Georgia Bankruptcy Blog

From the Delaware Litigation Blog comes the case of  Nelson v. Emerson, 2008 WL 1961150 (Del. Ch., May 6, 2008) (the opinion is linked from the Delaware Litigation Blog), where the one major secured creditor alleged the directors of the corporation breached their fiduciary duty to the creditor by filing a Chapter 11 petition and paying themselves excessive compensation.

The same claims had apparently been rejected by the Bankruptcy Court in In Re Repository Tech, Inc., 363 B.R. 868 (Bankr. N.D. Ill 2007) (read this opinion here). 

The problem with Nelson's claims is that he is seeking a second chance to win the same game.Nelson made the same arguments he raises in this case to the Bankruptcy Court for the Northern District of Illinois when he sought to have Repository's bankruptcy filing dismissed as being filed in bad faith or, alternatively, due to gross mismanagement of the Company. The Bankruptcy Court, despite dismissing Repository from Bankruptcy because it could not reorganize
successfully, explicitly found that “the bankruptcy filing cannot be held to be in bad faith” and that there had not been “any mismanagement of [Repository's] assets and business.” Satisfied with the dismissal of  Repository's bankruptcy, but unhappy with the Bankruptcy Court's ruling that the bankruptcy had not been brought in bad faith, Nelson appealed to the District Court for the Northern District of Illinois and
argued that the Bankruptcy Court's findings on the bad faith issue were dicta. In essence, Nelson was attempting to preserve his ability to present his bad
faith argument to another tribunal in the hope that a new court might find the argument more substantial. The District Court rejected Nelson's argument, ruling
that the bad faith determination was an essential part of the Bankruptcy Court's holding because Nelson himself had advanced the argument that the bankruptcy filing was made in bad faith.

Francis Pileggi's more thorough review of the opinion is found here. 

From CNNMoney.com

The Countrywide executive told a U.S. Senate Judiciary subcommittee that the company was taking new steps to address concerns that have led to an outcry from consumer advocates and that were the catalyst for Tuesday's hearing. Bailey said Countrywide plans to hire an independent auditor to review its treatment of loans whose borrowers have filed for bankruptcy. If Countrywide made mistakes that hurt borrowers, the company will compensate them, he said.

Countrywide also plans to create a bankruptcy ombudsman to review claims of borrower abuse, and adopt a series of "best practices" issued by a national group of bankruptcy trustees.

The article also discusses the adversary filed in the Northern District against Countrywide, discussed in this post:

The subcommittee was also scheduled to hear testimony from Robin Atchley, a mother of four from Georgia and a former Countrywide borrower. Atchley, in her testimony, told the panel that her and her husband were engaged in a "tug of war" with Countrywide and its lawyers to try and stay in their house.

"It seems as if Countrywide used the bankruptcy court to gain even more opportunities to take advantage of our predicament and to profit from our struggle," Atchley said, detailing various fees and charges the company assessed.

Is Bank of America still going to buy Countrywide?

It was not a very busy pre-foreclosure week in the Northern District, as far as new Chapter 11 petitions, but a few cases were filed in the last several days --

In re Allen, Ch. 7 Case No. 01-82408-MHM, 2008 Bankr LEXIS 366 (Bankr. N.D. Ga. February 14, 2008).

Debtor’s pre-petition state law cause of action was property of the Chapter 7 Estate, with a value that likely exceeded the liabilities of the Estate. The Trustee sought to conditionally abandon the cause of action as follows:

Trustee proposes to abandon the Claim on the following conditions: Debtor will pay to the estate $ 10,000, non refundable; Debtor will be substituted as Plaintiff in the lawsuit…the proceeds of any recovery on the Claim will be disbursed 40% plus litigation expenses to' Debtor's attorney; $ 25,000 to Trustee; the remainder divided equally between Debtor and Trustee up to the amount of accrued administrative expenses and filed claims; Debtor offers to waive his discharge if Debtor's share of the recovery is more than the aggregate amount of unsecured debt for which no proof of claim is filed, thereby implying that such creditors may seek and obtain payment from Debtor.

The Court denied the motion. Section 544 allows abandonment only when the trustee or the court concludes that the asset is burdensome to the estate or of inconsequential value and benefit. No such finding was possible in the case.

Abandonment" is not defined in the Bankruptcy Code. Black's Law Dictionary defines "abandonment":

The relinquishing of a right or interest with the intention of never again claiming it.
BLACK'S LAW DICTIONARY, Seventh Edition, West Publishing Co. (1999). Abandonment is an absolute term. One cannot slightly abandon, partially abandon, or conditionally abandon an asset of the estate.

No case law has been found or cited by the parties to support a proposal to "conditionally abandon" an asset, i.e., abandon the asset while retaining an interest in its proceeds. Just as Trustee could not abandon the estate's interest in a tangible asset of the estate while retaining the right to share in the proceeds from a sale, Trustee cannot abandon the Claim while retaining the right to share in the proceeds of the recovery. …

Any proposed settlement of Claim would require approval by the bankruptcy court, which, recognizing Debtor's interest in maximizing the claim, would protect Debtor from any proposal that failed to sufficiently acknowledge Debtor's interests. Therefore, the only disposition of Trustee's Motion for Conditional Abandonment is denial and direction that Trustee be substituted as Plaintiff in the state court proceeding. In that proceeding, the Trustee may consult with Debtor as respects Debtor's interest in the outcome.

The Court also noted that a Motion to Sell the cause of action previously filed by the Trustee was inappropriate -

At the hearing on the Second Motion to Sell, the court concluded that it contravened Georgia law and could not be approved. In the case of United Technologies Corp. v. Gaines, 225 Ga. App. 191, 483 S.E. 2d 357 (1997), the Georgia court concluded that when, under the Bankruptcy Code, a Chapter 7 Trustee acquires a debtor's tort claim, the Trustee becomes the real party in interest and alone possesses the right to pursue the claim. Assignment by the Trustee of the claim to the debtor would violate O.C.G.A. §44-12-24, which prohibits the assignment of such tort claims. Another Georgia case concluded that although the assignment of such claim by the Trustee to a debtor violates O.C.G.A. §44-12-24, the Trustee's abandonment of the claim, even following payment by the debtor to the estate, does not violate O.C.G.A. §44-12-24. Denis v. Delta Air Lines, Inc., 248 Ga. App. 377, 546 S.E. 2d 805 (2001).

Two recent opinions from the Northern District  (in the same Bankruptcy case) concern debtor's counsel's right to attorneys fees where, first, a Chapter 11 Trustee is appointed and then the case is converted from a Chapter 11 to a Chapter 7:

In re Patterson,  Case No. 07-61961-MHM, 2008 Bankr. LEXIS 704 (Bankr. N.D. Ga. January 15, 2008).  After conversion of case from Chapter 11 to Chapter 7, debtor's counsel filed an application for compensation and sought to apply pre-petition retainer to fees and expenses.  However, the Chapter 7 Trustee and United States Trustee objected because the case might be administratively insolvent.  Counsel argued that the retainer was a security retainer, not subject to disgorgement pursuant to 11 U.S.C. §726(b).

The Court disagreed, and ordered counsel to turn over the retainer to the Chapter 7 Trustee. Counsel  would have an administrative claims for fees in the Chapter 7 case, according to the priorities in the Code.

In re Patterson,  Case No. 07-61961-MHM, 2007 Bankr. LEXIS 4513 (Bankr. N.D. Ga. December 11, 2007).  After the withdrawal of Chapter 11 debtor's first counsel, and the appointment of a Chapter 11 Trustee, a second attorney appeared on behalf of the debtor

On July 29, 2007, Debtor filed an application (the "Application") to employ K. A. Foreman as attorney for debtor. By order entered August 8, 2007, that Application  was denied as unnecessary because, upon conversion, the Trustee's attorney displaced the debtor's attorney. In re NRG Resources, Inc., 64 B.R. 643 (W.D.La. 1986). An attorney employed by a Chapter 11 debtor who continues to perform services after conversion and appointment of a Chapter 7 Trustee may be compensated from property of the estate only if the attorney is either retained by Trustee for a specific and limited special purpose with prior court approval or performs services that are beneficial to the administration of the estate. ...

....As set forth above, however, a debtor's attorney is entitled to compensation from the estate following conversion only under extremely limited circumstances, which are not present here. All the services  by Mr. Foreman were rendered after the Chapter 11 Trustee was appointed, and most of the services were rendered after the case was converted. Mr... Accordingly, it is hereby ORDERED that the application ... for compensation is denied.

From the Wall Street Journal Legal Blog -

Tax firm Caplin & Drysdale was appointed national counsel for the asbestos claimants’ committee in the bankruptcy of Babcock & Wilcox, a maker of boilers and generators. The firm sought about $6.3 million in fees and costs for it services, and charged its full hourly-rate for travel time. The bankruptcy trustee objected to paying the full hourly rate for travel time not spent working, and the bankruptcy judge agreed, awarding attorney’s fees at 50% for those hours — trimming $135,685.80 from Caplin & Drysdale’s tab. The district and appellate courts agreed.

In re Babcock & Wilcox, Inc., Case No. 07-30377 (5th Cir. May 1, 2008).

After being on the verge of a filing for many months, Linens N' Things finally pulled the trigger.  According to this article in the Atlanta business Chronicle, the following local stores will close -

It will close stores at Perimeter Mall in Atlanta, Uptown Square Shopping Center in Fayetteville, Stonecrest Marketplace in Lithonia, Macon Mall in Macon and Southlake Pavillion in Morrow.

The company has landed $700 million in debtor-in-possession financing from General Electric Capital Corp., which Linens Holding said will ensure healthy merchandise flow as it gets ready for the back-to-school and holiday selling seasons.

From the May 2, 2008 Atlanta Journal Constitution -

Georgia ranked No. 2 nationally for its rate of consumer bankruptcy filings in the first quarter of the year. The bankruptcy courts statewide processed 12,981 consumer filings during the quarter, up 16 percent from the same period in 2007.

Only Tennessee had a higher bankruptcy rate than Georgia. In Tennessee, the rate in annual terms was 1 bankruptcy filing for every 56 households. In Georgia, 1 in every 60 households sought legal protection from creditors, according to the National Bankruptcy Research Center, a California-based data firm. ...

Indeed, the first-quarter statistics suggest that most Georgians entering bankruptcy are trying to keep their homes, not walk away. About 55 percent of Georgians who file for bankruptcy filed Chapter 13, which allows consumers to hold onto their house and car but requires that they repay a portion of their debts. A Chapter 7, chosen by 45 percent of Georgians who file for bankruptcy, is a liquidation in which most debts are wiped out, but so are all of a consumer's assets that aren't protected by exemptions.

Not a Bankruptcy case, but relevant to corporate and shareholder litigation:

KITTIE LAPERRIERE, Class certification, to consist of all persons who acquired the publicly traded equity securities of Vesta Insurance Group, Inc., between June 2, 1995, and June 28, 1998, inclusive (the “Class Period”). Excluded from the class, ISRAEL BURGER, RICHARD SULLIVAN, POINTERS, THE CLEANERS & CAULKERS LOCAL 1 PENSION FUND, FLORIDA STATE BOARD OF ADMINISTRATION

 versus

VESTA INSURANCE GROUP, INC., et al., TORCHMARK CORPORATION,
Defendant-Appellee.

No. 06-14524 (April 30, 2008)  (Click here for opinion).

This interlocutory appeal presents an issue of first impression in the circuit courts: whether, and to what extent, the proportionate liability scheme of section 21(D)(f) of the Securities Exchange Act of 1934 (the “Act”),1 enacted as part of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), amends section 20(a) of the Act, under which a person who controls a violator of the Act is “liable jointly and severally with and to the same extent” as that violator.

......

We conclude that section 20(a) controlling person liability survives section 21(D)(f)’s proportionate liability scheme. Those who would have been substantively liable as controlling person under section 20(a) before the PSLRA was enacted will be substantively liable after its enactment. All that the PSLRA has changed for controlling persons is the standard for deciding whether their responsibility for damages is joint and several or proportionate. Damages are now allocated based on the proportionate liability provisions in the PSLRA, including the provision that knowing violators of the securities laws are “liable for damages jointly and severally.” The district court’s order denying Appellants’ motion to strike Torchmark’s PSLRA-based affirmative defenses is AFFIRMED.

By: Scott B. Riddle, Esq.

In a prior post, I discussed Judge Massey's opinion concerning Amended Bankruptcy Rule 6003.  In re Smith, Ch. 11 Case No. 08-63990 (click here for Order). 

Catherine Vance, Vice President of Research & Policy and Associate General Counsel of Development Specialists, Inc., has subsequently written an article about the new Rule, in which she cites Judge Massey's opinion in Smith (and this Blog).

You can read the entire article, entitled The Purpose and Application (So Far) of New Bankruptcy Rule 6003, on the Bankruptcy Litigation Blog.