Benchnotes Sep 2001

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Sep 2001

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In the last 10 years, the Supreme Court has issued three decisions relating to
the admission of expert testimony under Rule 702—<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Merrell Dow
Pharmaceuticals Inc., 509 U.S. 579 (1993)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Electric Co.
v. Joiner, 522 U.S. 136 (1997)</a> and <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Tire Co. v. Carmichael,
526 U.S. 137 (1999)</a>. In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Canvas Specialty Inc., 261 B.R.
12 (Bankr. C.D. Cal. 2001)</a>, Bankruptcy Judge Samuel L. Bufford takes
the standards set forth in that trio of decisions and applies them in a bankruptcy
adversary proceeding context. This opinion provides a good outline for preparing and
tendering expert testimony. Initially, advocates must provide evidence for the court
to determine (1) the area of expertise of the proposed expert and (2) whether
the testimony will assist the trier of fact to understand or determine the facts in
issue. In order for the profferred expert testimony to be admitted, evidence must
then be presented on the purported expert's qualifications. In addition, there must
be a recognized body of knowledge, learning or expertise upon which the witness
relies. The court noted that where there is no field of expertise (as with
astrology), nobody would qualify as an expert witness. Further, that expertise must
be relevant to the determination of facts in issue. Even if these standards are met,
the testimony will not be admitted unless the advocate shows that the testimony
satisfies three criteria: (1) the testimony must be based on sufficient facts or
data; (2) the testimony must be the product of reliable principles and methods;
and (3) the proposed expert witness must have applied these principles and methods
reliably to the facts of the case. Objections to expert testimony can be based on
the allegations that (1) there was not a quantum of facts or data relied upon
sufficient to support the expert opinions expressed; (2) the expert was operating
under gross misunderstanding of relevant facts; or (3) the expert might not have
obtained the right kind of data to support the conclusions. In addition, the expert
must use reliable principles and methods and must explain the principles and methods
used so that the parties and the court can examine the reliability.

<h3>Indemnification Policy Proceeds Are Deemed Property of Estate</h3>

In re Equinox Oil Co. Inc., Civil Action No. 00-3502 (E.D. La.
June 11, 2001), involved the appeal of a bankruptcy court decision that was
the subject of de novo review on the legal question of whether the proceeds of an
indemnification policy designed to reimburse for losses owed to third parties were
property of the estate. Noting that the Fifth Circuit's earlier decisions offered
"guidance," albeit not a definitive answer, District Judge Helen G. Berrigan
reviewed and summarized <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… World Exposition Inc. v. Federal Insurance Co.,
832 F.2d 1391 (5th Cir. 1987)</a> (LWE); <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Edgeworth, 993
F.2d 51 (5th Cir. 1993)</a> and <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Vitek, 51 F.3d 530 (5th
Cir. 1995)</a>. According to Judge Berrigan, LWE stands for the proposition that
where proceeds of liability coverage were directed to officers and directors personally
and where LWE's rights limited the indemnification, the insurance proceeds belonged to
the officers and directors and were not an asset of the LWE bankruptcy estate. In

Edgeworth, since the proceeds of the policy were for the benefit of victims of
alleged malpractice and could not be payable to the debtor, the proceeds were not an
asset of the estate. In Vitek, the liability policy named directors, officers and
Vitek as co-insurers. As both the debtor/corporation and officers/directors had direct
coverage, the Fifth Circuit approved a settlement between the estate and carrier
without specifically deciding whether all or part of the insurance proceeds belonged to
the estate. As it arose in chapter 7, the Vitek court noted that the decision
should be of "little or no" value in a chapter 11. While questioning the continuing
viability, Judge Berrigan held that even under Edgeworth the proceeds in Equinox
would still be an asset of the bankruptcy estate since the policy is clear that
proceeds are to be paid to the debtor, as this is an indemnification policy and not
a liability policy for the benefit of third parties.

<h3>Standing to Pursue Preference Action</h3>

<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Together Development Corp., 262 B.R. 586 (Bankr. D. Mass.
2001)</a>, involved a preference action brought by an unsecured creditors' committee
against principals of the chapter 11 corporate debtor in which the principals sought
to dismiss for lack of standing. Prior to the filing of the complaint, the debtor
and the committee had entered into a stipulation, the purpose of which was to
effectuate permission for the committee to initiate all causes of action on behalf of
the debtor prior to the expiration of limitations. No objections were filed, and the
bankruptcy court approved that stipulation. There was apparently a "scrivener's error"
in that the stipulation omitted a specific grant of authority for the committee to
bring avoidance actions. The parties then filed an amended stipulation. The bankruptcy
court approved the amended stipulation over the timely objections of the principals. The
committee then commenced the adversary proceeding naming the debtor as plaintiff, but
signed by committee counsel on the debtor's behalf. The court characterized the
complaint as a complaint to avoid and recover preferential transfers. However, the
complaint also contained state law claims for breach of fiduciary duty. The bankruptcy
court denied the motion to dismiss, holding that the principals were barred from
challenging the committee's standing because (1) the defendants failed to object to
the original stipulation; (2) the Supreme Court decision of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Underwriter's
Insurance Co. v. Union Planters Bank N.A., 530 U.S. 1 (2000)</a>, was
factually and legally distinguishable; (3) §1109(b) authorized the committee to
file the adversary proceeding; and (4) §105(a) and established bankruptcy law
supported the committee's actions. The defendants appealed. On remand, Bankruptcy
Judge Joel B. Rosenthal noted that the First Circuit had held that objections to
a party's standing cannot be waived and that the court must consider a challenged
party's standing whenever raised, regardless of whether the challenger failed to make
an earlier challenge or the court itself sees standing problems. As a result, the
court held that the defendants did not waive their challenge by failing to object to
the original stipulation because such an objection cannot be dispositively waived. The
court then noted that the central issue on remand was to decide what impact, if any,
the Supreme Court's decision in Hartford Underwriters—more commonly known as Hen
House—has on the proposition that explicit statutory language confers standing only on
"the trustee" to pursue alleged preferential transfers to the debtor's property. After
reviewing the cases, the court reached the conclusion that Hen House is not
controlling and that the committee was authorized to prosecute such actions pursuant to
§§1103(c)(5) and 1109(b), particularly where the committee acts on behalf
of and as agents of the debtor and seeks recovery for the debtor's entire estate,
not simply the unsecured creditors.

<h3>Terminable-at-will Provisions</h3>

In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re National Hydro-Vac, 262 B.R. 781 (Bankr. E.D. Ark.
2001)</a>, Bankruptcy Judge James G. Mixon addressed issues relating to a bankcard
merchant agreement, pursuant to which the debtor was able to charge its customer credit
card for services and to obtain immediate payment from the bank. The parties agreed
that the agreement was an executory contract, and the bank conceded that the agreement
was not a contract to make a loan or extend other accommodations to a debtor. Upon
the filing of the bankruptcy petition, the bank had unilaterally exercised its right
to terminate as allowed in the agreement, asserting concern over the debtor's financial
condition. Since that termination, the debtor had been unable to enter into a new
bankcard merchant agreement on the same terms with any other bank or entity offering
such a service. Subsequent to the termination, the bank filed a motion for relief
from stay and for abandonment so it could exercise its right to terminate under the
agreement. The bank argued that the agreement was a personal services contract, which
the debtor could not assume. The bank also argued that assumption of the agreement
by the debtor would be futile because immediately upon assumption, the bank would
exercise its unilateral right to terminate the agreement. Relying on Arkansas law,
the court found that the relationship between the two parties was commercial and not
based on the provision of personal services rendered by the bank, noting there was
no specific individual with whom the debtor contracted to supply this service and that
the bank's service was not unique. The bank was equally unsuccessful in arguing that
the specific contract provision providing that the agreement was neither transferable nor
assignable was sufficient to convert it into a personal services contract. With regard
to the futility argument, the court noted that in a common-law context,
terminable-at-will provisions do not confer "an unrestricted right to cancel" a contract
that is commercial rather than personal in nature. In a commercial contractual
relationship, terminable-at-will provisions must be exercised in good faith. In this
case, as the debtor was not in default and had no history of chargebacks when the
bank terminated the agreement, canceling a contract when the debtor filed bankruptcy at
least "raises the inference of bad faith" on the part of the bank. The court denied
the motion.

<h3>HMO-asserted Administrative Claim Denied</h3>

In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Right Time Food Inc., 262 B.R. 882 (Bankr. M.D. Fla.
2001)</a>, Bankruptcy Judge Jerry A. Funk addressed an administrative claim asserted
by the health maintenance corporation (HMO) through which a chapter 11 debtor
provided health insurance benefits to employees. The HMO agreement provided that the
debtor was required to give 45 day's notice prior to terminating. During that notice
period, the debtor had no employees. However, the HMO asserted an administrative claim
for premiums that came due before the contract had been rejected. The court denied the
request for an administrative claim, finding that the bankruptcy estate did not obtain
"any concrete benefit" from the expenses relating to the post-petition premiums under the
facts of this case.

<h3>Miscellaneous</h3>

<ul>
<li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Hartung, 258 B.R. 210 (Bankr. D. Mont. 2000)</a>
(creditor did not violate the automatic stay by reporting debtor's alleged crime of
issuance of a bad check to the proper authorities for prosecution);

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Curtis, 262 B.R. 619 (Bankr. D. Vt. 2001)</a> (more than
a general power of attorney is required in order to permit debtor's daughter to file
chapter 7 petition on debtor's behalf);

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Cadillac by Delorean, 262 B.R. 711 (Bankr. D. N.D.
2001)</a> (rejects the proposition that the United States declared bankruptcy in
1933 or at any other time or that the Transportation Secretary serves as receiver
for the United States in bankruptcy);

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Elder, 262 B.R. 799 (C.D. Cal. 2001)</a> (conviction of
stalking under California law is always an intentional act, and claims arising from
stalking are non-dischargeable);

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Bradlees Stores Inc., 262 B.R. 253 (Bankr. S.D.N.Y.
2001)</a> (§546(c) is an exclusive remedy for reclaiming creditors; unless a
seller meets the 10-day notice requirement, it has no other common law or statutory
right of action);

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Hunter, 261 B.R. 789 (Bankr. M.D. Fla. 2001)</a>
(post-petition income received within 180 days of the petition date from a
spendthrift trust was included in "property of the estate" even though the corpus of
the trust would not be included in property of the estate); and

</li><li><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Bank One Dayton N.A., 261 B.R. 646 (S.D. Miss.
2001)</a> (28 U.S.C. §1452, providing for removal of claims related to
bankruptcy cases, authorizes the removal of a case filed in an Indian tribal court).

</li>

Journal Authors

Deborah D. Williamson

Ronald Hornberger

Journal Date

Saturday, September 1, 2001 - 12:00

Bankruptcy Rule

2001