Benchnotes Sep 2006

<h4>Equitable Remand of Core Proceedings under 28
U.S.C. §1452(b)</h4>
In <i>Patterson v. Morris</i>, 337 B.R. 82 (E.D.
La. 2006), a putative class action was filed <i>inter alia</i> by
debtors and subsequently removed by the defendants. The action alleged
fraud, misrepresentation, conversion and unjust enrichment by
overstating court costs, sheriff's fees, attorneys' fees and other
expenses in collection and foreclosure proceedings instituted by
defendants. Conceding subject-matter jurisdiction under title 11, the
plaintiffs sought remand, and District Judge Duval reviewed the
applicable standards for removal, noting that the court could
mandatorily abstain pursuant 28 U.S.C. §1334(c)(2), exercise
discretionary abstention under 28 U.S.C. §1334(c)(1) and/or
equitably remand under 28 U.S.C. §1452(b), depending on whether
the claims were "related to," "arising in" or
"arising under." After a review of the factors that shape
such a determination, the court held that the removed action was a
core proceeding. As such, mandatory abstention did not apply. However,
after applying the factors set out in <i>Browning v. Navarro</i>, 743
F.2d 1069 (5th Cir. 1984), the court held that the matter should be
equitably remanded pursuant to §1452(b). </p><p><b>Negative Notice
Effective </b> </p><p>In <i>In re Pierce</i>, 435 F.3d 891 (8th Cir. 2006),
the debtor filed an objection to a claim, and attached a
"negative notice" advising the claimants that if they did
not respond to the objection and request a hearing within 30 days, the
bankruptcy court could enter an order without further hearing. The
claimants failed to timely respond, and the bankruptcy court entered an
order disallowing part of the claim. The claimant appealed, arguing
that the bankruptcy court was required to hold an evidentiary hearing.
The ruling was affirmed by the district court. The court of appeals
also held that §102(1)(B)(i) permits negative notice to satisfy
the requirement of "notice and hearing" contained in
§502(b): "Negative notices shift the burden to an interested
party to evaluate his claim and the debtor's objections, and then make
his own decision whether an evidentiary hearing would be helpful, and
request a hearing, if desired." </p><p><b>"Corporate Waste"
Claims OK'd as Theory for Officer Liability </b> </p><p>Bankruptcy Judge

<b>S. Martin Teel</b> addressed the usual claims asserted by
post-confirmation liquidation or litigation trusts against the debtor's
former officers, directors and professionals in <i>In re Greater
Southeast Community Hospital Corp.</i>, 333 B.R. 506 (Bankr. D. D.C.
2005). Applying District of Columbia law, Judge Teel refused to
recognize a separate cause of action for "deepening
insolvency." He also held that the strong-arm provisions of
§544(6) do not prevent applications of defenses against claims that
were "inherited" from the debtor. Applying Delaware law,
Judge Teel then addressed the "corporate waste" theory of
fiduciary breach, noting that it refers to an exchange of corporate
assets for consideration so disproportionately small as to lie beyond
the range at which any reasonable person might be willing to trade.
Such claims are extremely difficult to prove "because if it can
be said that ordinary businessmen might differ on the sufficiency of the
terms, then the court must validate the transaction." Further,
any substantial consideration received by the corporation
"suffices to defeat a claim [of corporate waste]." The
trustee alleged that the chapter 11 debtor and/or its subsidiaries
approved lending agreements with high interest rates, used charter
flight services instead of commercial airlines, overpaid the debtor's
president and vice president, and generally spent too much on corporate
overhead. Judge Teel held that the lack of allegations that the debtor
received little consideration, that the counterparties failed to
perform or that the transactions were made solely to benefit the
individual directors and officers mandated dismissal for failure to
state a claim. However, allegations that the debtor forgave millions
of dollars of loans to executives without any consideration and that
"at least some of these loans were made to finance highly
personal interests such as a divorce settlement, the purchase of a
house and a car," and a gift to a university did state a claim
for corporate waste under Delaware law. The court then applied the
test to claims against specific officers. In determining whether a
corporate officer breached his or her fiduciary duty under Delaware
law, unless a specific officer had the power to control the specific
complained-of activity, "that officer could not be held
responsible for those actions. Simply being an officer of the company
was not enough." As a result, allegations that the CEO failed to
follow proper business practices in good faith by using charter planes
provided by businesses in which he was a majority owner, instead of
traveling on commercial carriers, even though he knew commercial flights
were cheaper, and without obtaining approval from debtor's board of
directors, stated a claim for breach of an officer's fiduciary duties
of care and loyalty. Finally, applying District of Columbia
malpractice and Arizona fraudulent-transfer laws, the court held that
a claim that the debtors' law firms engaged in practices, including
preparation of negligent or fraudulent opinion letters, that benefited
only debtors' lenders and, indirectly, the law firms, that the debtors
paid the law firms for these services, and that the debtors did not
receive reasonably equivalent value for these payments, stated a claim
for avoidance of the allegedly fraudulent transfers.
</p><p><b>Miscellaneous</b> </p><p>• <i>In re UAL Corp.</i>, 428 F.3d 677
(7th Cir. 2005) (possibility that future collective bargaining
agreement might provide for new pension plan was not grounds for
denial of approval of agreement with PBGC, which created moratorium on
establishment of "follow on" plan); </p><p>• <i>In re
Carroll's Wine Co.</i>, 332 B.R. 874 (Bankr. N.D. Iowa 2005)
(Rooker-Feldman doctrine was cause to lift stay to allow continuance of
post-judgment litigation as it was inappropriate for bankruptcy court
to revisit issues that would have effect of undermining state court
judgment); </p><p>• <i>In re National Audit Defense Network</i>, 332
B.R. 896 (Bankr. D. Nev. 2005) (avoidance of transfer to immediate
transferee is not a pre-requisite to pursuit of an avoidance action
against mediate transferee, adopting the holding of <i>In re
International Admin. Serv. Inc.</i>, 408 F.3d 689 (11th Cir. 2005));

</p><p>• <i>In re Gillis</i>, 333 B.R. 1 (Bankr. D. Mass. 2005)
("regular income" requirement does not mandate that debtor's
income, by itself, must be sufficient to fully fund chapter 13 plan);
</p><p>• <i>In re Smith</i>, 333 B.R. 94 (Bankr. M.D.N.C. 2005) (plan
that depended on increased cost-based reimbursements from Medicare was
not feasible where projections were not consistent with either
pre-petition or post-petition operations); </p><p>• <i>Savoy IBP 8
Ltd. v. Nucentrix Broadband Networks</i>, 333 B.R. 114 (N.D. Tex.
2005) (admission of post-petition settlement negotiations as evidence
to support claim of estoppel was not abuse of discretion or violation of
Fed. R. Evid. 408); </p><p>• <i>In re Premiere Network Services
Inc.</i>, 333 B.R. 126 (Bankr. N.D. Tex. 2005) (pre-petition attorney
was not an "insider"); </p><p>• <i>In re Premiere Network
Services Inc.</i>, 333 B.R. 130 (Bankr. N.D. Tex. 2005) (possible
setoff rights and status as competitor of debtor constituted
"good business reasons" for separate classification);
</p><p>• <i>In re Cahill</i>, 428 F.3d 536 (5th Cir. 2005) (bankruptcy
court's reliance upon lodestar amount for typical chapter 13 contained
in a General Order in calculating reasonable fee award was not abuse
of discretion); </p><p>• <i>In re Thomas</i>, 428 F.3d 735 (8th Cir.
2005) (§362(b)(11) exception applied where state law authorized
post-petition presentment of pre-petition checks); </p><p>• <i>In re
Royal</i>, 137 Fed. Appx. 537 (4th Cir. 2005) (proposed eminent domain
taking was not enforcement of governmental unit's police or regulatory
power where there was no allegation that debtor had violated any statute
or regulation); </p><p>• <i>In re Flag Telecom Holdings Ltd.</i>,
337 B.R. 15 (S.D.N.Y. 2005) (doctrine of legal impossibility is an
affirmative defense that may not be raised by court <i>sua
sponte</i>); </p><p>• <i>In re Hayes Lemmerz Intern. Inc.</i>, 337
B.R. 49 (Bankr. D. Del. 2006) (weekly transfers made after supplier
sent letter requiring debtor to make future payments in advance and by
wire transfer and to bring overdue invoices current in order to
receive further shipments were not made in the ordinary course of
business, although prior practice was to make weekly payments);

</p><p>• <i>Skiba v. Gould</i>, 337 B.R. 71 (W.D. Pa. 2005)
(§541(c)(2) only applies to a debtor's beneficial interest in a
trust and does not encompass pension plans other than trusts);
</p><p>• <i>Mirant Corp. v. The Southern Co.</i>, 337 B.R. 107 (N.D.
Tex. 2006) (presumption in favor of maintaining venue of adversary
proceeding in forum where bankruptcy case is pending is
"significantly weakened, if not entirely destroyed, once debtor's
reorganization plan is confirmed."); and </p><p>• <i>In re N.C.P.
Marketing Group Inc.</i>, 337 B.R. 230 (D. Nev. 2005) (as trademarks
are personal and non-assignable without consent of the licensor,
trademarks cannot be assumed). </p>