchase to retain any portion of the hold back. Also, the purchaser failed to provide evidence that any loss of business was the result of anyone other than the purchaser.
Practice Pointer: When representing a purchaser of assets, creativity is good and can lead to achieving a deal where one might not have existed beforehand. However, when considering the moving parts of any deal, be aware of all possible arguments that your client, not the adverse party, will be the original source of a breach.
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PAYMENT OF REASONABLE ATTORNEYS’ FEES THAT HAVE ACCRUED WILL BE UPHELD ACCORDING TO THE TERMS OF THE UNDERLYING AGREEMENT AND/OR APPLICABLE STATE LAW; PROSPECTIVE FEES FOR ANTICIPATED ACTIONS ARE DISFAVORED AS UNDETERMINABLE
Orix PLC Houston Venture v. Victor (In re Jillian’s Entertainment Holdings), 2007 Bankr. LEXIS 1454 (Bankr. W.D. Ky. May 2, 2007) (Stosberg, J.)
The Bankruptcy Court for the Western District of Kentucky held that if a non-Bankruptcy justification exists to award attorneys’ fees then such fees should be appropriately paid. The Bankruptcy Court then approved the creditor’s request that reimbursement for its attorney fees be included in the award for fees actually accrued. The Bankruptcy Court did apply a standard of reasonableness to the award (reducing some fees relating to preparation of a fee application) and refuse to Order payment of fees on a prospective basis because appeals had not been filed, and such fees not yet incurred.
Practice Pointer: When advising creditors, encouraging them to include in their terms a provision that attorneys’ fees for any efforts necessary to collect the debts incurred hereunder, including collection through proceedings in a United States Bankruptcy Court, are to be paid by the debtor may effectively allow a creditor client greater leverage downstream to improve recovery or expand the size or depth of a claim.
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FEE EXAMINER CAN BE APPOINTED AT THE DISCRETION OF AND FOR THE BENEFIT OF THE COURT; FEE EXAMINER IS DIFFERENT FROM AN EXAMINER APPOINTED PURSUANT TO SECTION 1104
In re Collins & Aikman Corp., 2007 Bankr. LEXIS 1539 (Bankr. E.D. Mich. May 4, 2007) (Rhodes, C.J.)
Responding to the extensive concerns and complaints of significant unsecured creditors the Bankruptcy Court for the Eastern District of Michigan held that, where in excess of $88 million of fees and expenses had been incurred and requested by counsel paid by the estate, and no effective reorganization of the debtor was going to occur, appointment of a “fee examiner” to assist the Court in evaluating estate professional fees was appropriate.
A number of creditors who were owed significant sums of money by the debtor were understandably concerned about the fees applied for and approved for estate professionals in this mega-bankruptcy case. Recognizing this concern, the Court requested that interested parties submit their reasons for or against the appointment of such a “fee examiner.” The Court held that he could make such a limited appointment under the “catch-all” powers vested in Bankruptcy Courts under Section 105 of the Bankruptcy Code. After numerous responses (in favor of by numerous creditors and the United States Trustee – and opposed to by the debtor and the committee of unsecured creditors), the Bankruptcy Court held that a fee examiner would be appointed, but such examiner would review fees and expenses only for the Court, and such review would be conducted on a macro level, rather than the intense, line-by-line scrutiny desired by certain individual creditors.
As an additional matter, in responding to the Court’s request for opinions on the fee examiner topic, the United States Trustee filed a Motion to Appoint a Fee Examiner pursuant to Section 1104 of the Bankruptcy Code. The Bankruptcy Court denied this motion on the basis that the scope of authority given to an examiner was larger than what was necessary in this instance and that the Bankruptcy Court’s authority under Section 105 was ample to achieve the review goals needed
Practice Pointer: The Court’s position on the United States Trustee’s Motion is instructive on the point that a general examiner can have wide sweeping authority and review capability. Such avenue should not be discounted as an option for disgruntled creditor clients.
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ALLEGATION THAT DEBTOR PURCHASED PRODUCTS FROM CANADIAN ENTITY WAS NOT ENOUGH TO ESTABLISH PERSONAL JURISDICTION OF THE COURT OVER CANADIAN ENTITY
Frentz v. Roycom Ltd. (In re Thermoview Indus., Inc.), 2007 Bankr. LEXIS 1613, (Bankr. W.D. Ky. May 16, 2007) (Lloyd, J.)
In dismissing the trustee’s action for avoidance of an allegedly preferential transfer, the Bankruptcy Court for the Western District of Kentucky held that the Court could not establish that it had personal jurisdiction over a Canadian corporation without an adequate showing of minimum contacts from the trustee. The assertion that the Canadian corporation had sold goods to the debtor FOB (Canada) was insufficient to establish such minimum contacts.
The Canadian corporation did business in Canada, not in the United States, although it would ship product throughout the world, including to the debtor. The trustee filed a complaint to avoid certain debtor payments and recover property transferred. In reaching its conclusion that sales to parties in the United States and the debtor did not establish minimum contacts, the court determined that the “stream of commerce plus” approach is appropriate for a finding that minimum contacts occurred, and that a mere sale of some product is not equivalent to taking a place in the stream of commerce and taking additional steps to create purposeful availment. Accordingly, the matter was dismissed for lack of personal jurisdiction.
Practice Pointer: Personal jurisdiction issues present interesting defenses and leverage for foreign clients. The rules on personal jurisdiction are not uniformly applied by all Courts and can provide excellent opportunities to reduce risk or maximize leverage for clients not specifically transacting within the United States.
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RETAINAGE FUNDS HELD BY GENERAL CONTRACTOR ARE NOT PROPERTY OF A DEBTOR SUB-CONTRACTOR’S ESTATE; GENERAL CONTRACTOR HAD DUTY UNDER TERMS OF CONTRACT WITH OWNER TO OBTAIN LIEN RELEASES, AND SUCH ACTIONS DO NOT CREATE PREFERENCE
Rieser v. Brownmor Co. (In re Pyper Const. Co.), 2007 Bankr. LEXIS 1642 (Bankr. S.D. Ohio May 16, 2007) (Waldron, J.)
In an action by a Chapter 7 Trustee to avoid payments from a non-debtor general contractor to a non-debtor under–subcontractor on the basis that such dollars were property of the estate and thus an impermissible post-petition transfer to pay prepetition debts, the Bankruptcy Court for the Southern District of Ohio held that funds held (i.e., retainage funds) by a general contractor are not property of a debtor subcontractor’s estate, and that the dollars held by the general contractor could be used to satisfy obligations to the under-subcontractor to avoid placement of liens on the owner’s property, an obligation of the general contractor.
The general contractor had agreed to pay $54,000 from retainage funds on a particular construction project to a party who served as a sub-contractor to the general contractor’s sub-contractor (the under-subcontractor). Such payment was made at a discount on the total amount due, and was made to procure the agreed release of liens from the under-subcontractor so the project owner’s property would remain free of encumbrances. The trustee claimed an interest in the retainage funds as property of the debtor’s estate. The Bankruptcy Court applied the holding from the Sixth Circuit’s opinion in In re Arnold that in a construction context, the duties of a general contractor to pay under-subcontractors was an independent interest to that of the debtor in the retainage funds and that payment of such funds without passing through the debtor was appropriate.
Practice Pointer: Although this case appears to be “close” on the analysis, construction projects, and the related lien interests inherent therein often lead to fact based conclusions by Courts. When working with clients when the construction and Bankruptcy arenas collide, it is important to carefully analyze outgoing payments before such payments are made, because making payments before analysis can lead to a situation where your client is asked (or forced) to “double pay.”
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