Notable Reported Cases for the Week Ended 10/16/05

Here's our weekly roundup of significant recently decided cases involving complex bankruptcy disputes for the week ended 10/16/05.

In re Kreisler, (2005 WL 2436451) (Bankr. N.D. Ill., 10/4/05)

In re CK Liquidation Corp., (2005 WL 2436444) (D. Mass., 10/4/05)

In re Aldar Investments, Inc., (2005 WL 2429094) (Bankr. M.D. La., 9/30/05)

In re Onco Investment Co., (2005 WL 2401908) (D. Del., 9/29/05)

In re Millenium Seacarriers, Inc., (2005 WL 2398014) (S.D.N.Y., 9/28/05)

Argentinian Recovery Company, LLC v. Board of Directors of Multicanal, S.A., (2005 WL 2375074) (S.D.N.Y., 9/28/05)

IRS v. Harvard Secured Creditors Liquidation Trust, (2005 WL 2397224) (D.N.J., 9/28/05)

In re Insilco Technologies, Inc. (2005 WL 2371982) (Bankr. D. Del., 9/27/05)

In re Kreisler, (2005 WL 2436451) (Bankr. N.D. Ill.): The creditor, an insider, filed a motion to have its secured claim deemed allowed. The trustee objected to the claim, contending that the claims should be disallowed or equitably subordinated. In equitably subordinating the claims, the Court looked to 7th Circuit law, as set forth in In re Lifschultz Fast Freight, 132 F.3d 339, 341 (7th Cir. 1997), noting:

[T]he Seventh Circuit cleared up any confusion in Lifschultz when it emphatically noted that "inequitable conduct is still the general rule for equitable subordination." 132 F. 3d at 349. The Lifshcultz court cautioned parties against "mistak[ing] the birth of an exception for the death of a rule" when making the argument that the requirement of inequitable conduct no longer exists. Id. at 348. The court instructed that it was incorrect to assume that "creditor misconduct is no longer a requirement in any circumstance or instance...." Id.

After finding the creditor to be an insider of the debtor, the court found sufficient inequitable conduct on the part of the insider to warrant subordination of the creditor's claim. The Court stated:

It can hardly be said that Garlin dealt with [the insiders] at arm's length. After all, Garlin was formed by [an insider] for the sole purpose of purchasing [the] Bank's mortgage and notes at a deeply discounted rate. Although this fact alone does not constitute inequitable conduct, the formation of [the creditor by the insider], coupled with the fact that [the insiders] controlled and dominated that company and led its negotiations with [the] Bank, demonstrates that [the insiders] devised a scheme to receive some of the proceeds from the sale of the Western Avenue Properties to the exclusion of their unsecured creditors. Based on the evidence, the Court concludes that [the insiders] contrived an elaborate scheme to protect some of their equity in the Western Avenue Properties to the exclusion of their unsecured creditors. [One of the insiders acted as the puppeteer of the creditor in order to purchase [the] Bank's mortgage and notes, and [the other insider] was involved as an active participant in the scheme to protect [their joint] equity in the Western Avenue Properties.

The Court also found that the creditor's claims should be equitably subordinated under § 510(c) based on the creditor's failure to comply with Bankruptcy Rule 3001(e)(2), which requires the filing of a notice of transfer of claim with the Bankruptcy Court. The Court stated:

The use of the word 'shall' in Rule 3001(e)(2) indicates that Congress considered the filing of such notice to be mandatory." ... The plain and ordinary meaning of the word "shall" is mandatory, not precatory.

In re CK Liquidation Corp., (2005 WL 2436444) (D. Mass., 10/4/05): Unsecured creditor challenged orders of the bankruptcy court in connection with a dispute over the sale of a debtor's assets. The creditor's objection to the sale of the debtor's assets at auction was overruled. The creditor moved to vacate the sale order on the basis of fraud on the court contending that the attorneys misrepresented the dividend that unsecured creditors would have received from the sale because legal fees had not been taken into account. The bankruptcy court rejected the creditor's argument, holding that no fraud was committed because the bankruptcy court was not misled. The bankruptcy court effectively reasoned that everyone knows that attorneys regularly deplete the proceeds of an estate, and no one should reasonably expect otherwise.

In re Aldar Investments, Inc., (2005 WL 2429094) (Bankr. M.D. La., 9/30/05): The trustee filed an adversary proceeding against the debtor's former attorneys challenging the validity and extent of attorneys' liens on litigation settlement proceeds. The debtor, plaintiff in an antitrust suit, agreed to pay one set of lawyers on an hourly basis, another on a contingency basis, and a third on a flat fee basis. The trustee disputed the validity of the liens of all three firms, and was successful against the first firm, but not against the others. Most interesting aspect of the case is the trivia gained from learning that valid attorneys' liens are considered "privileges." If it's a privilege to get a lien, what do they call a lawyer's getting paid in the normal course..."Lucky"?

In re Onco Investment Co., (2005 WL 2401908) (D. Del., 9/29/05): Another plan appeal dismissed as moot, this time by holders of certain senior notes, who sought a declaration that no distributions could have been made under the confirmed plan unless and until senior noteholders were paid in full. How many mootness opinions have to be issued before lawyers and clients will abandon fruitless appeals like these ab initio

In re Millenium Seacarriers, Inc., (2005 WL 2398014) (S.D.N.Y., 9/28/05): Procedurally complex case worth a read. This appeal questioned whether a Bankruptcy Court has inherent jurisdiction to hear an adversary action to clarify the meaning of its own order involving the sale of a debtor's assets, and whether the dismissal of a bankruptcy case requires the dismissal of related adversary which was related to the bankruptcy case at the time of its commencement. Court holds that dismissal of the underlying bankruptcy case does not divest the court of jurisdiction over the "related to" adversary proceeding.

Argentinian Recovery Company, LLC v. Board of Directors of Multicanal, S.A., (2005 WL 2375074) (S.D.N.Y., 9/28/05): Court considers the interplay between the requirements of the Securities Act of 1933 (the "Securities Act"), and the comity normally extended to reorganizations of foreign companies that are chartered and operating under the laws of another country.

IRS v. Harvard Secured Creditors Liquidation Trust, (2005 WL 2397224 (D.N.J., 9/28/05): District Court reverses Bankruptcy Court summary judgment order, thereby denying to the Harvard Industries secured creditor trust a refund based on allegedly specified liability losses relating to (i) amounts paid to settle products liability claims, (ii) amounts contributed to the PBGC in settlement, and (iii) payments made on account of certain workers' compensation claims.

In re Insilco Technologies, Inc. (2005 WL 2371982) (Bankr. D. Del., 9/27/05): Liquidating Trust's post-confirmation state law claims alleging unjust enrichment, deepening insolvency, fraud, breach of fiduciary duty, malpractice, etc., were not within postconfirmation "related to" jurisdiction because (i) the plan and disclosure statement failed to identify these claims as assets available for liquidation and distribution to creditors, (ii) pursuit of these claims did not call for interpretation of any plan provision, and (iii) claims did not have requisite "close nexus" to plan.

© Steve Jakubowski 2005

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