Georgia Bankruptcy Blog

By: Scott B. Riddle, Esq.

This is not a bankruptcy case, but it will be applicable in many large bankruptcy cases involving allegations of fraud by shareholders or investors.

On January 15, 2008, the United States Supreme Court entered an important decision in Stoneridge Investment Partners v. Scientific-Atlanta (06-43) (click here to download the opinion).

There is no need to re-invent the wheel here, or wait on law review articles to analyze the case.  Lawyers and scholars have already provided a thorough analysis of the important two-day old opinion.  Here are just a few of the articles:

From the Supreme Court Blog --

The Supreme Court, in one of the most important securities law rulings in years, decided Tuesday that fraud claims are not allowed against third parties that did not directly mislead investors but were business partners with those who did. ...

Investors, the Court said, may only sue those who issued statements or otherwise took direct action that the investors had relied upon in buying or selling stock — whether that involved public statements, omissions of key facts, manipulative trading, or conduct that was itself deceptive. One impact of the decision is likely to be the scuttling of a massive $40 billion lawsuit against financial institutions growing out of the Enron scandal. The Court has a case on its docket involving that very dispute, and Tuesday’s ruling will be followed up soon, perhaps by next week, with action on that case — California Regents v. Merrill Lynch, et al. (06-1341).

...
Justice Anthony M. Kennedy, who wrote the Stoneridge ruling, said the private right to sue for securities fraud “does not reach the customer/companies because the investors did not rely upon their statements or misrepresentations.” The ruling upheld a decision by the Eighth Circuit Court rejecting claims against Scientific Atlanta, Inc., and Motorola, Inc. The investors contended that those two companies helped a giant cable TV firm, Charter Communications, inflate artificially its financial statements in order to bolster its stock’s price. The investors contended that the two companies should be treated as “primary violators,” even though they had not themselves issued any public statements to advance the alleged manipulation plot.

Prof. Larry Ribstein's Ideoblog -

I’m very sympathetic with the result. The amicus brief I signed onto argued against a 10b-5 private right of action “against a non-trading, non-speaking entity that merely ‘enables’ the commission of an alleged fraud by a public company on its shareholders.”

My problem is that, instead of focusing on the type of conduct that should get a defendant into trouble under the securities laws, the Court focused on reliance. This is a weak theory once you accept, as the Court does, that 10b-5 liability can be based on conduct rather than misstatements. Given the fraud-on-the-market presumption of reliance, it's far from clear why reliance was missing here, as the dissent pointed out. ...

Professor Stephen Bainbridge has a primer on the case on his Business Associations Blog, and summarizes the opinion in this post.  

 A few other random articles:

• Conde Nast Portfolio -  Champagne Popping Over Stoneridge Ruling
• Wall Street Journal Law Blog
• Washington Post: Corporate Fraud lawsuits Restricted: Enron and Other Shareholders Limited By Court.

By: Scott B. Riddle, Esq. (thanks to the Supreme Court Blog for the tip).

In an opinion entered today in the case of Travelers Casualty & Surety v. Pacific Gas & Electric (05-1429), the Supreme Court reversed the Ninth Circuit and held that the Bankruptcy Code does not forbid a claim for attorneys fees where such fees are provided for in a contract, even where the fees were generated in litigating Bankruptcy issues. 

The facts from the Syllabus -

After respondent (PG&E) filed for Chapter 11 bankruptcy, petitioner (Travelers), which had previously issued a surety bond to guarantee PG&E's payment of state workers' compensation benefits, asserted a claim in the bankruptcy action to protect itself should PG&E default on the benefits. With the Bankruptcy Court's approval, PG&E agreed to insert language into its reorganization plan and disclosure statement to protect Travelers in case of such a default. Additional litigation over the negotiated language nevertheless ensued and was ultimately resolved by a court-approved stipulation stating, inter alia, that Travelers could assert a general unsecured claim for attorney's fees, which were authorized in the parties' original indemnity agreements. When Travelers filed an amended claim for such fees, PG&E objected based on the rule the Ninth Circuit adopted in its prior Fobian decision that where the litigated issues involve not basic contract enforcement questions, but issues peculiar to federal bankruptcy law, attorney's fees generally will not be awarded. The Bankruptcy Court rejected Travelers' claim on that basis, and the District Court and the Ninth Circuit affirmed.

  The Court first reviewed the general law regarding the filing of claims -

When a debtor declares bankruptcy, each of its creditors is entitled to file a proof of claim—i.e., a document providing proof of a “right to payment,” 11 U. S. C. §101(5)(A)— against the debtor’s estate. Once a proof of claim has been filed, the court must determine whether the claim is “allowed ” under §502(a) of the Bankruptcy Code: “A claim or interest, proof of which is filed under section 501 . . . is deemed allowed, unless a party in interest . . . objects.”

But even where a party in interest objects, the court “shall allow” the claim “except to the extent that” the claim implicates any of the nine exceptions enumerated in §502(b). Ibid. …

Travelers’ claim for attorney’s fees has nothing to do with property tax, child support or alimony, services provided by an attorney of the debtor, damages resulting from the termination of a lease or employment contract, or the late payment of any employment tax. See §§502(b)(2)–(8). Nor does it appear that the proof of claim was untimely. See §502(b)(9). Thus, Travelers’ claim must be allowed under §502(b) unless it is unenforceable within the meaning of §502(b)(1).

By: Scott B. Riddle, Esq.

In an opinion entered today in the case of Marrama v. Citizens Bank of Massachusetts, No. 05-996 (February 21, 2007), the United States Supreme Court held that an individual debtor does not have an unqualified right to convert from a Chapter 7 case to a Chapter 13 case.

The Court, by Justive Stevens, identified the issue to be decided -

An issue that has arisen with disturbing frequency is whether a debtor who acts in bad faith prior to, or in the  course of, filing a Chapter 13 petition by, for example,fraudulently concealing significant assets, thereby forfeits his right to obtain Chapter 13 relief. The issue may arise at the outset of a Chapter 13 case in response to a motion  by creditors or by the United States trustee either to dismiss the case or to convert it to Chapter 7, see §1307(c). It also may arise in a Chapter 7 case when a debtor files a motion under §706(a) to convert to Chapter 13. In the former context, despite the absence of any statutory provision specifically addressing the issue, the federal courts are virtually unanimous that prepetition bad-faith conduct may cause a forfeiture of any right to proceed with a Chapter 13 case.1 In the latter context, however, some courts have suggested that even a bad-faith debtor has an absolute right to convert at least one Chapter 7 proceeding into a Chapter 13 case even though the case will thereafter be dismissed or immediately returned to Chapter 7.2 We granted certiorari to decide whether the Code mandates that procedural anomaly. 547 U. S. ____ (2006).

The basic facts are as follows --  

In verified schedules attached to his petition, Marrama made a number of statements about his principal asset, a house in Maine, that were misleading or inaccurate. For instance, while he disclosed that he was the sole beneficiary of the trust that owned the property, he listed its value as zero. He also denied that he had transferred any property other than in the ordinary course of business during the year preceding the filing of his petition. Neither statement was true. In fact, the Maine property had substantial value, and Marrama had transferred it into the newly created trust for no consideration seven months prior to filing his Chapter 13 petition. Marrama later admitted that the purpose of the transfer was to protect the property from his creditors. After Marrama's examination at the meeting of creditors, see 11 U. S. C. §341, the trustee advised Marrama's counsel that he intended to recover the Maine property as an asset of the estate. Thereafter, Marrama filed a "Verified Notice of Conversion to Chapter 13."

Relying primarily on Marrama's attempt to conceal the Maine property from his creditors,the trustee contended that the request to convert was made in bad faith and would constitute an abuse of the bankruptcy process. The Bank opposed the conversion on similar grounds.

The Akin Gump Supreme Court Blog has an excellent recap of yesterday's Supreme Court oral argument in the case of Marrama v. Citizens Bank of Massachusetts (05-996).  The blurb about the case is as follows -

The question presented in Marrama is whether a bankruptcy court may deny a debtor’s request to convert his case from chapter 7 to chapter 13 of the Bankruptcy Code based on a finding that the debtor has acted in bad faith. The petitioner, Robert Louis Marrama, contends that a court may not deny a debtor’s requested conversion under the plain language of Section 706(a) of the Code, whereas the respondents suggest that a bankruptcy court possesses the inherent authority to sanction bad faith conduct by denying a conversion.

Visit the Supreme Court Blog for the excellent recap and analysis of the argument and questioning (including whether or not the issue is moot - an issue not raised in the briefs).

In Howard Delivery Service v. Zurich American Insurance, No. 05-128, the Supreme Court ruled today that claims for unpaid workers comp. premiums were not entitled to priority status under then-Section 507(a)(4) (now subsection (a)(5)).

In a nutshell, the Justice Ginsberg wrote that workers compensation was more comparable to other types of business insurance (fire, theft, vehicle, etc.) than insurance provided to employees as a fringe benefit. Further, the insurance premiums were, in large part, for the protection of the employer as it protected it from large tort awards.

Read the opinion here (after a welcome screen).

From the Supreme Court Blog --

The Supreme Court agreed on Monday to spell out the right of a debtor to change a Chapter 7 proceeding into a Chapter 13 case. The case is Marrama v., Citizens Bank of Massachusetts (05-996).

In that case, the First Circuit Court ruled that the right to convert such a case is not absolute, and can be denied in some circumstances. The appeal of Robert Louis Marrama argues that the actual language of the federal bankruptcy law does make that right absolute. In his case, the conversion was denied on the basis of a bankruptcy court finding that the request was made in bad faith

Click here for the First Circuit Opinion.

As reported in the Supreme Court Blog, only one bankruptcy case is awaiting a ruling by the US Supreme Court before the term ends in about 3 weeks. In case no. 05-128, Howard Delivery v. Zurich American Insurance, the issue is whether a claim for workmen's compensation insurance is a priority claim Section 507(a)(4) of the Bankruptcy Code as a "contribution to an employee benefit plan arising from services rendered," as held by the 4th and 9th circuits, or is such a claim not entitled to statutory priority, as held by the 6th, 8th and 10th circuits.

You can read the Fourth Circuit's opinion here.

In an opinion entered yesterday (Marshall v. Marshall, No. 04-1544), the US Supreme Court gave former Playment and current diet products spokeswoman Anna Nicole Smith (real name Vickie Lynn Marshall) another bite at her deceased husband's $1.6 billion estate. The Bankruptcy Court originally awarded Anna Nicole $474 million in a case filed against her late husband's son, E. Pierce Marshall. However, the Ninth Circuit threw out the entire judgment, finding that the "probate exception" to federal jurisdiction precluded the Bankruptcy Court from hearing the case.

Both sides have vowed to continue the battle in lower courts.

For further discussion about the case and the Supreme Court's opinion, see the Bankruptcy Litigation Blog and the article at Law.com.

In Central Virginia Community College v. Katz, No. 04-885, the Supreme Court held that states do not have soverign immunity from preference actions.

Update: Background and discussion on this decision can be found at the SCOTUS Blog and at the Bankruptcy Litigation Blog.