Benchnotes Dec/Jan 2005

<h4>Motion to Dismiss Fraudulent Conveyance Action Denied</h4>

In <i>In re Railworks Corp.,</i> 325
B.R. 709 (Bankr. D. Md. 2005), the defendants sought dismissal of
several fraudulent conveyance actions brought by a litigation trustee.
The defendant asserted that the reservation-of-claims clause in the
debtor's confirmed chapter 11 plan failed to preserve the right of the
estate representative to pursue causes of action under §544(b).
Furthermore, the defendants asserted that the litigation trustee lacked
standing to pursue the causes of action under §544(b) and that the
bankruptcy court did not retain jurisdiction over the post-confirmation
causes of action. Bankruptcy Judge <b>E. Stephen Derby</b> found that
there were three factors in determining standing under §1123(b)(3):
(a) the plan must retain the claims to be asserted post-confirmation;
(b) if the person seeking to enforce the claim is a stranger to the
estate, the person must be appointed and be a representative of the
estate; and (c) the claims being reserved must belong to the estate or
the debtor. The court held that the debtor's plan had satisfied each of
these requirements and that the litigation trustee had standing to
pursue the causes of action. Furthermore, the court retained
jurisdiction post-confirmation, since the claims were either core
matters or sufficiently related to the bankruptcy case to warrant
jurisdiction. In <i>In re Bridgeport Holdings Inc.,</i> 326 B.R. 312
(Bankr. D. Del. 2005), a similar case, Bankruptcy Judge <b>Peter J.
Walsh</b> addressed whether the debtor's reservation of rights to pursue
avoidance actions in its liquidation plan was sufficient to prevent the
plan confirmation order from being accorded <i>res judicata</i> effect
on the post-confirmation trustee's ability to pursue a preference
complaint. The defendant in the preference action filed a motion to
dismiss the preference complaint asserting, <i>inter alia,</i> that the
trustee was barred from pursuing such cause of action since the
liquidation plan failed to specifically preserve the right to assert a
cause of action against the defendant. The bankruptcy court began by
discussing the numerous provisions in the liquidation plan and
disclosure statement that set out the debtor's intention to preserve all
avoidance actions. Following the discussion of the plan provisions, the
bankruptcy court undertook a detailed review of the authority cited by
the defendant, finding that such cases were factually distinguishable or
that the bankruptcy court did not agree with the holding. The bankruptcy
court denied the motion to dismiss, holding that the language contained
in the debtor's liquidation plan was adequate to preserve the right of
the trustee to pursue such causes of action.

</p><h4>Veil-Piercing Claim Is Property of Debtors' Estate</h4>

<p>In <i>In re Bridge Information Systems Inc.,</i> 325 B.R. 824 (Bankr.
E.D. Mo. 2005), Bankruptcy Judge David P. McDonald was required to
determine whether a veil-piercing claim was property of the debtor's
estate, thus allowing the plan administrator to enter into a settlement
of such claims that would be binding upon third parties. Pre-petition,
controlling shareholder of the debtor caused the debtor to transfer
certain assets to individual partnerships controlled by the shareholder.
During the same time period, the controlling shareholder convinced a
member of the lending group to delay filing an involuntary bankruptcy
petition. During the delay, the controlling shareholder completed the
fraudulent transfers. In opposing the compromise between the plan
administrator and the controlling shareholder, the member of the lending
group asserted ownership over the veil-piercing claim and that it was
not property of the bankruptcy estate. In determining whether the cause
of action was property of the estate, the bankruptcy court found that
even though the member of the lending group had relied on the false
representations of the controlling shareholder, only the debtor had
suffered injury from the fraudulent transfers. The bankruptcy court held
that under Missouri law, the veil-piercing claim was property of the
debtor's estate and thus only the plan administrator had authority to
prosecute the claim.

</p><h4>Related-to Jurisdiction Undiminished in Liquidation</h4>

<p>In <i>In re Boston Regional Medical Center Inc.,</i> 410 F.3d 100
(1st Cir. 2005), the First Circuit Court of Appeals addressed the scope
of post-confirmation "related to" jurisdiction in a case involving a
liquidating reorganization plan. Following confirmation of a liquidating
reorganization plan, the liquidating trust initiated an adversary
proceeding against the defendants in bankruptcy court to compel the
turnover of the debtor's share of certain trust assets. The defendants
asserted that the bankruptcy court did not have "related to"
jurisdiction under 28 U.S.C. §1334(b). The First Circuit began by
noting that the statutory grant of "related to" jurisdiction is quite
broad, which enables bankruptcy courts to deal efficiently and
effectively with the entire universe of matters connected to bankruptcy
estates. The court found that while §1334 does not distinguish
between pre-confirmation and post-confirmation jurisdiction, several
courts have limited the "related to" jurisdiction in post-confirmation
proceedings involving reorganized debtors. The court held that when a
trustee commences litigation designed to marshal the debtor's assets for
the benefit of its creditors pursuant to a liquidating reorganization
plan, the compass of related-to jurisdiction persists undiminished after
plan confirmation.

</p><h4>Executory Contract Appeal Denied</h4>

<p>In <i>In re Teligent Inc.,</i> 326 B.R. 219 (S.D.N.Y. 2005), Hon.
John G. Koeltl addressed an appeal of a bankruptcy court's order denying
a request by the claims representative to vacate an order authorizing
the debtor's assumption of an executory contract. The claims
representative initially filed a preference complaint seeking to recover
both pre-petition and post-petition payments made to the debtor's health
care insurance provider. In response to a motion to dismiss based on the
well-settled doctrine that a preference action may not be maintained for
payments made in connection with an assumed executory contract, the
claims representative sought to vacate the order authorizing the
debtor's assumption of the health care policy. The district court
confirmed the bankruptcy court's ruling that the claims representative
was estopped from seeking to vacate the order, imputing the debtor's
knowledge and conduct in prosecuting the motion to assume the health
care policy to the claims representative. Additionally, the court held
that despite the potential greater distribution to unsecured creditors,
the claims representative was unable to establish entitlement to relief
under Federal Rule of Civil Procedure 60(b)(6).

</p><h4>Consultant's Administrative Expense Claim Denied</h4>

<p>The allowance of professional fees as an administrative expense,
where the professional's employment had not previously been approved by
the court, was recently addressed in <i>In re Garden Ridge Corp.,</i>
326 B.R. 278 (Bankr. D. Del. 2005), by Hon. Donald D. Sullivan. Prior to
filing bankruptcy, the debtors retained the services of a real estate
consultant. Post-petition, the debtors sought to retain the same real
estate consultant; however, the creditors' committee objected to the fee
structure. The debtors decided to employ an alternate real estate
consultant and withdrew the motion to retain the initial real estate
consultant. The initial real estate consultant sought to recover its
fees and expenses as an administrative expense of the estate under
§503(b)(1)(A) of the Code. The bankruptcy court determined that
allowance of professionals' fees under §503(b)(1)(A) would
essentially negate §327(a) and Congress' intent that professionals
be approved prior to providing services to the estate and denied the
application for an administrative expense claim.

</p><h4>Patent License Agreements Assignable with Creditor Consent</h4>

<p>In <i>In re Quantegy Inc.,</i> 326 B.R. 467 (Bankr. M.D. Ala. 2005),
Hon. Dwight H. Williams Jr. addressed the ability of the debtor to
assume and assign its interest in patent license agreements. The
creditor asserted that the patents were not assignable under federal
patent law, citing <i>In re Catapult Entertainment Inc.,</i> 165 F.3d
747 (9th Cir. 1999). The debtor argued that the licenses were not
personal and were therefore assignable, since the identity of the party
performing the services was not material. After reviewing the license
agreements, the bankruptcy court determined that it was not necessary to
address either of these arguments, since the license agreements had
specific provisions relating to assignment. The bankruptcy court held
that so long as the debtors proposed to assign the licenses in
compliance with the license agreements, the creditor's performance under
the license agreements was not excused and thus the creditor would be
required to consent to the transfer.

</p><h4>Miscellaneous</h4>

<ul>
<li><i>In re Enron Corp.,</i> 325 B.R. 671 (Bankr. S.D.N.Y. 2005)
(determination of whether payments made with respect to short-term
commercial paper prior to the maturity date qualified as "settlement
payments" under §546(e) is a factual issue);

</li><li><i>In re Fleming Companies Inc.,</i> 325 B.R. 687 (Bankr. D. Del.
2005) (chapter 11 debtor's rejection of executory contract, which
contained arbitration provisions, did not prevent the debtor from
enforcing such provision);

</li><li><i>In re Oakwood Homes Corp.,</i> 325 B.R. 696 (Bankr. D. Del. 2005)
(Rule 9(b) of the Federal Rules of Civil Procedure, which requires that
"all of the elements of fraud or mistake" be plead with particularity,
applied to claims of constructive fraud under §§544 and 548);

</li><li><i>In re ChoChos,</i> 325 B.R. 780 (Bankr. N.D. Ind. 2005) (while
the elements of constructive fraud must be plead with particularity
under §§544 or 548, Rule 9(b) of the Federal Rules of Civil
Procedure did not apply to a cause of action under §549);

</li><li><i>In re Lewandowski,</i> 325 B.R. 700 (Bankr. M.D. Pa. 2005) (in a
case of apparent first impression, the discharge exception under
§523(a)(19) was held applicable, even though statute creating the
exception was enacted after the filing date of debtor's bankruptcy
petition);

</li><li><i>In re DSC Ltd.,</i> 325 B.R. 741 (Bankr. E.D. Mich. 2005)
(bankruptcy court had authority to set an earlier deadline for
additional creditors to join an involuntary bankruptcy petition under
§303(c));

</li><li><i>In re Drew,</i> 325 B.R. 765 (Bankr. N.D. Ill. 2005) (proceeds
from debtor's mortgage refinancing became part of post-confirmation
bankruptcy estate, thus allowing chapter 13 trustee to modify confirmed
chapter 13 plan to increase the dividend to unsecured creditors);

</li><li><i>In re Craig,</i> 325 B.R. 804 (Bankr. N.D. Iowa 2005) (collection
letters sent to nondebtor spouse did not implicate debtor's discharge
injunction);

</li><li><i>In re Courtney Excavating &amp; Constr. Inc.,</i> 325 B.R. 839
(Bankr. W.D. Mo. 2005) (bankruptcy court did not have related-to
jurisdiction to determine validity and extent of debt between party that
had issued irrevocable letter of credit on behalf of debtors and company
that had provided surety bonds for debtor);

</li><li><i>In re Metropolitan Mortg. &amp; Securities Co. Inc.,</i> 325 B.R.
851 (Bankr. E.D. Wash. 2005) (as diminution of insurance proceeds
affected both the debtor's interest in the proceeds and its rights to
recover such proceeds, both the insurance policies and insurance
proceeds were property of the bankruptcy estate); and

</li><li><i>In re Hawthorne,</i> 326 B.R. 1 (Bankr. D. D.C. 2005) (service
under Rule 9014 was inappropriate as Rule 3007 contains specific
directions for service of an objection to claim).
</li>