“Substantive Best Practices” Best Practices in Bankruptcy Law

Click on any item to view associated materials Biographies of Speakers

The Honorable Kevin Gross, Judge, U.S. Bankruptcy Court Laura Davis Jones, Esquire, Pachulski Stang Ziehl & Jones LLP Michael B. Joseph, Esquire, Ferry Joseph, P.A.

Program Materials *

Best Practices for Debtor’s and Creditor’s Attorneys Important Cases Recent District of Delaware Consumer Cases Ten Important/Interesting Cases Prior to 2016 Ten Important/Interesting 2016 Cases Practice Pointers

* The forms included herein are samples only and may not be appropriate for any

particular matter.

1

DOCS_DE:172648.1 68700-001

Laura Davis Jones

Laura Davis Jones is a name partner of the national bankruptcy law firm of Pachulski

Stang Ziehl & Jones LLP, and is the managing partner of the firm’s Delaware office. She gained

national recognition as debtor’s counsel in the Continental Airlines bankruptcy case, and has

represented numerous debtors, creditors’ committees, bank groups, acquirers, and other

significant constituencies in national chapter 11 cases and workout proceedings. She lectures at

national bankruptcy and litigation seminars, and has authored numerous articles. Ms. Jones was

named “Deal Maker of the Year” by The American Lawyer in 2002 and has also been profiled in

The American Lawyer.

Ms. Jones has been named continuously by her peers as one of the “Best Lawyers in

America” and as one of the “Best Lawyers in Delaware,” and was selected as one of the top ten

lawyers in Delaware by “Delaware Super Lawyers.” She is included among Chambers USA

America’s “Leading Lawyers for Business,” and ranked among the top-tier

Bankruptcy/Restructuring lawyers in Delaware. Ms. Jones has been recognized in the K&A

Restructuring Register and the Law Dragon 500 since their inception, has been named repeatedly

to the International Who’s Who of Insolvency and Restructuring Lawyers, and holds an AV Peer

Rating, Martindale-Hubbell’s highest peer recognition for ethical standards and legal ability.

She is a graduate of University of Delaware and received her J.D. from Dickinson School of

Law, where she was on the board of editors and business manager for the Dickinson Law Review,

as well as to serve on the Appellate Moot Court Board. Ms. Jones is admitted to practice in

Delaware and the District of Columbia.

8816854

MICHAEL B. JOSEPH, ESQUIRE

Michael B. Joseph is the Chapter 13 Trustee for the District of Delaware (appointed in 1987) and has served as a Chapter 7 Bankruptcy Trustee (appointed in 1981) and a is currently a Chapter 12 Case Trustee. He is a partner in the Wilmington, Delaware law firm of Ferry Joseph, P.A. Mr. Joseph received his B.A. from Rutgers University (1972) and his J.D. from Widener University Delaware Law School (1975). He is admitted to practice in Delaware (1976), New Jersey (1977), United States District Court for the District of Delaware (1977) and the Third Circuit Court of Appeals (1990). Mr. Joseph is a Fellow of the American College of Bankruptcy. Mr. Joseph is a Past President of the National Association of Chapter 13 Trustees (2010-2011) He is also has served as a member of the Liaison Committee to the U.S. Department of Justice Executive Office for United States Trustees in Washington, D.C. (2006-2011). He is a member of the Delaware Bankruptcy American Inn of Court, the Bankruptcy Section of the Delaware State Bar Association, the American Bankruptcy Institute, the American Bar Association, and the Local Rules Committee of the United States Bankruptcy Court for the District of Delaware. Mr. Joseph is a member of the Mediation and Voluntary Arbitration Panel for the United States Bankruptcy Court for the District of Delaware. He has acted as a Delaware Superior Court Arbitrator and has mediated numerous cases in his capacity as a Bankruptcy Court Mediator. Also, he has served as a Liquidating Trustee in several Delaware matters. Mr. Joseph has lectured at many national, regional and local bankruptcy seminars, including the 2016 NACTT Annual Seminar in Philadelphia, the National Conference of Bankruptcy Judges, and ABI Conferences. September 2016

2016 Delaware Supreme Court Pre-Admission Conference BEST PRACTICES FOR CONSUMER DEBTOR’S AND CREDITOR’S ATTORNEYS

DEBTOR’S ATTORNEYS:

1. Become familiar with the Rules of Bankruptcy Procedure and the Delaware Local Rules of Bankruptcy Practice and Procedure, Chambers Procedures, Trustee’s requirements and local customs. a. Each year there may be amendments to the Federal Bankruptcy Rules and

Forms that should be reviewed with effective dates usually December 1st. b. Delaware Local Bankruptcy Rules and Forms also are subject to amendments

each year effective February 1st. 2. Engagement and retention agreements a) Basic Fees: Specify services covered b) No Look Fees in Chapter 13-See Delaware General Order (9/12) c) Be sure that fees charged are disclosed properly in schedules (2016(b) and SOFA (Part 7, Paragraph 16) 3. Pre-bankruptcy consultation and investigation ----- Forms: develop good intake forms ----- Pacer Searches ----- Lien Searches ----- Credit Reports ----- 4 years tax-returns ----- Copies of bills, documents, notices 4. Credit Counseling Certificates Prepetition: Credit Counseling Certificate must be within 180 days of filing from an approved agency Post petition: Financial Management instructional course certificate 5. Review and determine CMI (current monthly income) for Means Test 6. Review of Domestic Support Obligation’s and requirements and addresses 7. Review assets, valuation, all insurance policies, and priority, secured and unsecured debt and when debt incurred. 8. Review exemptions and determine applicable law. 9. Assurance that all required documents ready to file and Debtor has reviewed, approved and signed. Ready any notice required to creditors. 10. Calendar important dates ---- Section 341 meeting ---- Confirmation hearing ---- Bar dates

---- Stay relief motions ---- Discharge dates

11. Chapter 7 no asset Consumer cases usually are open for about 4 months. Unless there are challenges or other complex factors, a debtor’s attorney will attend the Section 341 meeting, assist with reaffirmations and any amended schedules needed. Fees are usually all paid in advance of the Chapter 7 proceedings and disclosed to the Court and the Trustee. 12. Chapter 13 cases unlike Chapter 7 go on for at least 3 to 5 years, and debtor’s attorneys continue representation throughout the consummation of the plan until discharge. Once a Plan is complete, the debtor’s attorney assists with the final steps for discharge and the closing of the case. Fees may be charged post confirmation, with notice and approval by the court and the trustee.

CREDITOR’S ATTORNEYS 1. Become familiar with Rules of Bankruptcy Procedure and the Delaware Local Rules of Bankruptcy Practice and Procedure, Chambers Procedures, Trustee’s requirements and local customs. 2. Obtain retention or engagement agreement. 3. Obtain and review all underlying documents, agreements and itemized claims. 4. Review relevant docket and calendar important dates ----Section 341 meeting ----Objection to Discharge deadlines ----Objection to confirmation hearing ----Claims bar date 5. Make sure Proof of Claim is filed prior to Bar date, and any complaints objecting to discharge. 6. Attend Chapter 13 Confirmation hearing, contact Debtor’s counsel in advance to resolve objections. 7. Stay relief motions: Make certain client submits basis for allegations set forth in Motion. 8. Follow up on reaffirmations and redemptions - document 9. Follow up on surrender of secured collateral - document 10. Contested matters: obtain appraisals and valuation evidence and document underlying claim, determine if witnesses required and communicate with client, opposing party

and the Court.

American Bankruptcy Institute

National Association of Chapter 13 Trustees, Member of the Board of Directors (Past President)

Fellow, American College of Bankruptcy

1 | P a g e

SUPREME COURT OF DELAWARE PRE-ADMISSION CONFERENCE 2016

SUBSTANTIVE BEST PRACTICES IN CONSUMER BANKRUPTCY LAW

Michael B. Joseph, Esquire

Important Cases:

United States Supreme Court

1. Husky Int’l Elecs., Inc. v Ritz, No. 15-145, 2016 WL 2842452, the term “actual fraud” in Section 523(a)(2)(A) encompasses forms of fraud, like fraudulent conveyance schemes, that can be effected without a false representation.

2. Bank of America, N.A. v. Caulkett, No. 13-1421, 2015 WL 2464049 , 135 S.Ct. 1995 (June 1, 2015). Chapter 7 debtor cannot use § 506(d) to void wholly unsecured junior lien because “Dewsnup defined the term ‘secured claim’ in § 506(d) to mean a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.”

3. Wellness Int’l Network, Ltd. v. Sharif, No. 13-935, 2015 WL 2456619, 575 U.S___ (May 26, 2015).We hold that Article III is not violated when the parties knowingly and voluntarily consent to adjudication by a bankruptcy judge.” This case furthers interpretation of Stern v Marshall.

4. Harris v. Viegelahan, No. 14-400, 2015 WL 2340847 , 135 S. Ct. 1829 (May 18,

2015).At conversion (in good faith) to Chapter 7 after confirmation, undistributed funds held by Chapter 13 trustee must be refunded to debtor

5. The Bullard v. Blue Hills Bank, No. 14-116, 2015 WL 1959040, 575 U.S. ___

(May 4, 2015). Supreme Court unanimously held denial of confirmation is not final

2 | P a g e

and debtors have to suffer dismissal a condition for appeal of the denial of confirmation.

6. Baker Botts, LLP v Ascarco, LLC 556 U. S.___(2015) Section 330(a)(1) of the Bankruptcy Code does not permit bankruptcy courts to award fees for defending fee applications to professionals hired under Section 327(a) of the Bankruptcy Code.Judgment: Affirmed, 6-3, in an opinion by Justice Thomas on June 15, 2015. Justice Sotomayor joined

7. Law v Siegel 134 S.Ct. 1188 (March 4, 2014)

In an unanimous opinion, the Supreme Court held that a bankruptcy court cannot surcharge a debtor’s homestead exemption to pay for the Chapter 7 trustee’s administrative expenses, even if those expenses were incurred as a result of the debtor’s fraudulent misrepresentations. The bankruptcy court had surcharged the debtor’s $75,000 California homestead exemption to cover the trustee’s fees and costs, but the Supreme Court reversed. It held that Bankruptcy Code Section 522(k)’s explicit language that a debtor’s exempt property “is not liable for payment of any administrative expense” (other than in inapplicable and specific circumstances detailed in that section), precludes a bankruptcy court from invoking either its authority under Section 105(a) to issue orders to “carry out” the provisions of the Bankruptcy Code, or its inherent sanctioning powers, to surcharge the debtor’s homestead exemption. n short, where Congress has declared a debtor’s exempt property off limits, a bankruptcy court cannot not use Section 105(a) to override that specific statutory limitation.

8. To determine dischargeability under § 523(a)(4), defalcation in a fiduciary capacity requires an intentional wrong: either “conduct that the fiduciary knows is improper . . . [or] reckless conduct of the kind that the criminal law often treats as the equivalent." Bullock v. BankChampaign, N.A., No. 11-1518, 2013 WL 1942393, at *5 (May 13, 2013).

3 | P a g e

9. Hall v United States, No 10-875, 2012 WL 1658486 (U.S. May 14, 2012) In a Chapter 12 case with clear implications for Chapter 13 practice, the Supreme Court concludes that postpetition taxes on the sale of estate property are not incurred by the estate and are not administrative expenses collectible through the plan and are not dischargeable at the completion of payments.

10. Ransom v. FIA Card Servs., N.A. 131 S. Ct. 716 (January 11, 2011)

Means test case: Because Congress intended the means test to approximate the debtor’s reasonable expenditures on essential items, a debtor should be required to qualify for a deduction by actually incurring an expense in the relevant category. If a debtor will not have a particular expense during his plan, an allowance to cover the cost is not “reasonably necessary” within the meaning of the statute. Here debtor could not take a car ownership expense for a nonexistent car expense as the car was owned outright.

11. Hamilton v. Lanning, 130 S. Ct. 2464 (June 7, 2010)

Another Means test case: When a bankruptcy court calculates a debtor’s projected disposable income, the court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation.

12. United Student Aid Funds, Inc. v. Espinosa, 130 S. Ct. 1367 (March 23, 2010)

Where a student loan creditor received notice of the terms of a debtor’s Chapter 13 plan that provided for a partial discharge of the student loan, Rule 60(b)(4) relief was not available and the confirmation order would be binding on the creditor.

13. Marrama v. Citizens Bank of Massachusetts 127 S. Ct. 1105 (2007)

Debtor filed a petition under chapter 7 and misrepresented value of his Maine property and that he had not transferred it in the preceding year. When the Chapter 7 Trustee sought to recover the Maine property as an estate asset, the debtor responded by seeking to convert his case to Chapter 13. The Trustee and bank objected contending that the request to convert was in bad faith and an abuse of the bankruptcy process. The Supreme Court rejected debtor’s

4 | P a g e

argument that Section 706(a) of the Bankruptcy Code provides an absolute right to convert in the case of bad faith conduct. The court held that bankruptcy courts have broad authority to prevent abuse. In this case, the debtor could not qualify as a Chapter 13 debtor due to his conduct in the Chapter 7 case.

THIRD CIRCUIT

14. In Re: Jevic Holding Corp. 2015 WL 2403443 (3rd Circuit May 21, 2015) The Third Circuit Court of Appeals held that (1) absent a showing that a structured dismissal of Chapter 11 case has been contrived to evade procedural protections and safeguards of the plan confirmation or conversion processes, the bankruptcy court has the discretion to order such a disposition; (2) the “Absolute Priority” Rule is not necessarily implicated outside a plan confirmation context when a settlement is presented for court approval separate and apart from a reorganization plan; and (3) the bankruptcy court had sufficient basis to approve a settlement which resulted in the structured dismissal of a Chapter 11 case with creditor distributions that did not comply with the Bankruptcy Code’s distribution scheme

15. In Re; Michael, 669 F 3rd 305 (3rd Cir 2012) When a debtor converts his or her Chapter 13 bankruptcy reorganization plan to a Chapter 7 liquidation plan in good faith, any plan payments made to the Chapter 13 trustee but not disbursed to creditors must be returned to the debtor. Cited by SCOTUS above in Harris (2015)

16. Rea v Federated Investors, 627 F.3rd 937, 2010 WL 5094250 (3rd Cir. 2010) The Third Circuit, affirming the lower court’s dismissal of a Section 525 claim, held that the Bankruptcy Code’s antidiscrimination provision under 11 USC Section 525(b) did not prohibit a private employer from discriminating against a prospective employee who previously filed bankruptcy. While the Bankruptcy Code prohibits a government employer from not hiring an individual who has filed bankruptcy, it does not specifically prohibit a private employer from doing so.

17. In re Rodriguez, No. 12-2146, 2013 WL 1716110 (3d Cir. Apr. 22, 2013) (Jordan, Aldisert, Nygaard) (unpublished)- In re Fesq, 153 F.3d 113 (3d Cir. Aug. 18, 1998) (Stapleton, Alito, Shadur), was not overruled by United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 130 S. Ct. 1367, 176 L. Ed. 2d 158 (Mar. 23, 2010); bank cannot challenge confirmation order by Rule 60 motion on any ground except fraud.

5 | P a g e

18. InRe:Taylor2011USAppLexis17651(3rdCirMarch2011) The Third Circuit considered whether two lawyers, their law firm, the managing partner of the law firm, and their client could be sanctioned for the lawyers’ decision to rely on information provided by a client’s third party computer system in pursuing creditor claims in a bankruptcy matter. Where a lawyer systematically fails to take any responsibility for seeking adequate information from her client, makes representations without any factual basis because they are included in a “form pleading” she has been trained to fill out, and ignores oblivious indications that her information may be incorrect, she cannot be said to have made reasonable inquiry.” The sanctions against the managing partner of the firm were overruled, in part, because the managing partner did not have hands on contact with the subject case or any of the incorrect filings submitted to the bankruptcy court. The sanctions against the bank were upheld because the bank did not appeal the bankrupt Thirteen Recent and Important District of Delaware Consumer Cases

1. DiMauro v Wilmington Trust, (April 2016) Petition date was the operative date for valuation of debtor’s home for the purpose of determining whether a junior mortgage is completely unsecured and thus subject to a strip off under Section 1322(b)(2)

2. In Re: Jodi Campbell v Access Group et al Adv P No 14-50082 (June 2015)

Student Loan Discharge case where the court held that under the Brunner Test the debtor failed to satisfy the first two prongs of the 3 part test and therefore failed to meet the burden of showing undue hardship, and thus the student loan is not dischargeable.

3. Aro v Triumphe Leasing Network Inc Adv N0 13-51053 (January 2015) court

finds res judicata applies barring the challenge of the validity of a lien and secured claim but limits the claim and sets a cap for attorney’s fees and accrued interest at the Delaware statutory rate.

4. In Re: Richard & Mary Cloud Williams No. 13-12234, 2014 WL 3584002

(Bankr. D. Del. July 18, 2014). (Shannon) Mortgage Servicer refused to accept prepetition tender by debtors of mortgage arrears and essentially found to have caused the debtors to file a 2nd bankruptcy to save their home from foreclosure. Mortgage Servicer failed to

6 | P a g e

meet its burden to establish its claim and therefore found to be liable for debtors’ attorney’s fees and costs.

5. In Re: Kennedy No. 12-11223. 2012 WL 2480258 (Bankr D. Del 2013)(Shannon)

For purposes of valuation of real property, may the debtor impose a 10% “cost of sale” deduction in valuing the subject property? The Court held no, the deduction is not permitted for purposes valuation in the avoidance of or stripping off” a junior lien

6. In re: Vidal et al, 12-11758, 12-12319, 12-12340, 12-12563, 2013 WL 441605 (Bankr. D. Del. Feb. 5, 2013).

The Court will not confirm a Chapter 13 Plan that provides for lien avoidance by a plan provision alone-an adversary proceeding or Motion is required to be filed in addition to a reference in the plan.

7. In re: Don Scioli: No. 12-10572, 2013 WL 318718 (Bankr. D. Del. Jan. 28,

2013) Court sustained trustee’s objection to exemptions and found that 3 automobiles held by the debtor were not held as tenants by the entirety as they were titled only in the debtor’s individual name. A detailed analysis of Delaware property law is set forth in the opinion.

8. In Matter of Wimbrow 2012 WL 3069527 (Bankr D Del July 27,

2012) (Shannon) After the debtor left his job at an accounting firm, he was sued in state court by the creditors, two former partners, who alleged that he breached the non-compete clause in his employment contract. The state court entered judgment in favor of the creditors. The creditors filed an adversary proceeding alleging their claims were not dischargeable. (1) The creditors' allegation that the debtor committed a defalcation while acting in a fiduciary capacity failed because an exception under § 523(a)(4) could not be based on a constructive trust. The debtor was not an employee when the alleged defalcation occurred, and the law did not consider him a fiduciary simply because he was contractually obligated not to compete with the firm for a year after his departure. (2) The creditors also failed to establish larceny for purposes of § 523(a)(4). Although the accounting firm had a legal claim on the money earned by the debtor, it did not own the money. (3) The embezzlement claim failed because the debtor did not misappropriate the creditors' money. Rather, he breached his employment contract.

7 | P a g e

9. In re Calvin Williams 2011 WL 2533046 (Bankr. D. Del June

2011)(Shannon) The Bankruptcy Court held that in the discretion of the Court, the relatively discrete issues raised in the litigation over an interest in property in a Chapter 13 case do not warrant attorney’s fees of over $20,000 to a creditor. Fees charged at the rate of $500 per hour exceeds the rates typically charged by counsel operating in consumer chapter 13 or chapter 7 cases before this court.

10. In Re: Juvennelliano 464 B.R. 651, 656 (Bankr. D. Del. Sept. 7, 2011) (Shannon) (Damages from postconfirmation breach of assumed vehicle lease were administrative expense claim to extent assumed lease benefited bankruptcy estate. Monthly payments and excess mileage charges for period vehicle was used for benefit of estate were allowed administrative expenses, but attorney fee for filing motion was not. "Allowing an administrative expense claim for only those damages that provided a benefit to the estate provides certainty that the claim is [of] the . . . type contemplated under 11 U.S.C. § 503(b)(1)(A).").

11. In Re: In re Quinn 425 B.R. 136 (Bankr. D. Del. 2010) (Shannon)

Postpetition, preconfirmation damage to home triggered administrative priority claim of purchaser for cleanup and repairs when debtors left 16 large dogs unattended in property. Administrative expense claim was in addition to general unsecured claim previously allowed.

12. Emery-Watson v Manakounis 412 B.R. 670 (Bankr. D. Del 2009) (Shannon)

Under Delaware law, a contract for sale of the debtor’s residence was unconscionable, justifying rescission, when neighbor acquired residence for $30,000 that had been appraised for $150,000. Contract found to be so one- sided as to shock the conscience of the Court. Equitable lien granted to creditor for actual amounts paid.

13. In Re: Murray 377 B.R. 464 (Bankr. D. Del 2007) (Shannon)

This is a case about a $200,000 Delaware license plate (Number “67"). The debtor originally filed a Chapter 7 case and after the U.S. Trustee moved to dismiss pursuant to Section 707(b) (3) the debtor voluntarily converted to Chapter 13. After the case converted the former Chapter 7 Trustee learned the debtor held a valuable Delaware tag and sought an order converting the case back to Chapter 7 based upon debtor’s failure to disclose. The Court, while considering the holding in the Marrama case,

8817025 8 | P a g e

denied the motion and found that under the facts of this case the conversion to Chapter 13 was not in bad faith and debtor intended to pay 100% to his creditors. (Note: Tag sold for $145,000.00 and creditors were paid in full and debtor received surplus proceeds).

DOCS_DE:209769.2 68700/001

BRIDGE THE GAP 2016 SUBSTANTIVE BEST PRACTICES

IN BUSINESS BANKRUPTCY CASES

Laura Davis Jones, Esquire Pachulski Stang Ziehl & Jones LLP 919 N. Market Street 17th Floor P.O. Box 8705 Wilmington, DE 19899-8705 Telephone: (302) 652-4100 Facsimile: (302) 652-4400 Email: ljones@pszjlaw.com

DOCS_DE:209769.2 68700/001

A. Ten Important / Interesting Cases Prior to 2016 1. Stern v. Marshall, 131 S.Ct. 2495 (2011). In this decision, the Supreme Court determined that the Bankruptcy Court, as non-Article III court, lacked jurisdiction to render a final decision on a state-law claim brought by a debtor against a creditor; the Court’s decision has potentially far-reaching implications for what had appeared to be the settled authority of the Bankruptcy Court. The facts here arose in the context of the much-publicized Anna Nicole Smith case. Smith (a/k/a Vickie Lynn Marshall) (“Vickie”) claimed that her husband, Howard Marshall, II (“Marshall”), would have provided for her in a trust but for interference by Marshall’s son, Pierce Marshall (“Pierce”). Vickie brought suit for tortious interference against Pierce, Vickie’s bankruptcy ensued, Pierce asserted a defamation claim in the bankruptcy case, and Vickie asserted her tortious interference claim as a counterclaim. The Bankruptcy Court eventually ruled in Vickie’s favor on both the defamation claim and the tortious interference counterclaim. The Supreme Court, while it found statutory authority in 28 U.S.C. § 157(b)(2)(C) (expressly defining counterclaims as “core” claims) for the Bankruptcy Court to enter final judgment on this “core” claim, determined that the grant of that jurisdiction was inconsistent with Article III of the United States Constitution. In sum, the Supreme Court found that the Bankruptcy Court “exercised the judicial power of the United States by entering final judgment on a common law tort claim, even though the judges of such courts enjoy neither tenure during good behavior nor salary protection.” Of note, the Supreme Court dismissed the argument that Pierce’s proof of claim, which may have given rise to a compulsory counterclaim by Vickie, thereby boot-strapped the counterclaim into the public rights exception that would permit a final determination by a non-Article III court. The Supreme Court also dismissed the argument that bankruptcy courts operate as a “adjunct” to district courts, noting the authority to enter final judgment and the traditional appellate review exercised the district courts (i.e., clearly erroneous factual review rather than de novo). It remains uncertain whether the consequence of the decision will be increased areas in which the bankruptcy courts act as factfinders and submit proposed dispositions to district courts or whether some other resolution is possible. 2. United Savings Association of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 366 (1988): The Supreme Court ruled that under secured creditors are not entitled to interest on their collateral to assure adequate protection under section 362(d)(1). The “interest in property” protected by this statute does not include a secured creditor’s right to immediate foreclosure. Secured creditors are entitled to adequate protection only against the diminution, if any, in their interests in the asserted collateral by reason of the use of the collateral. Thus, where the value of a secured party’s collateral is not diminishing by the debtor’s use, sale, or lease, the secured party’s interests are adequately protected. Such parties are also not prejudiced in that, in the case of an under secured creditor, the debtor has the burden of proving that the collateral is “necessary to an effective reorganization” – that the collateral “is essential for an effective reorganization that is in prospect.”

3 DOCS_DE:209769.2 68700/001

3. Bank of America National Trust & Savings Ass’n v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999): The Supreme Court held that the debtor’s equity holders could not (over the objection of a senior class of impaired creditors) give new capital and receive interests in the reorganized entity, where that opportunity was exclusively given, free from competition and without benefit of market valuation, to the old equity holders under the plan. Without deciding whether the absolute priority rule has a new value corollary, the Court found that the rights contemplated to be given to old equity under the plan were “on account of” the old equity position and not on account of new value in any event. 4. Hartford Underwriter’s Insurance Co. v. Union Planters Bank N.A. (In re Hen House Interstate, Inc.), 530 U.S. 1 (2000): Based on the statute’s plain reference to “trustee,” the Supreme Court held that section 506(c)’s surcharge provisions are not available to any party other than the debtor-in-possession or trustee. The Court briefly reviewed pre-Code practice in connection with the petitioner’s argument that other parties had been allowed to surcharge and thus the practice was implicitly adopted by the Bankruptcy Code, but ultimately, the Court pronounced that “the language of the Code leaves no room for clarification by pre-Code practice.” 5. Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. 33 (2008): This case turned on Section 1146(a) of the Bankruptcy Code, which exempts from stamp or similar taxes any asset transfer “under a plan confirmed under section 1129 of the Code.” The Supreme Court held that Section 1146(a) applies only to post-confirmation transfers made under the authority of a confirmed plan of reorganization. 6. In re West Electronics, 852 F.2d 79 (3d Cir. 1988): The Court held that the federal government was entitled to relief from stay in order to terminate its defense contract with the debtor. Based on a strict reading of section 365(c)(1), because the government under federal law would be excused from accepting performance from any entity other than the debtor or debtor in possession, the Court barred the debtor in possession from assuming the non-assignable contract even though the debtor in possession was not seeking to assign the contract, but instead, it apparently intended to perform the contract itself. 7. In re Pillowtex, Inc., 304 F.3d 246 (3d Cir. 2002): The Third Circuit found that the lower court abused its discretion in approving the employment of debtor’s counsel, where the law firm had received a potentially preferential transfer from the debtor pre-petition, even though the firm agreed to return any preference, if any was so adjudicated, and to waive any claim resulting from any such turnover. The court remanded so that a hearing could be held on whether the law firm had received a preference: “We hold that when there has been a facially plausible claim of a substantial preference, the … court cannot avoid the clear mandate of [section 327(a)] by the mere expedient of approving retention conditional on a later determination of the preference issue.” 8. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S.Ct. 2065 (2012). In the underlying decision, In re River Road Hotel Partners, LLC, 651 F.3d 642 (7th Cir. 2011), the Seventh Circuit determined that secured lenders have a right to credit bid in

4 DOCS_DE:209769.2 68700/001

free-and-clear asset sales in which their liens are to be stripped, regardless of whether those sales occur in the context of an 11 U.S.C. § 363 sale or a Chapter 11 plan; the Court further rejected the debtor’s efforts to use section 1129(b)(2)(A)’s cramdown authority to implement bidding procedures in the context of a sale under a Chapter 11 plan that would have prevented credit bidding. On appeal, the Supreme Court affirmed. Justice Scalia, writing for the majority, found the debtor’s effort to use section 1129(b)(2)(A)(iii)’s “indubitable equivalent” in lieu of a right to credit bid under section 1129(b)(2)(A)(ii) “to be hyperliteral and contrary to common sense” relying on the canon of construction that the “specific governs the general” and that “effect shall be given to every clause and part of a statute.” Id. at 2070-71. The court parsed the three alternatives of section 1129(b)(2)(A) as “(i) is the rule for plans under which the creditor’s lien remains on the property, (ii) is the rule for plans under which the property is sold free and clean of the creditor’s lien, and (iii) is a residual provision covering dispositions under all other plans—for example, one under which the creditor receives the property itself . . . .” Id. at 2072. 9. In re Chrysler LLC, No. 09-2311 (2d Cir.): No brief recap will prove sufficient, and the series of opinions concerning the sale process should be required reading for any corporate bankruptcy petitioner. See, e.g., In re Chrysler LLC, 405. B.R. 84 (Bankr. S.D.N.Y. 2009). That said, some of the high points include the bankruptcy court’s willingness to permit a quick sale (and the corresponding notice regime) when there was a legitimate business justification for doing so; as well as its finding that the absolute priority rule was not violated when membership interests in New Chrysler were issued to the UAW and the U.S. and Canadian governments, creditors subordinate to the secured lenders, since they were issued as consideration for the contribution of new value. 10. Wright v. Owens Corning, 679 F.3d 101 (3rd Cir. 2012). In this decision, the Third Circuit had occasion to address, interpret, and apply its 2010 decision In re Grossman’s, Inc., 607 F.3d 114, 121 (3d Cir. 2010). In Grossman’s, the Court repudiated its prior decision in Matter of M. Frenville Co., Inc., 744 F2d 332 (3rd Cir. 1985), for determining when a claim arises and, in the context of an asbestos-related tort claim, adopted the “prepetition relationship” test and determined that “a ‘claim’ arises when an individual is exposed pre-petition to a product or other conduct giving rise to an injury, which underlies a ‘right to payment’ under the Bankruptcy Code.” Grossman, 607 F.3d at 125. In Wright, the Court made clear that its decision in Grossman’s would be applied “retroactively,” including, in that case, to bankruptcy proceedings commenced in 2000, with a 2002 bar date, and where one claimant was exposed to product in 1998 resulting in damages manifested in 2009. Moreover, the Court stressed the general applicability of Grossman’s and described its requirement as simply “that a claimant be exposed to a debtor’s product or conduct pre-petition,” further noting that it “requires individuals to recognize that, by being exposed to a debtor’s product or conduct, they might hold claims even if no damage is then evident.” Wright, 679 F.3d at 106. However, the Court then went on to review the due process issue more directly with respect to publication notice received by unknown claimants while Frenville was still the law of the Circuit. The Court then observed that “we generally hold that for unknown claimants, like the Plaintiffs, notice by publication in national newspapers is sufficient to satisfy the

5 DOCS_DE:209769.2 68700/001

requirements of due process, particularly if it is supplemented by notice in local papers.” Id. at 107-08. But the Court then determined that the claimants in Wright were in a unique situation insofar as Frenville was the law of the Circuit at the time they received publication notice:

[n]ot until we overturned Frenville and established our new test for determining when a claim exists under the Code did the Plaintiffs unexpectedly hold “claims” that arguably could be discharged in the proceedings addressed by the notices. By that time, however, the bar date had passed, the Confirmation Order had been entered, and the Confirmation Date had occurred, each of which affected the Plaintiffs’ newfound claim status without an opportunity for them to be heard. Due process affords a re-do in these special circumstances to be sure all claimants have equal rights. We thus hold that, for persons who have “claims” under the Bankruptcy Code based solely on the retroactive effect of the rule announce in Grossman’s those claims are not discharged when the notice given to those persons was with the understanding that they did not have claims.

Id. at 108. Thus, the decision in Wright appears to give with one hand (that determines when claims accrue) and then taken away with other (that determines the sufficiency of due process). Curiously, the decision also states that “the Debtors’ notices were sufficient as to most unknown claimants.” Id. The decision does not explain what characterizes the “most unknown claimants” class as to which notice was sufficient or how that notice sufficed. B. Ten Important / Interesting 2016 Cases 1. Puerto Rico v. Franklin Ca. Tax-Free Trust, 136 S.Ct. 1938 (2016). In connection with ongoing financial difficulties, the Commonwealth of Puerto Rico enacted the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the “Act”), calculated to allow Puerto Rico’s public utilities to restructure their debt. Parts of the Act were similar to Chapters 9 and 11 of the Bankruptcy Code. Investment funds and bondholders challenged the Act, claiming it was pre-empted by the Bankruptcy Code. The District Court enjoined enforcement, the First Circuit agreed, and the Supreme Court affirmed, concluding that 11 U.S.C. § 903(1) pre-empts the Act. Chapter 9 of the Bankruptcy Code, which deals with adjustment of debtors of a municipality, provides, inter alia, that the Chapter “does not limit or impair the power of a State to control, by legislation or otherwise, a municipality of or in such State in the exercise of the political or governmental powers of such municipality . . . but (1) a State law prescribing a method of compensation of indebtedness of such a municipality may not bind any creditor that does not consent to such compensation.” 11 U.S.C. § 903(1). The Bankruptcy Code further provides that the “term “State” includes . . . Puerto Rico, except for the purpose of defining who may be a debtor under chapter 9 of this title.” 11 U.S.C. § 101(52).

6 DOCS_DE:209769.2 68700/001

The key question here was whether, having established that Puerto Rico could not pass the gating clause at the beginning of Chapter 9 as to who could be a debtor, did the remaining sections of Chapter 9, including the pre-emption provision, apply. The Supreme Court concluded that the “plain text” controlled and that “because the statute ‘contains an express pre-emption clause,’ we do not invoke any presumption against pre-emption but instead ‘focus on the plain wording of the clause, which necessarily contains the best evidence of Congress’ pre-emptive intent.” 136 S.Ct. at 1946. The Court concluded that the definition of State, while it precluded Puerto Rico from making use of Chapter 9, did not exclude it from the pre-emptive language of section 901(3). Thus, Puerto Rico is both barred “from authorizing its municipalities to seek Chapter 9 relief . . .” and is barred “from enacting its own municipal bankruptcy law.” Id. at 1942. The Court differentiated the gateway provision of Chapter 9 with the exemption provision, and the state from the municipality, finding that “[a] municipality that cannot secure state authorization to file a Chapter 9 petition is excluded from Chapter 9 entirely. But the same cannot be said about the State in which that municipality is located.” Id. at 1947 (emphasis in original). In late June 2016, Congress passed and President Obama signed the Puerto Rico Oversight, Management and Economic Stability Act (a/k/a PROMESA) to try to address the “catch-22” of Puerto’s Rico’s inability to either allow its municipalities to make use of Chapter 9 or to create its own restructuring law. Further developments will ensue. 2. Husky Int’l Elec., Inc. v. Ritz, 136 S.Ct. 1581 (2016). In this decision, the Supreme Court concluded that, for the purposes of the discharge provisions of the Bankruptcy Code, debts incurred by false pretenses, false representation, or actual fraud include fraudulent conveyances that are effectuated without any false representation. Section 523(a)(2) provides that a discharge under, inter alia, Chapter 7 or Chapter 11, does not include a debt ‘”for money, property, services, or an extension, renewal, or refinancing of credit to the extent obtained by—(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition. . . . “ 11 U.S.C. § 523(a)(2)(A). In this case, Chrysalis Manufacturing Corp. (“Chrysalis”) incurred a debt to Husky International Electronics, Inc. (“Husky”). Chrysalis’ director and part owner Daniel Lee Ritz, Jr. (“Ritz”) drained Chrysalis of assets; Ritz was sued by Husky, and Ritz then filed Chapter 7 bankruptcy. Husky filed a complaint seeking to hold Ritz liable and objecting to the discharge. The District Court found Ritz liable but that he could be discharged because the debt was not obtained by actual fraud. The Fifth Circuit affirmed, fining that a misrepresentation was a necessary element of actual fraud. The Supreme Court noted that the Fifth Circuit’s decision “deepened an existing split among the Circuits,” and it granted certiorari accordingly. 136 S.Ct. at 1585. The Court first observed that before 1978, the Bankruptcy Code prohibited discharge of a debt obtained by “false pretenses or false representations” but that the Bankruptcy Reform Act of 1978 added to that list “actual fraud.” Id. at 1586. The Court found a presumption

7 DOCS_DE:209769.2 68700/001

that a Congressional amendment is “’to have real and substantial effect,’” and then found that the “historical meaning of ‘actual fraud’ provides even stronger evidence that the phrase has long encompassed the kind of conduct alleged to have occurred here: a transfer scheme designed to hinder collection of a debt.” Id. The Court delved into the history of the courts’ treatment of fraud, found that “from the beginning of English bankruptcy practice, courts and legislatures have used the term ‘fraud’ to describe a debtor’s transfer of assets that, like Ritz’ scheme, impairs a creditor’s ability to collect the debt.” Id. at 1587. Notably, the Court differentiated the discharge provision of section 727(a)(2) as a “blunt remedy for actions that hinder the entire bankruptcy process” from section 523(a)(2)(A), which it called a “tailored remedy for behavior connected to specific debts.” The decision here resolves a split among the Circuit Courts and provides a broader tool for creditors who seek recovery from debtors who have transferred away assets. 3. In re Trump Ent. Resorts, Unite Here, 810 F.3d 161 (3d Cir. 2016). In this decision, the United States Court of Appeals for the Third Circuit concluded as a matter of first impression among the Courts of Appeals that the debtor may reject continuing terms and conditions of a collective bargaining agreement (“CBA”) even after the expiration of the CBA. The Court was forced to reconcile 11 U.S.C. § 1113, which permits a debtor to reject a CBA under certain conditions, and provisions of the National Labor Relations Act, which prevent an employer from unilaterally changing terms and conditions of a CBA after its expiration. The Bankruptcy Court authorized the rejection, and the Third Circuit took direct appeal. The underlying facts were not disputed. The debtors operated Trump Taj Mahal casino in Atlantic City, New Jersey. The debtors filed for bankruptcy on September 9, 2014, and the CBA with Unite Here expired on September 14, 2014. Thereafter, the parties conducted negotiations as required by section 1113, the debtors filed their motion to reject the CBA, and the relief was granted by the Bankruptcy Court, authorizing the rejection and the modification of the CBA based on the debtors’ final proposal to Unite Here. The Third Circuit acknowledged that bankruptcy courts are split on whether an expired CBA may be rejected, but found that “a mere divergence in statutory construction does not render § 1113 ambiguous.” 810 F.3d at 167. The Court determined to follow the “lead of the Supreme court” and take a “broad, contextual view of the Bankruptcy Code” and declined to “embark, as the parties do, in hyper-technical parsing of the words and phrases that comprise § 1113.” Id. at 168-69. The Court then, looking at the history of section 1113, adopted to address the Supreme Court’s decision in NLRA v. Bildisco & Bildisco, found it “enacted to balance

8 DOCS_DE:209769.2 68700/001

the needs of economically-stressed debtors in avoiding liquidation and the unions’ needs in preserving labor agreements and safeguarding employment for their members.” Id. at 173. Section 1113, the Court found, effectively fills a “gap,” and, “when the employer’s statutory obligations to maintain the status quo under the terms of an expired CBA will undermine the debtor’s ability to reorganize and remain in business, it is the expertise of the Bankruptcy court which is needed rather than that of the NLRB.” Id. Thus, section 1113 “applies to a CBA after it has expired.” Id. The Court dismissed the union’s argument that because a debtor may not assume or reject an expired executory contract under section 365 that it may not reject an expired CBA, finding that “the key terms and conditions of a CBA continue to burden the debtor after the agreement’s expiration. Rejection of those terms, therefore, is not a moot issue as it would be in the case of other contracts or leases.” Id. The decision gives debtors, at least in the Third Circuit, a powerful tool in their efforts to reorganize and deal with recalcitrant unions. 4. In the Matter of: Motors Liquidation Co. v. General Motors, LLC, 2016 WL 3766237, __ F.3d __, (2nd Cir. July 13, 2016). In this decision, the Second Circuit restored the claims of pre-petition claimants who had not received actual notice of the sale in bankruptcy free and clear where the debtor had full knowledge of the contingent claims.

This decision arises out of the 2009 bankruptcy of General Motors Corporation (“GM”) and the “free and clear” provisions of the sale order under 11 U.S.C. § 363 that transferred the bulk of the valuable assets from old GM to new GM within approximately 40 days after the commencement of the case. In 2014, new GM began recalling cars in connection with an ignition switch problem, including many cars built before the bankruptcy. The “free and clear” language of the sale order allegedly barred claims against new GM as successor and insofar as new GM had assumed only a narrow range of liabilities attributed to old GM. New GM, for example, had assumed lemon law claims and post-closing injuries and repairs but not the economic loss components of the claims at issue, estimated at $7 to $10 billion, or pre-closing claims.

The Court’s decision spends significant time on the background of the GM cases and the ignition switch issue, noting, among other things, that the switch was approved for production in May 2002 “despite never having passed testing,” that complaints began “almost immediately,” and that old GM engineers understood that “turning off the ignition switch could prevent airbags from deploying” potentially resulting in serious injuries. Id. at *6. Complaints continued, with reports of fatalities in 2005 and 2006, resulting in a design change in April 2006. Id. at *7.

The Court first considered the scope of the sale order and whether it included successor liability claims as an “interest in property” under section 363(f) and agreed that “successor liability claims can be ‘interest’ when they flow from a debtor’s ownership of transferred assets” but found that the “bankruptcy court’s power to bar ‘claims’ in a quick

9 DOCS_DE:209769.2 68700/001

§ 363 sale is plainly no broader than its power in a traditional Chapter 11 reorganization.” Id. at *12 (comparing section 363(f) to section 1141(c)). In sum, the Court first concluded that the bankruptcy court can approve a sale “free and clear” of successor liability claims where there is “some contact or relationship between the debtor and the claimant such that the claimant is identifiable,” and where the claims arise from a right to payment either before the petition date or “resulted from pre-petition conduct fairly giving rise to the claim.” Id. at *13. Having made this determination, the Court found that the sale order applied to pre-closing accident claims and to the economic loss clams, which were “contingent” claims; the Court found that the sale order did not apply to independent claims related to new GM or to claims by used-car purchasers who purchased old GM cars after closing of the sale. Id. at *14.

The Court then turned to procedural due process issues and found that old GM—in light of all the reports and other information it had about the ignition switch issues—was aware of a contingent claim by owners and that “the only contingency was Old GM telling owners about the ignition switch defect—a contingency wholly in Old GM’s control and without bearing as to Old GM’s knowledge. New GM essentially asks that we reward debtors who conceal claims against potential creditors.” Id. at *17. The Court emphasized, “[d]ue process applies even in a company’s moment of crisis.” Id.

The Court then turned to the question of prejudice to these creditors that it had found were entitled to direct notice. The Bankruptcy Court had found no prejudice because it would have approved the sale “even if plaintiffs were provided adequate notice.” Id. The Court determined that it need not determine whether prejudice was required because the plaintiffs had demonstrated prejudice, concluding “[b]ecause we cannot say with confidence that no accommodation would have been made for them in the Sale Order, we reverse.” Id. at 18. The Court further reasoned that the terms of the sale were heavily negotiated among multiple parties and that, for example, after objections by state attorneys general, lemon law claims were added as an assumed liability.

This case is a lesson both for Chapter 11 debtors and the purchasers of their assets. The proposition that known creditors are entitled to notice of a sale (or plan) in bankruptcy should be uncontentious. Here, the Court identified a large class of creditors plainly known to the debtors who were excluded from notice, observing that GM tracked the identity of every purchaser, and a known, serious issue with the debtors’ product. Clearly the issue could have been addressed in some form if it had been focused upon. Curiously, however, neither the parties nor the Court appear to have addressed the number of “known” creditors at issue—apparently owners of many or all models of GM vehicles manufactured by GM over several years—and presumably literally millions of contingent creditors requiring notice. If there is a lesson, it appears to be that there will continue to be fallout from one of the biggest and quickest insolvency proceedings in recent years and that one of the most important issues for debtors and purchasers continued to be the rudimentary issue of notice.

10 DOCS_DE:209769.2 68700/001

5. In re Tracht Gut, LLC v. L.A. Cnty. Treas. & Tax Coll., 2016 WL 4698300, __ F.3d __ (9th Cir. Sept. 8, 2016). In this decision, the United States Court of Appeals for the Ninth Circuit concluded that tax sales conducted in accordance with California law, with notice and opportunity for bidding, established that the price received was reasonably equivalent value. In this case, the prepetition debtor had acquired two properties, taxes were owing, the county conducted tax sales, and the debtor filed for Chapter 11. The debtor filed a complaint against the county and the purchasers, arguing that the price was too low and that the transfers were voidable fraudulent transfers under 11 U.S.C. § 548(a). The Bankruptcy Court dismissed the complaint, and the 9th Circuit Bankruptcy Appellate Panel affirmed. The central issues was whether the Supreme Court’s decision in BFP v. Resolution Trust Corp., 114 S.Ct. 1757 (1994) (“BFP”), which had found that the prices received in connection with mortgage foreclosure sales conducted in accordance with state law “conclusively satisfies” the requirement of reasonably equivalent value, should be extended to tax sales. The Ninth Circuit found that “[b]ecause California tax sales have the same procedural safeguards as the California mortgage foreclosure sale at issue in BFP” that “the price received at a California tax sale conducted in accordance with state law conclusively established ‘reasonably equivalent value’ for purposes of 11 U.S.C. § 548(a).” Id. at *1. The Court noted that the BFP decision had “expressly limited that holding to mortgage foreclosures of real estate. ‘The considerations bearing upon other foreclosures and forced sales (to satisfy tax liens, for example) may be different.’” Id. at 4. The Court emphasized the safeguards associated with the requirement (for commercial properties) that the default not have been redeemed for three years, the filing, recording, and service of notice to interested parties and the defaulting party, publication notice, and public auction. Id. at *5. This decision, as it notes, joins the Ninth Circuit with the Fifth and Tenth Circuits in this extension of BFP to tax sales conducted with the requisite safeguards. It is an object lesson for debtors to be wary of any plan to recover in bankruptcy such transfers. 6. In re Fair Fin. Ins. Co., 2016 WL 4437606, __ F.3d __, (6th Cir. Aug. 23, 2016). In this decision, the United States Court of Appeals for the Sixth Circuit restored the Chapter 7 trustee’s claims against an alleged participant in the debtor’s Ponzi scheme. The case arises from the 2009 collapse of debtor Fair Finance Company when certain of its owners and operators were indicted for wire fraud, securities fraud, and conspiracy. An involuntary Chapter 7 followed, and the Chapter 7 Trustee brought several adversary proceedings, including one against Textron Financial Corporation (“Textron”), which was alleged to have assisted in the concealment and perpetuation of the Ponzi scheme. Textron prevailed upon a Rule 12(b)(6) motion to dismiss, and the Trustee appealed.

11 DOCS_DE:209769.2 68700/001

The facts showed the debtor had engaged in a practice of large insider loans with no repayments and issuance of notes the payment of interest upon and redemption of which were funded by issuance of more notes in classic Ponzi fashion. Textron, provider of a line of credit to the debtor, had early known of these issues, beginning with an audit conducted in 2002 and continuing thereafter. In 2007, the debtor secured alternate funding and paid off Textron in the amount of approximately $17 million; the Court noted that in the preceding three years Textron had been paid approximately $300 million.

The lower court had, inter alia, dismissed the Trustee’s fraudulent transfer claims with respect to a 2004 security agreement, finding it “merely a refinancing” of a 2002 agreement. Id. at 10. The Sixth Circuit found as a matter of law that the lower court erred in determining that parties did not intend a novation and reversed. The Court found that while the relied upon facts “to varying degrees, do support the district court’s conclusion,” that “there remains extensive evidence that went unexamined by the district court, evidence that supports the Trustee’s contention that the parties clearly and overwhelmingly manifested their intention for . . . a novation . . . .” Id. at *11. This made it error to determine intent at the dismissal stage.” Id. The Court itemized, for example, such boilerplate language as that which says the agreement superseded any prior oral or written ones, an entire agreement clause, and a recital referencing receipt of consideration. Id. at *12.

While the decision incorporates other conclusions, including with respect to interpretations of Ohio statute of limitations provisions and the in pari delicto rule, the compelling finding here goes to the lower court’s disregard of the fully panoply of facts at the motion-to-dismiss stage as well as the significance the Sixth Circuit applied to certain boilerplate provisions, which are a reminder to avoid slavish adherence to forms. 7. In re Millennium Lab Holdings II, LLC, 543 B.R. 703 (Bankr. D. Del. 2016).

At issue here is actually the Delaware Bankruptcy Court’s underlying order, Docket No. 195, confirming the debtor’s plan and approving nonconsensual third-party releases. Certain lenders moved for certification of direct appeal, which was granted by the Bankruptcy Court in this decision.

The debtor offered laboratory diagnostic testing. Prior to the petition date, the debtor and the Department of Justice settled certain claims against it for an agreed settlement payment of $256 million. The debtor determined that the settlement terms diminished their capacity to service existing debt and entered into negotiations with certain prepetition lenders, resulting in a restructuring support agreement, which led to a bankruptcy filing and, in due course, to a confirmation hearing.

Certain lenders opted out and, in particular, objected to third-party releases, arguing that they had “meritorious claims” against former equity holders and certain executives thereof. The Bankruptcy Court certified for direct appeal the question of whether Bankruptcy Courts “have the authority to release a non-debtor’s direct claims

12 DOCS_DE:209769.2 68700/001

against other non-debtors for fraud and other willful misconduct without the consent of the releasing non-debtor.” 543 B.R. at 711. The Bankruptcy Court found that it could do so where the releases were “both fair and necessary” to the reorganization, but objectors argued that there was no controlling precedent from the Supreme Court and that the Third Circuit’s decision in In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000), was dicta merely “setting forth the hallmarks of nonconsensual third party releases” rather than authorizing them. Id. The debtor’s argument that the Continental decision, to the extent that the relevant language was dicta, was overcome by later adoption in such decisions as In re United Artists Theatre Co., 315 F.3d 217, 227 (3d Cir. 2003), and In re Global Indus. Techs., Inc., 645 F.3d 201 (3d Cir. 2011).

The Bankruptcy Court then determined that Continental, together with the other aforementioned decisions and “acknowledgements of the lower courts within this jurisdiction that the Continental hallmarks are the law of this Circuit” demonstrated that non-consensual third-party releases were permitted, id. at 713, but found conflicting decisions based upon other decisions from the District of Delaware denying nonconsensual third party releases, and, in particular focused upon the decision in In re Washington Mutual, Inc., 442 B.R. 314 (Bankr. D. Del. 2011). Id. at 713-14.

The Bankruptcy Court thus granted the motion for direct certification. However, the 3rd Circuit denied the certification [Docket No. 291], and the appeal is presently pending before the United States District Court for the District of Delaware as Civil Action 16-00110-LPS. Upon the recommendation of the magistrate judge, the matter was withdrawn from mandatory mediation, briefing is complete, and the appeal is scheduled for oral argument on October 7, 2016. The validity of nonconsensual third party releases thus remains in question, at least to the extent that one finds this history of Continental’s application insufficient proof. 8. In re Jevic Holdings Corp., 787 F.3d 173 (3d Cir. 2015). While this case was decided in 2015, the petition for writ of certiorari was granted on June 28, 2016, 136 S.Ct. 2541 (2016), and the case scheduled to be heard in the Supreme Court’s upcoming term.

This much discussed decision by the United States Court of Appeals for the Third Circuit affirmed the underlying decisions of the United States Bankruptcy Court for the District of Delaware, as affirmed by the United States District Court for the District of Delaware, approving a settlement that resulted in the “structured dismissal” of a Chapter 11 case.

In the underlying Chapter 11 case, the Official Committee of Unsecured Creditors (the “Committee”) had brought a fraudulent conveyance action against the debtor’s lenders (CIT Group, “CIT”) and owners (Sun Capital Partners, “Sun”). Certain counts survived a motion to dismiss. The debtor, the Committee, CIT, and Sun eventually reached a settlement that involved releases among those parties, payment by CIT to satisfy debtor and Committee legal fees and other administrative expenses, assignment by Sun of its lien to provide funds for tax and administrative creditors and unsecured

13 DOCS_DE:209769.2 68700/001

creditors on a pro rata basis, and dismissal of the case. However, the settlement excluded the claims of certain drivers (the “Drivers”) for claims arising under the WARN Act, including a priority wage component of more than $8 million. The Drivers and the U.S. Trustee objected principally because the settlement violated the priority of distribution under 11 U.S.C. § 507, and the U.S. Trustee also argued that the Bankruptcy Code does not permit structured dismissals. The Bankruptcy Court rejected these arguments, detailed the “dire circumstances” present in the case, including the lack of any prospect of distribution to any creditors other than the secured creditors absent the settlement. 787 F.3d at 178. The United States District Court for the District of Delaware affirmed.

The Third Circuit initially phrased the issue as a “novel question of bankruptcy law: may a case arising under Chapter 11 ever be resolving in a ‘structured dismissal’ that deviates from the Bankruptcy Code’s priority system?” The Court concluded: “in rare cases, it may.” Id. at175 (emphasis added). The Court then observed that Rule 9019 permits settlements that are “fair and equitable,” applied the factors that guide that analysis under In re Martin, 91 F.3d 389 (3d Cir. 1996), and found no error in the lower court’s conclusion that the balance of the factors favored the settlement. Id. at 180.

The Court then considered whether structured dismissals are permitted at all, observing that “structured dismissals are simply dismissals that are preceded by other orders of the bankruptcy court (e.g., orders approving settlements, granting releases, and so forth) that remain in effect after dismissal.” Id. at 181. The Court then found that 11 U.S.C. § 349 “authorized the bankruptcy court to alter the effect of dismissal ‘for cause’—in other words, the Code does not strictly require dismissal of a Chapter 11 case to be a hard reset.” Id. (emphasis added). The Court also focused upon the fact that the Drivers did not dispute the Bankruptcy Court’s conclusion that “there was no prospect of a confirmable plan in this case and that conversion to Chapter 7 was a bridge to nowhere,” concluding that “this appeal does not require us to decide whether structured dismissals are permissible when a confirmable plan is in the offing or conversion to Chapter 7 might be worthwhile.” Id. at 181-82. Ultimately, the Court found that “absent a showing that a structured dismissal has been contrived to evade the procedural protections and safeguards of the plan confirmation or conversion processes, a bankruptcy court has discretion to order such a disposition.” Id.at 182.

With respect to whether the settlement could skip the Drivers’ priority claims, the Court found that “[s]ettlements that skip objecting creditors in distributing estate assets raise justifiable concerns about collusion among debtors, creditors, and their attorneys and other professionals.” Id. at 184. However, the Court concluded that “the Code and the Rules do not extend the absolute priority rule to settlements in bankruptcy” but that “the policy underlying that rule—ensuring the evenhanded and predictable treatment of creditors—applies in the settlement context.” Id. Thus, Bankruptcy Courts “may approve settlements that deviate from the priority scheme of § 507 of the Bankruptcy Code only if they have ‘specific and credible grounds to justify [the] deviation.’” Id.

Thus, the Third Circuit’s conclusion strictly constrains—but permits—structured dismissals that violate section 507’s priority scheme. As the structured-dismissal

14 DOCS_DE:209769.2 68700/001

alternative becomes more popular, the outcome of the Supreme Court’s review becomes increasingly important. 9. In re Caesars Entm’t Operating Co., Inc., Bankr. N.D. Ill. Mar. 16, 2016 (Case No. 15 B 01145, transcript of proceedings, Docket No. 3938).

This bench ruling in the contentious Caesars case is remarkable for the public disclosure of an affair between a member of a financial advisory firm (the “FA Partner”) hired to investigate Caesars’ private-equity owners, and counsel for Caesar’s parent company, the target of the investigation. The FA Partner did not disclose the relationship in the initial retention application in 2014, then disclosed the relationship and stepped down in June 2015. Almost a year later, the Court conducted a hearing on March 16, 2016, to consider the retention of another firm as successor to the financial advisory firm. The Office of the United States Trustee objected in light of the affair and the fact that many of the financial advisory firm personnel moved to the other firm, arguing that the failure of the disclosure “taints the entire team.” Transcript p. 14.

The debtors stressed that the sole source of the non-disclosure was the FA Partner, which should not be imputed to the rest of the firm. The Court observed that the ABA Model Rules do not apply to financial consultants and that it had found no law on point “that involves Section 327 or Rule 2014.” Id. at p. 17. Nevertheless, the Court went on to observe that the financial advisory firm investigation was “tainted because what we can’t know is the effect of this relationship on it, and we’ll never know that.” Id. at p. 28. The Court stated: “[L]et’s remember what happened here. She was having an affair that she did not disclose with counsel for the very company that her employer was investigating. She was sleeping with the enemy.” Id. at p.30. The Court went on to recommend that the debtors withdraw the financial advisory firm’s final fee application, observing that:

I’m quite likely to deny it. If I do that, I’m going to write it up. This is a novel issue. I’ve not been able to find anything quite like this anywhere else, fortunately. And if I do that, it will probably end up in the Bankruptcy Reporter. I will have to say some very unkind things of the kind I’ve already said today, that I would rather not say, and that I think we would not, at least the people involved would not like to see enshrined for all time in a publication by the West Company.

Id. at p. 34. Nevertheless, the transcript itself was not sealed and the issues quickly become public and were widely reported in the press. The decision is an object-lesson in the importance of Rule 2014 disclosures for all professionals and the catastrophic results for firms and individuals when private and professional lives intersect in the public domain. 10. Sun Capital Partners II, LP, v. New England Teamsters & Trucking Indus. Pension Fund, 2016 WL 1239918, __ F.Supp.3d __, (D. Mass. Mar. 28, 2016). This

15 DOCS_DE:209769.2 68700/001

decision found private equity investment funds liable to a multi-employer pension fund for withdrawal liability. The decision is currently on appeal to the United States Court of Appeals for the First Circuit. In this case, Scott Brass, Inc., filed for bankruptcy and ceased payments to a pension fund. Private equity funds Sun Fund III and Sun Fund IV (collectively, “Sun”)—who together owned the majority of the debtor’s parent—sought declaratory judgment that they were not liable for the pro rata share of unfunded vested benefits owed to the pension fund. The Court first granted summary judgment in favor of Sun and, on appeal, the First Circuit reversed in part and remanded for further proceedings. On remand, the District Court considered first whether the Sun entities were engaged in a trade or business under 29 U.S.C. § 1301(b)(1), applying the First Circuit’s “investment plus” approach. The Court found Sun Fund III “has received an economic benefit in the form of ‘an offset against the management fees it would have otherwise paid its general partner for managing the investment” and was thus engaged in a trade or business. Id. at *5. As to Sun Fund IV, it found that a management fee “offset carryforwards is a valuable benefit” that also satisfied the investment plus criteria. Id. at *8. The Court then turned to the question of common control, observing that Sun Fund IV’s 70% interest and Sun Fund III’s 30% interest in the debtor’s parent fell below the 80% threshold to establish controlling interest “in the absence of some mechanism by which the ownership interests . . . would be aggregated.” Id. The Court observed that “the 80 percent ownership rule appears to provide a roadmap for exactly how to contract around withdrawal liability” and that Sun admitted that “an important purpose” in dividing ownership was to avoid withdrawal liability. Id. at *10. The Court found that Sun’s formation of an intervening LLC as a vehicle for investment, with the respective percentage control, was, alone, insufficient and turned to the “economic realities of the business entities created” by Sun. Id. Examining the relationship, the Court found no partnership-in-fact but did find a “more limited partnership or joint venture” based on the record. Id. at *13. The Court stressed that the Sun funds “are not passive investors . . . brought together by happenstance, or coincidence” and that “joint activity took place” prior to formation “to decide to coinvest.” Id. Effectively, the Court concluded, that a “separate entity which is perhaps best described as a partnership-in-fact chose to establish this ownership structure and did so to benefit the plaintiff Sun Funds jointly.” Id. at *14. The decision is an important one for, as the high expenses of pension funds continue to push companies into insolvency, owners who have tried to distance themselves from pension liability may find themselves not as remote as they believed. C. Practice Pointers 1. Review the Local Rules (both Bankruptcy Court and District Court), General Chambers Procedures, and individual Judge Chambers Procedures.

16 DOCS_DE:209769.2 68700/001

2. Be courteous and respectful toward the Court, its staff, and opposing counsel. 3. Learn the protocol of each Judge’s Courtroom. 4. Bankruptcy Court is a federal court in which the Federal Rules of Evidence and Federal Rules of Civil Procedure (as adopted by the Federal Bankruptcy Rules) apply. 5. Communicate with the U.S. Trustee’s Office. 6. Familiarize yourself with electronic filing procedures and requirements, Court hearing telephonic participation, and use of equipment in the Courtroom. 7. Know the rules of engagement: (i) Perform complete conflicts check; (ii) Bankruptcy Rule 2019; (iii) Sections 327 and 328 of the Bankruptcy Code; (iv) Waivers. 8. Obtain sufficient retainers.

9. Review retired Judge Walsh’s “First Day DIP Financing Orders”: Judge Walsh set forth in an instructive letter dated April 2, 1998, to Delaware bankruptcy counsel various suggestions and recommendations regarding the content of debtor-in-possession financing orders presented at “first day” hearings in order to improve the content of such submissions and facilitate attorneys in avoiding order provisions that may be “unnecessary, overreaching, or just plain wrong.” The requirements have now been largely incorporated into Rule 4001-2 of the Delaware Local Rules of Bankruptcy Practice and Procedure. 10. Review unpublished decisions and transcript decisions of the Bankruptcy Court.