1 the BANKRUPTCY COURTS' GREATEST HITS: TOP 10 BANKRUPTCY COURT DECISIONS of 2018 David G. Epstein George E. Allen1 Chair
Total Page：16
File Type：pdf, Size：1020Kb
THE BANKRUPTCY COURTS’ GREATEST HITS: TOP 10 BANKRUPTCY COURT DECISIONS OF 2018 David G. Epstein George E. Allen1 Chair University of Richmond Law School This is the 45th Annual SBLI Seminar on Bankruptcy Law & Rules. I spoke at the 3rd Annual Seminar on Bankruptcy Law and Rules held at the Hyatt Regency in February 1977. I don’t remember what I talked about. The program says I talked about preferences and fraudulent conveyances and the relationship of the Uniform Commercial Code and the Bankruptcy Act of 1898. I know that I did not talk about bankruptcy court decisions. Bankruptcy court opinions were not freely available. 1977 was before West Bankruptcy Reporter, before LEXIS and before WESTLAW. By contrast, 2,486 bankruptcy court opinions entered during 2018 are available on Westlaw. Opinions from Delaware and New York and other states that misspell the “parol evidence rule.” E.g., In re Ryckman Creek Resources LLC, 2018 WL 4178692 (Bankr. Del 2018); In re AMR Corporation, 2018 WL 6523965 (Bankr. S,.D. N.Y. 2018) . Opinions that refer to an LLC (limited liability company) as a “limited liability corporation.” E.g., In re Braun, 2018 WL 506602 (Bankr. N.D. Cal. 2018); In re NNN 400 Capitol Center 16 LLC, 2018 WL 4849655 (Bankr. Del. 2018). Even better, there is Judge Colton’s reference to South Park in In re Bateman, 585 B.R. 618 (Bankr. M.D. Fla 2018), a case involving an arbitration clause in the fine print of a Verizon consumer contract: “The court is reminded of an episode from the cartoon series “South Park” in which Apple comes to town and demands blood from iPhone customers because a provision to give up your blood was buried in the consumer service agreement that everyone in South Park had agreed to by simply clicking a box, but of course never read. (Trey Parker, 15 HumancentiPad South Park (2011) ).” 1 The honored Richmond trial lawyer, https://libguides.law.virginia.edu/c.php?g=39996&p=254096, Not the former Redskins Coach https://www.profootballhof.com/players/george-allen/ nor his politically incorrect former Senator son https://www.youtube.com/watch?v=r90z0PMnKwI 1 “TOP TEN” FIRST CASE: COVENANT NOT TO COMPETE (101(5) AND 727(b)) In re Cyberton International, Inc., 2018 WL 3635708 (Bank. D. Kan. 2018) 11 U.S. Code § 101 - Definitions In this title the following definitions shall apply: (5) The term “claim” means— (A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured. 11 U.S. Code § 727 - Discharge (b) Except as provided in section 523 of this title, a discharge under subsection (a) of this section discharges the debtor from all debts that arose before the date of the order for relief under this chapter… Capps sold his business to Cybertron. Then Capps and Cyberton entered into two separate agreements: (1) an employment contract and (2) a covenant not to compete. The covenant not to compete provided for both injunctive relief and liquidated damages. Several months later, Capps filed for Chapter 7 bankruptcy and received a discharge. Still later, Cyberton dismissed Capps who got a job with one of Cyberton’s competitors. Cyberton sued Capps in state court for injunctive relief. The state court granted a temporary injunction. Cyberton then filed a complaint in bankruptcy court for a declaratory judgment that Capps obligations under the covenant not to compete were not discharged. The court ruled for Cyberton. In so ruling, the bankruptcy court concluded that: (1) “…breach of a covenant not to compete . is not a claim because it cannot be remediated by mere money.” (2) “…the availability of liquidated damages in addition to injunctive relief did not render . breach of a performance of a covenant not to compete a claim.” (3) “These obligations could not be claims because they did not arise before Capps filed his bankruptcy petition. .Tenth Circuit precedent holds that a claim arises when the culpable conduct upon which the claim is based occurred.” The court cited to and relied on In re Parker, 313 F.3d 1267 (10thCir. 2002) (a legal malpractice claim). 2 Another 2018 bankruptcy court decision, In re Baerg Real Property Trust, 585 373, 388-89 (Bankr.N.D. Tex. 2018), addresses covenants not to compete in dictum: “The right to specific performance, unlike other equitable obligations, such as an injunction enforcing a covenant not to compete, generally gives rise to a ‘claim’ that can be discharged in bankruptcy. 11 U.S.C. § 101(5). Route 21 Assocs. of Belleville, Inc. v. MHC, Inc., 486 B.R. 75, 85 (S.D.N.Y. 2012), aff'd sub nom. In re Lyondell Chem. Co., 542 Fed.Appx. 41 (2d Cir. 2013). See also In re A.J. Lane & Co., Inc., 107 B.R. 435, 439 (Bankr. D. Mass. 1989) (“[R]ecognition of the doctrine and allowance of specific performance against a debtor in bankruptcy proceedings would be to prefer one creditor over others”). The policy rationale is that specific performance should not be permitted where the remedy would in effect do what Section 365 of the Bankruptcy Code can avoid, that is, the imposition of burdensome contracts on the debtor. Id. at 439 (right of specific performance is subordinate to debtor’s rejection rights). SECOND CASE: SUBSTANTIVE CONSOLIDATION (105 AND 303) In re Kretchmar, 579 B.R. 924, 591 B.R. 876 (Bankr. Okla 2018) 11 U.S. Code § 105 - Power of court (a) The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process. 11 U.S. Code § 303 - Involuntary cases (a) An involuntary case may be commenced only under chapter 7 or 11 of this title, and only against a person, except a farmer, family farmer, or a corporation that is not a moneyed, business, or commercial corporation, that may be a debtor under the chapter under which such case is commenced. (b) An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title— (1) by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, or an indenture trustee representing such a holder, if such noncontingent, undisputed claims aggregate at least $10,000 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims; * * * (h) If the petition is not timely controverted, the court shall order relief against the debtor in an involuntary case under the chapter under which the petition was filed. Otherwise, after trial, the court shall order relief against the debtor in an involuntary case under the chapter under which the petition was filed, only if— 3 (1) the debtor is generally not paying such debtor’s debts as such debts become due unless such debts are the subject of a bona fide dispute as to liability or amount; or (2) within 120 days before the date of the filing of the petition, a custodian, other than a trustee, receiver, or agent appointed or authorized to take charge of less than substantially all of the property of the debtor for the purpose of enforcing a lien against such property, was appointed or took possession. Debtor, an individual farmer, filed a Chapter 7 petition. His parents conduct similar farming operations. The Chapter 7 trustee and a creditor brought an adversary proceeding seeking substantive consolidation of the debtor and his non-debtor parents. After the bankruptcy court granted the non-debtor parents’ motion to dismiss, the plaintiffs moved for reconsideration, and the bankruptcy court reaffirmed its holding as to the parents. The parents’ motion to dismiss was based on two legal arguments. First, that the only way to achieve the effect of substantive consolidation of a non-debtor is through a section 303 involuntary bankruptcy petition. Second, individual debtors cannot be substantively consolidated with individual non-debtors. The court rejected the first argument as inconsistent with precedent: “a large majority of courts, including those in the Tenth Circuit, permit the doctrine of substantive consolidation to be applied to a non-debtor without a discussion of section 303.” The cases cited and discussed were all decided before Law v. Siegel, 134 S.Ct.l 1188 (2014). A recent ABI Journal article by a graduate of the University of Richmond Law School argues “allowing substantive consolidation of a debtor with a nondebtor entity without complying with the requirements of § 303 would seemingly appear to be the same sort of end- run around prohibited by Law v Siegel. Effectively, substantive consolidation would allow for a nondebtor entity to be forced into bankruptcy without the need to have three creditors take concerted action and, perhaps most importantly, without the risk of § 363(i)’s fee-shifting provision and the imposition of actual and/or punitive damages as a result of an unsuccessful petition.