Notable Reported Cases for the Week Ended 10/09/05

Here's our weekly roundup of significant recently decided cases involving complex bankruptcy disputes.

In re Pro Page Partners, LLC, (2005 WL 2470831) (6th Cir., 10/6/05, subject to Circuit Rule 28(g) citation limitations)

In re Medical Wind Down Holdings III, Inc., (2005 WL 2456261) (Bankr. D. Del., 10/5/05)

In re EToys, Inc., (2005 WL 2456255) (Bankr. D. Del., 10/4/05)

In re The Bridge to Life, Inc., (2005 WL 2429730) (Bankr. E.D.N.Y., 9/30/05)

In re Stoll, (2005 WL 2420356) (Bankr. S.D.N.Y., 9/30/05)

In re Adelphia Communications Corp., (2005 WL 2414852) (S.D.N.Y., 9/29/05)

In re FV Steel and Wire Co., 2005 WL 2401636 (Bankr. E.D. Wis, 9/27/05)

In re PRS Insurance Group, Inc. (2005 WL 2333649) (Bankr. D. Del., 9/23/05)


In re Pro Page Partners, LLC, (2005 WL 2470831) (6th Cir., 10/6/05, citability limited by Circuit Rule 28(g)): The chapter 7 trustee of a former provider of paging and wireless communications services brought suit against the debtor's insider and 30% shareholder, seeking recovery of the value of certain transfers made him by the debtor within one year of the filing. In his answer, the defendant alleged that $140,500 of "loans" to the debtor should be offset under the "new value" defense to possible preference liability. The issue facing the courts was whether the insider's advances were really loans, given the absence of any written credit agreement or promissory notes evidencing such "loans." The bankruptcy court allowed the "new value" defense, holding that "[r]egardless of whether [the insider's] monetary advances were loans, charitable contributions or even gifts, they replenished the debtor's bankruptcy estate" and thus constitute new value within the meaning of 11 U.S.C. § 547(c)(4). After reducing the amount of the avoidable transfers by the amount of the new value subsequently advanced by the insider, the court awarded the trustee a little more than $10,000, plus interest. Not a good day for the trustee or its lawyers.

Not surprisingly, the trustee appealed, and not surprisingly, the district court affirmed. In affirming the lower courts' ruling, the Sixth Circuit held:

The advances in question here--advances that took the form of checks drawn on Mr. Jones' account and made payable to the order of Pro Page or the Tennessee Department of Revenue--obviously constituted "money" within the "new value" definition of 11 U.S.C. § 547(a)(2). The trustee suggests that, under § 547(a)(2), money must be in the form of "goods, services, or new credit." As we read the statute, however, the phrase "in goods, services, or new credit" modifies only "money's worth;" the phrase does not modify both "money's worth" and "money."

It would have been strange indeed for Congress to have defined new value as meaning "[1] money [in goods, services, or new credit] or [2] money's worth in goods, services or new credit." If "money in goods, services, or new credit" could have any meaning at all, it would have to mean the same thing as "money's worth in goods, services, or new credit"--in which case there would have been no point in speaking of both money and money's worth. One term or the other would have been superfluous--and it is an accepted canon of statutory construction that Congress should be presumed not to have used superfluous words. See Platt v. Union Pacific R. Co., 99 U.S. 48, 58 (1878).

"Money," then, stands unmodified in the statutory definition of "new value." If Mr. Jones gave Pro Page money, as he did, it does not matter whether there was or was not an enforceable credit agreement. It does not matter whether the advances were truly loans rather than, as the trustee contends, capital contributions. Money is money whether it is to be paid back or not.


In re Medical Wind Down Holdings III, Inc. (2005 WL 2456261) (Bankr. D. Del., 10/5/05): Here the Bankruptcy Court reviews the law regarding when integration clauses in contracts will bar claims for fraudulent inducement or negligent misrepresentation. The court contrasted two cases to show the kinds of fact patterns that would be important to a decision barring claims of fraud or misrepresentation:

In Great Lakes [Chem. Corp. v. Pharmacia Corp., 788 A.2d 544, 552 (Del. Ch.2001)], the court barred a plaintiff's claim of fraud due to three contractual provisions. None of the three provisions included an integration clause and none of the three provisions contained the words rely or reliance; rather, the provisions disclaimed liability regarding estimates, projections, and other forecasts. The three heavily negotiated provisions were agreed upon "after months of extensive due diligence" and with the aid of "industry consultants and experienced legal counsel." As such, the court concluded that the "carefully negotiated and crafted" agreement was "clear" and prohibited the plaintiff's claims of fraud. As seen by the disclaimers in Great Lakes, to foreclose reasonable reliance, the clause or clauses need not necessarily contain the words "rely" or "reliance"; but such provisions must "clearly" and "explicitly" promise not to rely.... Great Lakes thus demonstrates the type of language and circumstances that courts applying Delaware law have required to bar a claim of fraud in the inducement. Kronenberg [v. Katz, 872 A.2d 568, 593 (Del. Ch.2004), aff'd without op., 867 A.2d 902(Del.2005)], in contrast, illustrates the type of language and circumstances that Delaware courts have deemed insufficient to bar a claim of fraud. The language in Kronenberg that was held to be insufficiently clear was as follows:
Entire Agreement. This Agreement, which includes the Exhibits and shall include any Joinders upon execution thereof, constitutes the entire agreement and understanding of the parties hereto with respect to the subject matter hereof and supersedes all prior or contemporaneous agreements, understandings, inducements, or conditions, oral or written, express or implied.

In the court's words, such language failed to "forthrightly affirm" that the parties were not relying on any representation or statement not contained within the contract. In reaching that conclusion, the court explained that the traditional interpretation of such language is that it "operates to police the variance of the agreement by parol evidence," and that "typical integration clauses do not operate to bar fraud claims based on factual statements not made in the written agreement."

In this case, the Bankruptcy Court found that a one sentence integration provision (stating "This Agreement sets forth the entire Agreement and understanding of the parties relating to the subject matter herein and merges all prior discussions between them.") was insufficient to bar claims of fraud and negligent misrepresentation, and thus let the complaint stand and denied the defendant's motion to dismiss.


In re EToys, Inc., (2005 WL 2456255) (Bankr. D. Del., 10/4/05): Motions filed by a shareholder and an administrative claimant against Barry Gold ("Gold"), Morris Nichols, Arsht & Tunnell ("MNAT") and Traub, Bonaquist, Fox LLP ("TBF") and certain of their partners sought removal, disgorgement of fees, and sanctions for contravening the disclosure requirements of Bankruptcy Rule 2014 and the conflict of interest prohibitions of section 327(a) of the Bankruptcy Code. The Movants also asked the Court to refer the matter for criminal and disciplinary investigations. The MNAT retention application failed to disclose that MNAT was representing GECC and two Goldman affiliates in a bankruptcy case filed by Finova Capital Corporation ("Finova") on the same day that the Debtors filed their case. TBF was retained by the Unsecured Creditors Committee. The Debtor retained Gold as President and CEO to coordinate its liquidation. At no time did Gold or TBF disclose that Gold and TBF's senior partner, Paul Traub, were partners in an entity named ADA, or that TBF paid Gold $30,000 a month from February to May 2001 for his services to ADA. Settlements were reached regarding disgorgement of fees, and every argument under the sun was advanced as to why the Court lacked jurisdiction to hear the matter and why the settlements should be approved. In a lengthy opinion, which never should have had to have been issued in the first place had the parties disclosed what was required of them, the Court ordered significant disgorgement of fees, but refused to refer the matter to the US Attorney.

The moral of this case, and many others that preceded it: Disclose, Disclose, Disclose.


In re The Bridge to Life, Inc., (2005 WL 2429730) (Bankr. E.D.N.Y., 9/30/05): Court dismisses Chapter 11 case filed in violation of injunction against future bankruptcy filings issued in a prior dismissed case. Court finds that subsequent filing was an abuse of the chapter 11 process. No creditors other than the judgment creditor were pressing for payment, and the case was filed so that the debtor could avoid having to post a supersedeas bond while appealing a judgment that it had the ability to pay. Court also found that the debtor had an alternative forum to resolve its state law dispute with the judgment creditor.


In re Stoll, (2005 WL 2420356) (Bankr. S.D.N.Y., 9/30/05): Court grants summary judgment in favor of the chapter 7 trustee on the issue of whether the debtor's interest in the trusts are property of the bankruptcy estate. The Court finds that the beneficiaries of the trust should be treated as joint tenants in common of the assets held by the defendant trusts, and disagrees with defendants' argument that the beneficiaries of the trust should be treated as partners for purposes of 11 U.S.C. § 363(h). Court holds that beneficiaries of "nominee trusts" under Massachusetts law are "partners" for purposes of determining accountability for trust obligations because of the unique control the beneficiaries enjoy over the actions of the trustees and because they hold title to the res of a nominee trust as tenants in common. The Court, however, set the matter for trial on the disputed factual issue of whether the chapter 7 trustee's sale of the debtor's part interest in the assets of the trust would result in a greater benefit to the estate than detriment to the co-owners under the circumstances of this case.


In re Adelphia Communications Corp., (2005 WL 2414852) (S.D.N.Y., 9/29/05): The Ad Hoc Committee of Arahova Noteholders requested leave to file an expedited appeal from four orders of the Bankruptcy Court overseeing the Adelphia Communications Corp. jointly administered cases arguing that the procedures established by the Bankruptcy Court to resolve inter-debtor issues contravene the provisions of the Bankruptcy Code by failing to require that each debtor-in-possession be charged with fiduciary duties to maximize value for its respective creditors. In denying the request for interlocutory appeal, the Court held:

I find that no exceptional circumstances are present that would justify an interlocutory appeal. The Arahova Committee is correct that this is an important case with a great deal of money at stake, but this alone does not justify a departure from the final judgment rule. If anything, this argument militates strongly in favor of deferring to the Bankruptcy Court, which has handled the case for three years and is infinitely more familiar with the record....
Even assuming that Arahova could demonstrate a substantial possibility of success on appeal, it cannot satisfy any of the other necessary factors. First, the Arahova Committee has fallen far short of demonstrating irreparable injury to it absent a stay. The Arahova Committee offers that "[i]f on appeal, however, the [Order in Aid] is vacated, the entire 'Resolution Process' and the decisions resulting therefrom will be rendered invalid." However, as the ACC Senior Noteholders point out, "[t]hat is true of any ruling that is overturned on appeal." The parties are required to undertake much of the same preparation to participate in the procedures under the Order in Aid as under the Arahova Committee's proposed procedures. Therefore, a stay of the proceedings now would not necessarily save any effort. The Arahova Committee is also concerned that the Bankruptcy Court's rulings will be effectively unreviewable at the end of the case. But, the Arahova Committee can seek a stay of the confirmation order pending appeal at the end of the case. As the debtors explained at oral argument, after the closing of the Time Warner/Comcast sale, the parties can still appeal Bankruptcy Court decisions determining distributions under the plan.


In re FV Steel and Wire Co., 2005 WL 2401636 (Bankr. E.D. Wis, 9/27/05): Potentially responsible parties (PRPs) sued by the EPA under CERCLA asserted contingent contribution claims against the bankrupt debtor. The debtor objected to the claims based on Cooper Indus., Inc. v. Aviall Servs., Inc. 125 S.Ct. 577 (2004), which limits the rights of one private party to sue another under § 113 of CERCLA, and under Bankruptcy Code section 502(e)(1)(B), which bars contingent contribution claims. The claimants responded that § 502(e)(1)(B) does not apply since that section is meant to prevent double dipping by a primary and secondary creditor, and, in this case, the EPA did not file a claim for cleanup. The court was unconvinced by the bankruptcy arguments, but found persuasive the CERCLA arguments warranting dismissal of the claims, holding (following 7th Circuit authority) that section 107(a) of CERCLA does not provide an avenue to allow one PRP to recover from another PRP under an implied private right of contribution. According to the Court, to assert a valid claim, the claimant must be either innocent of the environmental liability and thus entitled to file a direct claim under 107(a), or proceed under 113(f), which the Court held was inapplicable in this case because (citing Availl) no specified civil action had been filed relating to the Site.


In re PRS Insurance Group, Inc. (2005 WL 2333649) (Bankr. D. Del., 9/23/05): Court refuses to apply McCarran-Ferguson Act to reverse preempt chapter 11 estate's preference and fraudulent transfer claims asserted defensively under Code section 502(d) to disallow claims of insurance company involved in state liquidation proceeding. Court also refuses to apply Burford, Younger, or Colorado River doctrines to abstain from hearing these claims as insurer had filed proof of claim submitting to Bankruptcy Court's jurisdiction.


© Steve Jakubowski 2005

Written By:Francis Pileggi On October 12, 2005 10:20 PM

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Best regards,
Francis Pileggi.