Notable Reported Cases for the Week Ended 10/30/05

Here's our weekly roundup of significant recently decided cases involving complex bankruptcy disputes for the week ended 10/30/05.


In re MDIP, Inc., (2005 WL 2792358) (Bankr. D. Del., 10/26/05)

In re Women First Healthcare, Inc., (2005 WL 2737436) (Bankr. D. Del., 10/21/05)

In re DSC Ltd., (2005 WL 2671314) (E.D. Mich., 10/19/05)

In re Skorich, (2005 WL 2811899) (Bankr. D.N.H., 10/19/05)

In re Center For Advanced Mfg. & Technology, (2005 WL 2660275) (Bankr. W.D. Pa., 10/19/05)

In re TW, Inc., (2005 WL 2671531) (Bankr. D. Del., 10/14/05)


In re MDIP, Inc., (2005 WL 2792358) (Bankr. D. Del., 10/26/05): Court denies defendant's motion for summary judgment in fraudulent transfer action because genuine issues of material fact existed as to whether reasonably equivalent value had been given by the debtor when it purchased a business for $34 million that internal projections developed at the time of the sale (which the defendant disavowed in the litigation) suggested had a value of only $12 million to $16 million.

© Steve Jakubowski 2005


In re Women First Healthcare, Inc., (2005 WL 2737436) (Bankr. D. Del., 10/21/05): Motion by Sun Pharmaceuticals Industries, Ltd. ("Sun") for allowance of an administrative claim for expenses incurred in preparing to close on the sale of an asset of the debtor before the sale was rescinded and a new auction ordered. Sun argued that the Court should order the Debtor to reimburse Sun under the equitable powers conferred by section 105(a). The United States Trustee ("UST") and Mutual (the successful bidder) disagreed. They argue that the Court's Section 105(a) powers may only be exercised within the confines of the Bankruptcy Code, and asserted that Sun's administrative claim must be based on Section 503(b) instead. The Court stated:

The Court agrees with the UST and Mutual. Section 105(a) supplements courts' specifically enumerated bankruptcy powers by authorizing orders necessary or appropriate to carry out provisions of the Bankruptcy Code. However, section 105(a) has a limited scope. It does not 'create substantive rights that would otherwise be unavailable under the Bankruptcy Code'... The Third Circuit specifically cautioned, in the context of break-up fees, that the Bankruptcy Court may not "create a right to recover from the bankruptcy estate where no such right exists under the Bankruptcy Code....

The UST argues preemptively that Sun is also not authorized under section 503(b)(3)(D) to seek an administrative claim. Specifically, the UST notes that that section authorizes claims only of "creditors" who provide a substantial contribution to the estate which is a benefit to the estate that is not merely incidental to the creditor's actions....

Sun is not, however, seeking an administrative claim under section 503(b)(3)(D). The Third Circuit has expressly recognized as an administrative claim a stalking-horse bidder's claim for a break-up fee and expense reimbursement if granting such a claim provides a benefit to the estate... There is no suggestion that the predicate for such a claim is status as a creditor; nor does the benefit to the estate have to be substantial, as required by section 503(b)(3)(D). Therefore, the Court rejects this argument of the UST.

The Court concluded that Sun had an administrative claim under for all its expenses incurred from the sale order through the motion for reconsideration. It also held that Sun had an administrative claim under section 503(b)(1)(A) for expenses incurred after that date, but only to the extent it had established that its specific activities conferred a benefit on the estate. The Court considered the work actually done by Sun in the relevant time periods, by category, to determine if it could be allowed as an administrative expense. The categories were the following: reformulation study, internal time and expenses (time spent by Sun's management and employees), attorneys' fees and expenses, currency conversion. These sums were awarded in addition to the break-up fee and expenses previously approved.


In re DSC Ltd., (2005 WL 2671314) (E.D. Mich., 10/19/05): Involuntary petition was dismissed by the Court because the petitioners were deemed not to be "qualifying petitioning creditors." The Court still retained jurisdiction, however, to determine whether the debtor is entitled to damages, costs, and fees under Section 303(i) or Rule 9011. The debtor moved to dismiss the appeal on the basis that the order dismissing the opinion was not "final." The district court held here that "the bankruptcy court's failure to resolve the debtor's request does not render non-final his decision to dismiss the bankruptcy petition." The court stated:

This conclusion is consistent with the "bright-line" rule established by the Supreme Court with regard to the finality of decisions on the merits when sanction issues remain pending. In Budinich v. Becton Dickinson & Company, 486 U.S. 196, 202-03, 108 S.Ct. 1717 (1988), the Supreme Court held that a decision on the merits was "a 'final decision' for purposes of [28 U.S.C.] § 1291 whether or not there remains for adjudication a request for attorney's fees attributable to the case." Following Budinich, the Circuit Courts (including the Sixth Circuit) have concluded that appeals are final despite unresolved issued relating to sanctions....
DSC cites a number of cases in its argument that Judge Tucker's decision on the merits is not a final order because an assessment of damages remains to be resolved. Those cases are distinguishable, however, because they involved appeals of the bankruptcy courts' decisions finding a violation of the Bankruptcy Code's automatic stay provision, 11 U.S.C. § 362, prior to the courts' determination of the damages to be awarded to the debtor under Section 362(h) as a result of the violation. Those damages were not a separable dispute from the issue of whether there was a violation of the automatic stay. In the present case, however, there are no damages to be assessed with respect to the involuntary bankruptcy petition which has been denied and dismissed. DSC's request for damages is a separate claim for relief.


In re Skorich, (2005 WL 2811899) (Bankr. D.N.H., 10/19/05): The Court summarized the issues in the case as follows:

This case that involves the collision of the interests of a non-debtor ex-spouse and a chapter 7 trustee at the intersection of state marital law and federal bankruptcy law.... [The debtor's ex-wife] maintains that the Final Decree should control the distribution of all of the disputed property pursuant to the holding in Davis v. Cox, 356 F.3d 76 (1st Cir. 2004), because the [chapter 7] Trustee appeared in family court as a party to the divorce proceeding. She also contends that any attempt by the trustee to set aside the terms of the final divorce decree was barred by the Rooker-Feldman doctrine. The Trustee argued that the sole issue before the Bankruptcy Court was the effect of the Final Decree on the distribution of the bankruptcy estate in light of the trustee's status as a hypothetical lien creditor under Bankruptcy Code section 544(a) and state law.

The Court concluded that certain items of property are property of the bankruptcy estate despite their award to the debtor's ex-wife in the final divorce decree, whereas other property would be subject to the debtor's ex-wife's claims under the final divorce decree.


In re Center For Advanced Mfg. & Technology, (2005 WL 2660275) (Bankr. W.D. Pa., 10/19/05): The reorganized debtor brought an adversary proceeding asserting fraudulent transfer and turnover claims. The defendant moved to dismiss, challenging whether the postconfirmation pursuit of causes of action was permitted. The defendant asserted that the causes of action were not retained, assigned, or transferred to the debtor as required by the plain language of 11 U.S.C. § 1123(b)(3)(B), and thus the causes of action could not be pursued post-confirmation. The defendant also asserted that the complaint should be dismissed because the postconfirmation litigation trust is no longer a debtor in possession (due to confirmation of the Plan) and only a trustee has standing to assert the statutory powers under Chapter 5 of the Bankruptcy Code. The Court concluded that the US Supreme Court's decision in Hartford Underwriters Insurance Co. v. Union Planters Bank, 530 U.S. 1 (2000), is not an impediment to the litigation trust's pursuit of the causes of action. Rather, the Court held, the trust was appropriately bringing causes of action retained under the Plan.


In re TW, Inc., (2005 WL 2671531) (Bankr. D. Del., 10/14/05): The Court entered a scheduling order in routine preference litigation that required expert reports on issues on which a party bears the burden of proof were to be served no later than 130 days after the first answer or other responsive pleading is filed. The defendant timely filed and served its identification of the expert witness, describing his testimony as follows:

Brian Klemz is Chief Financial Officer for Vision. Without limitation, Mr. Klemz may provide expert testimony as to the standard business terms and practices in the industry in which the Defendant and/or the Debtors engaged in business. Such testimony may include, but is not limited to: 1) the credit terms and payment practices, including terms, conditions, manner and method of payment, in this industry during the preference period; and 2) whether such terms and practices were consistent with the parties' ordinary course of business before the preference period; and 3) that payments made during the preference period were made according to ordinary business terms.

Counsel for the plaintiff requested that the expert witness be precluded from testifying, arguing that Fed. R. Civ. P. Rule 26(a)(2) and its own interrogatories required more information than was provided, and that the plaintiff has been prejudiced. The plaintiff argued that Rule 26(a)(2) required preparation and filing of a written expert report and that in the absence of such a report, plaintiff has been prejudiced in that it can not prepare its case or employ its own expert in opposition.

The Court's pragmatic approach to the issue is worth restating in its entirety here because of its obvious implications to the bankruptcy litigation strategist:

Plaintiff is mistaken [in its arguments about Rule 26(a)(2)'s requirements]. Rule 26(a)(2) deals with the disclosure of expert testimony, and provides, in material part, in subparagraph (B), as follows:
Except as otherwise stipulated or directed by the court, this disclosure shall, with respect to a witness who is retained or specially employed to provide expert testimony in the case or whose duties as an employee of the party regularly involve giving expert testimony, be accompanied by a written report prepared and signed by the witness.

It appears clear to this Court that the requirement of preparation and filing of a written report was not intended to be imposed upon prospective witnesses who were not in the two categories specified in the rule, namely, those who are retained or specially employed to provide expert testimony in the case, and those whose duties as an employee of the party regularly involve giving expert testimony. See, Connolly v. NEC America, Inc. (In re Tess Communications, Inc.), 291 B.R. 535, 537 (Bankr. D. Colo. 2003). To hold otherwise would render the inclusion of the two categories meaningless.

Defendant's Identification of Expert Witness makes it clear that Mr. Klemz fits in neither of the categories of persons who are required to prepare and file a written report under Rule 26(a)(2)(B). Thus, in this Court's view, Mr. Klemz was not required by Rule 26(a)(2)(B) to prepare and submit an expert witness report.

Similarly, it is this Court's view that the recitals contained in Defendant's Identification of Expert Witness provide sufficient information to satisfy Plaintiff's Interrogatories. Simply stated, in the context of this case and the issues to be litigated, Plaintiff was provided all the information needed to prepare for trial.

Finally, this Court views Plaintiff's reliance upon Rule 26(b)(4) to be disingenuous. That provision is to the effect that although a party may depose any person identified as a potential expert witness, if an expert report is required under Rule 26(a)(2)(B), no deposition may be conducted until after the report is provided. Plaintiff bootstraps this provision upon its erroneous conclusion that Mr. Klemz was required to provide an expert witness report as justification for its failure to depose Mr. Klemz, although counsel specifically made the witness available for deposition, and there was ample time for such an examination before the close of discovery under this Court's Scheduling Order. Plaintiff's failure to depose Mr. Klemz was apparently a strategic decision with which it must now live.

In In re Cherrydale Farms, Inc., 2001 WL 1820323 (Bankr. D. Del. 2001), Judge Walsh of this Court deemed testimony of the Chief Financial Officer of the debtor, with many years of experience with the debtor and in its industry, sufficient to establish evidence of an industry standard, noting that, "I cannot think of a better witness." Id., at *5. See also, Troisio v. E.B. Eddy Forest Products Ltd. (In re Global Tissue, L.L.C.), 106 Fed. Appx. 99, 103 ("[We] believe that the decision in Cherrydale supports the notion that testimony from employees of the parties involved in a preference payment dispute may be used to establish an industry standard, as long as the court determines that the employees are credible and have significant and relevant industry experience.")

If Mr. Klemz proposes to offer expert testimony at the trial of this case, this Court will determine at that time his qualifications and credibility within the area or areas on which his expert opinion is to be offered. It appears from Defendant's Identification of Expert Witness that Mr. Klemz' testimony is expected to focus primarily upon Defendant's asserted "ordinary course of business" defense under § 547(c)(2). This Court will be truly astounded if counsel for Plaintiff, which has extensive experience in preference litigation in this district, is in the least bit surprised by any aspect of Mr. Klemz' testimony, or is in any way unprepared to address and/or counter it.

Based upon the foregoing, Plaintiff's Motion to Strike Defendant's Expert Witness Brian Klemz is DENIED.


Steven Jakubowski


Hat tip to Ryan Zeller and Kelly Frame.