On January 22, 2024, the U.S. Supreme Court denied a request from a group of sexual abuse victims of the Boy Scouts of America (BSA) to temporarily stay a $2.46 billion bankruptcy settlement contained in their plan wherein they argued that the settlement unlawfully bars them from suing groups that ran local scouting programs. These victims are 144 people out of more than 82,000 who filed claims against the BSA and argued that the Court should halt the settlement while it considers a similar legal dispute in the Perdue Pharma case in which the issue was argued before the U.S. Supreme Court in December 2023. The BSA filed for Chapter 11 bankruptcy in 2020 after they spent more than $150 million to settle lawsuits arising from claims of sexual abuse. In 2022, the bankruptcy court approved BSA’s Chapter 11 plan of reorganization which provided, inter alia, for the re-emergence of the BSA and created a fund to pay the victims.

At the crux of the argument in both the Perdue Pharma and BSAmatters are provisions of the settlements that prohibit victims from suing third parties for damages. In the case of Purdue Pharma, the Sackler family who ran the pharmaceutical firm that manufactured the opioid Oxycontin agreed to pay $6 billion in exchange for being shielded from future civil lawsuits. Some victims of the opioid crisis say the Sacklers shouldn’t be able to avoid those costly lawsuits for damages.

Under the BSA Plan, these victims do not want to be precluded from suing independent councils that ran local scouting programs and third-party organizations (i.e., churches and civic groups) that supported those programs. Those third-party groups contributed more than $2.4 billion to a BSA settlement trust for victims and under the agreement are shielded from future civil lawsuits. As you can see from the above, the argument is akin to the Perdue Pharma matter where victims there argue that the Sackler family should not be shielded from independent lawsuits against them despite the settlements in the bankruptcy.

Opponents of such Chapter 11 Plans argue that courts are generally not authorized to block such lawsuits. Advocates of such Plans argue that without the protections for third-party groups, major bankruptcy deals like the ones for Purdue and the BSA would never take effect. It is believed that the U.S. Supreme Court will decide the Perdue Pharmacase in late spring or early summer 2024. Stay tuned for this important decision.

To discuss the issues raised here or any other issues involving creditors rights and bankruptcy, please contact Leslie Beth Baskin, Esquire at 215-241-8926 or at lbaskin@sgrvlaw.com.

The Third Circuit has reversed a February 2023 Delaware Bankruptcy Court ruling and decided that an Independent Examiner is appropriate in the FTX bankruptcy matter. The three-judge panel sided with the U.S. Trustee’s Office in its position that the appointment of an examiner was necessary for a case of this size, and that the Bankruptcy Court erred last February when it decided that the appointment was discretionary and thus denied the request. The FTX bankruptcy was commenced in Delaware in November 2022 amid allegations of widespread fraud. FTX was a company led by convicted Sam Bankman-Fried and was involved in the cryptocurrency industry.

The U.S. Trustee, in appealing the Bankruptcy Court’s ruling, argued that the Bankruptcy Code required the appointment of an examiner at its request in any Chapter 11 involving fixed, liquidated, unsecured debts—other than debts for goods, services or taxes, or owing to an insider—exceeding $5 million. Further, the U.S. Trustee expressed the need for the appointment of an examiner to investigate fraud and mismanagement that it believed occurred at FTX before its collapse, saying that it was “too important” to leave to its creditors and current management. In the appeal, FTX’s counsel argued that an examiner was unnecessary, saying that new management brought in after its November 2022 collapse had produced “substantial” reports on its finances and that multiple government agencies were involved and pursuing their own investigations. Further, FTX counsel noted its concern that such a probe could cost $100 million. This concern was met by the argument that there were allegations of misappropriation of $10 billion of customer assets.

The Third Circuit agreed with the U.S. Trustee in reversing the lower court ruling, saying the law states the court “shall” appoint an examiner under these circumstances and that the appointment here was mandatory. Judge Restrepo, writing for the Third Circuit, said that there was value to having a fully independent investigation, as concerns were raised about FTX’s bankruptcy counsel’s pre-bankruptcy role as an FTX adviser and the possibility that officers and employees who engaged in wrongdoing before the bankruptcy are still with the company. The Court was also concerned that “the collapse of FTX caused catastrophic losses for its worldwide investors but also raised implications for the evolving and volatile cryptocurrency industry.” The Court also said that, unlike FTX, the examiner will be required to make their report public, which it said was appropriate considering the “catastrophic” losses of FTX’s investors and the implications its collapse has for the cryptocurrency industry as a whole. Per Judge Restrepo, “sometimes highly complex cases give rise to straightforward issues on appeal. Such is the case here.”

To discuss the issues raised here or any other issues involving creditors rights and bankruptcy, please contact Leslie Beth Baskin, Esquire at 215-241-8926 or at lbaskin@sgrvlaw.com.

There has been much commentary on the issue of whether an option in a contract is executory or not. Recently, In re Le Yang (22-00075, S.D. Ind. Oct. 23, 2023), Debtor sold an option to purchase a 70% interest in real property for almost $55,000. Upon the exercise of the option, the purchaser would then pay another $157,000. The option was recorded along with a mortgage in favor of the buyer, but the option had not been exercised before the bankruptcy filing. Debtor filed a motion to reject the option as an executory contract under 11 U.S.C Section 365(a) arguing that both parties to the contract had remaining unperformed obligations.

 Judge Moberly of the Bankruptcy Court in the Southern District of Indiana stated that the Seventh Circuit adopted the well-known and widely approved definition of an executory contract known as Countryman (as have the Third Circuit and other Circuits) whereby an executory contract is one where the obligations of both parties are so far unperformed that a failure by either to complete performance would constitute a material breach excusing performance by the other. Here, the Judge held that the option would be an executory contract if, “at the time of filing [,] each party has material unperformed obligations.” She went on to say that she was not persuaded that the holder of the option had “a remaining obligation to elect on the option” and that the option holder had no material obligations to perform on the filing date of the bankruptcy. She further said that the holder’s “future obligations are contingent upon it actually exercising the option.” If the holder were never to exercise the option, she said that “nothing happens” and neither party would have committed a breach.

Contrary to Debtor’s contention that the holder of the option would be obliged to remove the recordings in the land records if the holder were never to exercise the option, Judge Moberly did not view the obligation as “material.” She said that “[m]ost agreements have some degree of unperformed obligations on both sides, [but] this does not render all agreements executory under § 365.”

There has been much commentary on this issue, including whether bankruptcy or state law should apply (here, if a state law analysis was performed, it has been argued that the result would have been the same), and whether the Section 365 rights are “avoiding” powers, which is often found not to be but merely a breach.

To discuss the issues raised here or any other issues involving creditors rights and bankruptcy, please contact Leslie Beth Baskin, Esquire at 215-241-8926 or to lbaskin@sgrvlaw.com.

The U.S. Supreme Court has agreed to hear an appeal of a Fourth Circuit ruling involving an issue prevalent in many mass tort cases as to whether an insurer has standing to object to a Chapter 11 Plan when the insurer’s interests are not affected. Herein, the Fourth Circuit ruled that the insurer did not have such standing. See Truck Insurance Exchange vs. Kaiser Gypsum Company, Inc., U.S. No. 22-1079. See also In re Kaiser Gypsum Co., 60 F. 4^th 73 (4^th Cir. 2023).

The Plan proposed by the Debtor, Kaiser Gypsum, channeled all current and future uninsured asbestos and environmental claims into a bankruptcy trust (the “Trust”) per 11 USC Section 524 (g) and required these claimants to make disclosures of claims they may have made against other asbestos trusts which in turn would allow the Trust to audit such other claims to prevent fraud or duplication. The Bankruptcy Trust had a $49 million fund. The Plan then channeled claims covered by insurance to the tort system to collect per the insurance coverage without the concomitant disclosures. The Bankruptcy Court confirmed the Plan which ruling was affirmed by the District Court. The primary insurer appealed this ruling to the Fourth Circuit.

The Insurer filed an appeal asserting, inter alia, that: (1) the Plan altered its rights by barring it from raising in future cases that Debtor’s conduct violated its duties under the insurance contracts, and that (2) the Plan encouraged fraud as it did not impose on any future tort suits the insurer’s desired fraud prevention measures or disclosure requirements. These objections also rested on the premise that the Plan violated Debtor’s policies and that Debtor failed to act in good faith when they proposed a “two tier” standard based upon whether the claim was insured or not, thus resulting in disparate monitoring of claims. The Fourth Circuit rejected all of these arguments and opined that any “cooperation clause” was not applicable in the Plan process and found that the Plan was “insurance neutral” (and therefore the insurer lacked statutory authority or standing under the Bankruptcy Code to challenge the merits of the Plan). Put another way, the Fourth Circuit felt that the Plan did not take away any of the Insurer’s rights to defend itself against a claim (even if groundless or fraudulent) in the ordinary course of its business. 

In light of the many asbestos and tort bankruptcies which involve insurance issues, the decision here is highly anticipated and will resolve the split in the Circuits (note that the Third Circuit allows the insurer such standing to object).

To discuss the issues raises here or any other issues involving creditors rights and bankruptcy, please contact Leslie Beth Baskin, Esquire at 215-241-8926 or at lbaskin@sgrvlaw.com.

The U.S. Supreme Court has granted a petition for a writ of certiorari to determine whether Chapter 11 debtors should receive refunds for their overpayment of fees to the United States Trustee’s Office (see Office of the U.S. Trustee v. John Q. Hammons Fall 2006 LLC, 22-1238 (Sup. Ct.)). At stake is the possible return of approximately $326 million in fees from the U.S. Trustee’s Office to these debtors.

These fees emanated from a 2018 increase in fees, which Chapter 11 debtors paid to the U.S. Trustee’s Office. The issue came to a head when six bankruptcy districts in North Carolina and Alabama failed to match the fee hike for most of 2018. This failure caused a major disparity and created a circuit court split. Congress remedied this in 2020 which required the Alabama and North Carolina Debtors to pay the same fees as the rest of the country but failed to address fees which had already been paid.

Previously, in Siegel v. Fitzgerald, 142 S. Ct. 1770 (Sup. Ct. June 6, 2022), the Court unanimously held that the 2018 increase in fees paid by Chapter 11 debtors to the U.S. Trustee System was unconstitutional because it was not immediately applicable in the two states with Bankruptcy Administrators rather than U.S. Trustees. But the Siegel court did not resolve the issue of identifying the proper relief.

Herein, the U.S. government posits that relief in the future will be sufficient in that the Court has ruled that fees must be uniform throughout the country hereinafter. In the alternative, the government asks that Courts rule that someone should retroactively collect underpayments from the debtors in Bankruptcy Administrator districts.

The preeminent bankruptcy commentator, Bill Rochelle, has echoed the sentiment of many bankruptcy practitioners that the grant of certiorari was unexpected as there was no split of circuits as the four circuit courts (Ninth, Tenth, Second and Eleventh Circuits) that considered the issue already ruled that Chapter 11 debtors are entitled to refunds. Rochelle believes that the decision was less surprising when “one realizes that the Court grants certiorari more than half the time when the government is the petitioner.” Rochelle also notes that there will be a true practical significance to the U.S. Supreme Court’s decision in the Tenth Circuit case of John Q. Hammons Fall 2006 LLC v. U.S. Trustee, in that, if the Supreme Court upholds the Tenth Circuit in Hammons Fall, the outcome in other cases such as one currently pending in Washington D.C. in the Court of Federal Claims (Acadiana Management Group LLC v. US, 19-496 ( Ct. Cl.)) may result in refunds for all debtors who overpaid, even those who have not sued for refunds on their own.

I will keep you posted as to all future developments on this issue. To discuss the issues raised herein or any other issues involving creditors’ rights and bankruptcy, please contact Leslie Beth Baskin, Esquire at 215-241-8926 or at lbaskin@sgrvlaw.com.

The United States Supreme Court last week put on hold a proposed Chapter 11 bankruptcy plan for Purdue Pharma that would reserve billions of dollars allotted to pay victims and their families who suffered under the opioid crisis, which also (and controversially) is a plan that would give “immunity” to the payor of the funds, the Sackler family, who owns the company, to settle thousands of lawsuits filed by the states, hospitals, and victims. The Supreme Court will hear the argument in December 2023. Purdue Pharma filed for Chapter 11 relief in 2019 due to all of the debts arising from the lawsuits alleging that OxyContin fostered the opioid epidemic and caused more than 600,000 overdose deaths.

In a brief unsigned order, the Supreme Court granted the Justice Department’s request to temporarily block the Chapter 11 Plan which was approved by the bankruptcy court in 2021 and then affirmed by the Circuit Court. The Justice Department is challenging whether Sackler family members — who personally did not file for bankruptcy — can be protected from litigation over their role in the nation’s gargantuan opioid crisis. The Supreme Court has agreed to review the case and consider whether the U.S. bankruptcy code authorizes such agreements.

The appeal to the Supreme Court comes more than two months after the U.S. Court of Appeals sustained the approval by the bankruptcy court of the plan, saying the Sacklers being shielded from lawsuits was needed to “ensure the fair distribution” of the settlement money. Under the negotiated deal, the Sacklers would pay up to $6 billion over nearly two decades to help alleviate the crisis. The settlement plan could ultimately be worth more than $10 billion, Purdue Pharma has said.

The Justice Department argues in its filing to the high court that shielding the Sacklers is “an abuse of the bankruptcy system,” and that allowing the appellate court’s decision to stand would leave in place “a road map for wealthy corporations and individuals to misuse the bankruptcy system” to avoid liability from lawsuits.

There are very broad implications for the decision that the Supreme Court will hand down. A ruling by the Supreme Court to block the use of “non-consensual third-party releases” (which allow for the release of non-debtor third parties in exchange for their payment of proceeds to use to fund a bankruptcy plan) would likely jeopardize the Pharma bankruptcy settlement and have future implications in the funding and settlement of mass tort litigation in bankruptcy proceedings.

To discuss the issues raised here or any other issues involving creditors rights and bankruptcy, please contact Leslie Beth Baskin, Esquire at 215-241-8926 or at lbaskin@sgrvlaw.com.

On February 22, 2023, the U.S. Supreme Court decided Bartenwerfer v. Buckley, No. 21-908, and affirmed the Ninth Circuit in holding that 11 U.S.C. § 523(a)(2)(A), which bars debtors from discharging debts obtained by fraud, holding that it applies to debtors who are liable for fraud even though they did not personally commit the underlying relevant actions.

Kate Bartenwerfer (“Kate”) jointly purchased a home with her business partner, David Bartenwerfer (David”). They worked to remodel the home and sold it at a large profit. David performed most of the remodeling services and Kate was largely uninvolved in those actions. When the remodeling was finished, Kate and David (hereinafter may be referred to as the “Sellers”) sold the house to Kieran Buckley (“Buckley”), and as part of the sale process they certified that they disclosed all material facts related to the property. After the sale was consummated, Buckley noticed that many substantial defects were concealed from her prior to the sale and commenced a suit alleging misrepresentation and secured a judgment against both of the Sellers for the remodel for breach of contract, negligence, and nondisclosure of material facts.

The Sellers then jointly filed for bankruptcy in an attempt to discharge Buckley’s judgment. The Bankruptcy Court concluded that the judgment against Kate was non-dischargeable under section 523(a)(2)(A), which bars the discharge of “any debt . . . (2) for money, property, [or] services . . . obtained by . . . (A) false pretenses, a false representation, or actual fraud,” because David’s knowing concealment of the home’s defects could be imputed to Kate. The Bankruptcy Appellate Panel reversed in part and remanded for determination of whether Kate had specific knowledge of David’s fraud. On remand, the Bankruptcy Court concluded that Kate lacked any information regarding David’s fraud and therefore the judgment against her could be discharged. The Ninth Circuit reversed, holding that a debtor who is liable for a partner’s fraud cannot discharge that debt in bankruptcy, even if there is no evidence of that debtor’s responsibility or blame.

An appeal was taken up to the U.S. Supreme Court, which held that the text of section 523(a)(2)(A) precluded Kate from discharging the judgment debt insofar as the debt emanated from “the sale proceeds obtained by David’s fraudulent misrepresentations, it is a debt ‘for money . . . obtained by . . . false pretenses, a false representation, or actual fraud.’” In so concluding, the Supreme Court recognized that the statute does not concern itself with who committed the fraud — if debt results from someone’s fraud, it is non-dischargeable under section 523(a)(2)(A).

Further, the Supreme Court analyzed precedent interpreting a prior version of the statute — where it held two innocent partners were prohibited from discharging debts arising out of the fraud of another partner — and Congress’s decision to enact a new version of the statute echoing the Court’s holding. The Supreme Court stated that when Congress enacts a statute, it is presumed to be aware of the Court’s precedents and that the presumption is especially strong when Congress changes the statutory text to embrace one of the Court’s prior holdings or interpretations of the statute.

The Court also did not accept Kate’s argument that “[p]recluding faultless debtors from discharging liabilities run up by their associates” is inconsistent with Congress’s policy of giving debtors a fresh start. The Supreme Court stated that Congress struck a careful balance between debtors and creditors under the bankruptcy code, which the Court is not at liberty to rewrite. This decision resolves a circuit split as to whether these types of debts are dischargeable.

To discuss the issues raised here or any other issues involving creditors’ rights and bankruptcy, please contact Leslie Beth Baskin, Esquire at 215-241-8926 or at lbaskin@sgrvlaw.com.

On, January 31, 2023, Bankruptcy Judge Goldblatt issued a comprehensive opinion discussing Mareva injunctions which generally prohibit the defendant from transferring its assets when a plaintiff has only asserted a “legal claim” against the defendant/debtor and before a judgment is actually entered. The court also discussed how the U.S. Supreme Court opinion in the Grupo case (as discussed below) controlled his decision. See Miller v. Mott (In Re Team Systems Int., LLC).

In this highly contentious bankruptcy, Debtor was a small business government contractor whose work was done solely by its members and had no independent employees. The Chapter 7 trustee (the case was originally filed as a Chapter 11 but converted to a Chapter 7) initiated a fraudulent conveyance complaint (“Complaint”) against numerous defendants/insiders, their family members, and entities which they owned in an attempt to recover property worth in excess of $14 million. Per the Complaint, the trustee sought: (a) recovery of these conveyances; (b) the imposition of a preliminary injunction to prevent the alienation of 3 specific properties; (c) the enjoining of the transfer of other real estate and other assets; and (d) an accounting.

During the course of the litigation and the bankruptcy in general, it came to light that not only were there substantial prepetition transfers to insiders and that the insiders had taken steps to conceal the existence of these transfers, but that Debtor’s business records had been fabricated by the insiders to conceal substantial transfers to themselves. For example, some of the transfers were for the insiders’ purchase of multimillion dollar homes, expensive cars, etc., yet were listed by debtors on their business records as “payments to contractors” to lawyers for their legal services. Further, it appeared that some of the transfers of substantial sums of money were whited out on Debtor’s bank records in an effort to conceal these transactions.

The Court performed a thorough analysis under the U.S. Supreme Court decision in Grupo Mexicano de Desarrolla SA v. Alliance Bond Fund Inc., 527 U.S. 308 (1999), which held that a federal court may not freeze a defendant’s assets when a plaintiff only asserts a legal “claim” against the defendants as they only have a claim in general and not one against any particular asset. Importantly though, the Grupo court did not rule out the availability of an injunction when the Plaintiff seeks “equitable relief”.

In the case herein, the Court found that the trustee’s requests including one for an asset freeze was “equitable” in nature and therefore permissible. As aforestated, despite the fact that the Complaint was one for the return of fraudulent transfers (generally an action sounding in “law”), the trustee also requested a preliminary injunction to freeze certain assets. In deciding that Trustee’s request to “freeze cash” was a bit more troublesome, this Court still granted the relief as the Complaint also called for an accounting of the disposition of cash due to the incomplete business records and the uncertainty about the end result of the transferred funds. It appears that the Court’s granting of the trustee’s requested relief hinged on the “equitable exception” in the Grupo decision and thus concluded that it had the authority to impose the asset freeze here. Note that this Court also delved into an analysis of the U.S. Supreme Court case of Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), which discusses the availability of the requested relief where the trustee seeks the freezing of debtor’s cash. Herein, the trustee’s requests (albeit with a somewhat more limited scope than originally requested) were permitted since in addition to seeking to recover the value of the transferred cash as a fraudulent conveyance it also included a claim for an accounting in the disposition of that cash, which is categorized as equitable relief.

This opinion provides an extremely well-reasoned and analytical approach detailing the burdens which must be met and the scope in requesting an asset freeze of Debtor’s property.

To discuss the issues raised here or any other issues involving creditors rights and bankruptcy, please contact Leslie Beth Baskin, Esquire at 215-241-8926 or at lbaskin@sgrvlaw.com.