Whatever you may think

DSI's Cathy Vance has long been this blog's resident guru.  In her first post, she unlocked the mystery behind the origin of BAPCPA's section 1102(b)(3).  On BAPCPA's second birthday, she surveyed BAPCPA's unruly landscape as it entered its terrible two's and drove record numbers of readers here.  The next year, on the third anniversary of BAPCPA's passage, as anger and frustration turned to resignation, she untangled the purpose and application of the new Bankruptcy Rule 6003. 

Recently, Cathy has turned her attention to understanding how the in pari delicto defense morphed into one of the more powerful and complete defenses to professionals that are complicit--through their negligence--in a company's wrongdoing.  In last November's issue of the ABI Journal, Cathy wrote an article entitled, In Pari Delicto, Reconsidered, in which she posited--as none had before--that the in pari delicto doctrine is being inappropriately used by federal courts to supplant traditional tort law defenses that derive from state, not federal, law.

Cathy has graciously expanded upon the theme of her ABI article and written exclusively for this blog a follow up piece entitled In Pari Delicto and a Jurisprudential House of Cards, for which I am very grateful.  So without further ado, heeeeeeerrrrrreeee's Cathy! ........

In Pari Delicto and a Jurisprudential House of Cards

Catherine E. Vance

January 14, 2010

In a recent article I wrote, In Pari Delicto, Reconsidered,  (published in the November 2009 ABI Journal), I posited, among other things, that in the federal courts the in pari delicto doctrine is supplanting traditional tort law defenses, which derive from state, not federal, law. Within a few weeks, the Third Circuit issued its decision in OHC Liquidating Trust v. Credit Suisse (In re Oakwood Homes Corp.), 2009 U.S. App. LEXIS 27631, 2009 WL 4829835, (3d Cir. Dec. 14, 2009) (pdf), and that decision rather nicely proves my point.  

The facts, in a nutshell: Oakwood Homes, which made and sold manufactured homes, used securitizations to finance its operations. The company hit the skids in 1999 and contacted Credit Suisse regarding a financing transaction intended to provide the company with needed liquidity. An internal memo was prepared within Credit Suisse recommending against the transaction and that transaction never materialized, but two others were negotiated between Credit Suisse and Oakwood Homes in 2000 and 2001. After it sought bankruptcy protection in 2002, Oakwood Homes wanted to continue its securitization financing model with Credit Suisse. 

The plaintiff, OHC Liquidating Trust, was born in the Oakwood Homes bankruptcy. The Trust objected to Credit Suisse’s proof of claim and counterclaimed for common law negligence, breach of fiduciary duty and breah of implied contract. Credit Suisse filed a motion for summary judgment, arguing that none of these allegations could stand because the Trust, as successor to Oakwood Homes, was in pari delicto with Credit Suisse, i.e., Oakwood Homes was at least as blameworthy for entering into what the Trust called “value destroying” transactions with Credit Suisse. The district court, where the matter was heard, sided with Credit Suisse and granted the motion. 

Affirming, the Third Circuit stated, rather definitively, that in pari delicto “is recognized as a defense under New York common law” and cites a number of New York cases to support this proposition.

Back to my prior article for a moment. Here’s what I said then: 

The way that we’ve been thinking about in pari delicto in bankruptcy cases is quite at odds with the comparative negligence regime, irrespective of the variances among the states. Not only does the in pari delicto analysis precede, rather than follow, a merits-based determination on the elements of negligence, it may be resulting in the dismissal of cases that, under state law, would allow the plaintiff to recover.

This is precisely what happened in Oakwood Homes. Like most states, New York dropped contributory negligence, which barred recovery if the plaintiff bore any responsibility, in favor of a rule based on comparative negligence. What’s more, New York is a pure comparative negligence state.  

[T]he culpable conduct attributable to the claimant or to the decedent, including contributory negligence or assumption of risk, shall not bar recovery, but the amount of damages otherwise recoverable shall be diminished in the proportion which the culpable conduct attributable to the claimant or decedent bears to the culpable conduct which caused the damages.

N.Y. C.L.S. C.P.L.R. § 1411. This means, generally speaking, that the plaintiff can recover unless the plaintiff is solely and entirely to blame for the harm it suffered. Now, based on the facts set out in the district and appellate courts’ decisions, it’s likely that the Oakwood Homes Trust would have lost upon proper application of the comparative negligence standard but that does not diminish the fundamental legal error both courts made. The in pari delicto analysis is flatly inconsistent with a pure comparative negligence regime because the latter allows recovery that is forbidden by the former. By interposing in pari delicto and its consequent search for equal or mutual fault, these courts have, quite literally, judicially altered New York’s comparative negligence statute.

Compounding the problem, the Third Circuit cites New York cases to justify its application of in pari delicto that don’t provide much at all in the way of actual authority for the stated proposition.

One of the cited cases is Abright v. Shapiro, 214 A.D.2d 496, 626 N.Y.S.2d 73, (N.Y. App. Div. 1^st Dep’t 1995), which presents the classic in pari delicto scenario and is woefully off point. Abright involved rent-controlled property, where the landlord permitted tenants to rent the properties for use as professional office space and the tenants were required to indemnify the landlord for any damages resulting from that use. The court stated that it disagreed with the lower court’s determination that the indemnification provision was insufficient to encompass the landlord’s legal fees, but it nevertheless affirmed the lower court’s ruling – because both landlord and tenant were parties to an illegal contract and were, therefore, in pari delicto.

So, Abright is both factually and legally beside the point. In Oakwood Homes, there was no assertion that the company and Credit Suisse had entered into an illegal contract (indeed, in pari delicto was used to cut off inquiry into whether there even was, as the Trust alleged, an implied contract). Abright also falls well short as authority that in pari delicto “is recognized as a defense under New York common law,” as the Third Circuit has claimed because it wasn’t asserted as a defense at all. Rather, the appellate court invoked the doctrine sua sponte, refusing to allow either party “to enlist the aid of the courts in the enforcement of their unlawful bargain.”

The Third Circuit also relies on Jackson v. Assoc. Dry Goods Corp., 13 N.Y.2d 112, 192 N.E.2d 167 (1963) and D’Ambrosio v. City of New York, 55 N.Y.2d 454,450 N.Y.S.2d 149, 435 N.E.2d 366 (1982). Neither of these cases, however, has anything to do with measuring the relative fault of a plaintiff against that of a defendant, or the relevance of in pari delicto against allegations of negligence, implied contract or breach of fiduciary duty. Instead, both have at issue the rules of indemnification and contribution among joint tortfeasors. Moreover, as the Third Circuit correctly notes (sort of), D’Ambrosio makes clear that Jackson is no longer good law, but of the two, only Jackson incorporates notions of in pari delicto into the analysis.

A bit of explanation is in order, which D’Ambrosio provides for us. At one time, New York law did not allow contribution among joint tortfeasors based on “the belief that the courts should not participate in adjusting the relative rights of wrongdoers.” Given the harsh results this rule sometimes led to, a rule of indemnification evolved that depended on whether a joint tortfeasor’s negligence was “active” or “passive.” As explained by the D’Ambrosio court: 

Thus, one who was cast in damages for negligence could, if his negligence were merely "passive", nevertheless shift his liability to the tort-feasor whose negligence was considered "active" … One who was himself actively negligent could not, of course, receive the benefit of this doctrine; it was available only to shift full liability from the secondary to the primary wrongdoer, and its availability depended upon the level of culpability of the one seeking indemnity. The inquiry became primarily a question of the degree of fault, or the factual disparity between the delinquency of the several tort-feasors.

D’Ambrosio 55 N.Y.2d at 461, 450 N.Y.S.2d at 152, 435 N.E.2d at 369. (internal quotations and citations omitted).

Jackson was decided under the active/passive regime, which explains its reference to the in pari delicto doctrine and invokes the strict rule against contribution. In other words, if two or more joint-tortfeasors are actively negligent, the then-prevailing rule that “the courts should not participate in adjusting the relative rights of wrongdoers” kicks in. 

After Jackson but before D’Ambrosio came the decision in Dole v. Dow Chemical Company, 30 N.Y.2d 143 (1972). Dole eliminated the active/passive negligence test and “adopted the more realistic approach of holding joint tort-feasors liable according to their respective degrees of fault.” D’Ambrosio at 462, 152, 369. The consequence of Dole is to render irrelevant the application of in pari delicto in the context of joint tortfeasors because the very point of the law as it now stands is the allocation of blame.

On the whole, the cases cited by the Third Circuit, combined with New York’s adoption of its comparative negligence statute, indicate a trend away from the Third Circuit’s statement that in pari delicto “is recognized as a defense” in the negligence context under New York law. Whether between plaintiff and defendant or among those jointly responsible for harm, New York has evolved toward apportionment of fault without a threshold that relieves minor or passive participants or notions that where responsibility for negligence and resulting harm is shared, the court should leave all parties where it finds them. 

The Oakwood Homes decision, then, is premised on a jurisprudential house of cards. What’s more, the dispute between the Trust and Credit Suisse isn’t at all proper for invoking the in pari delicto doctrine. As the brief summary of the facts set out above and in the decisions show, the case is really about what brought harm to Oakwood Homes and who caused it. In other words, did some breach of a duty owed by Credit Suisse cause Oakwood Homes to enter into transactions that were “value destroying” to its business?

In answering this question in the negative, both the district and appellate courts reviewed the active participation of Oakwood Homes’ board and management in pursuing its securitization model, even after the bankruptcy. As the Third Circuit put it:  “To the extent the financing decisions were blameworthy, Oakwood was at least as culpable as Credit Suisse: Oakwood routinely approved the ‘value-destroying’ transactions as an appropriate way to raise liquidity when the company was in financial turmoil. The in pari delicto doctrine bars the claims.” Oakwood Homes, 2009 U.S. App. LEXIS 27631 at *11-12, 2009 WL 4829835 at *3.

Well, no, in pari delicto shouldn’t bar the claims because they aren’t of the kind that the doctrine was intended to address. The doctrine has the furtherance of sound public policy as its goal, denying access to the judicial system to persons engaged in conduct that is wrongful or illegal, like the parties in the Abright decision cited by the Third Circuit.

By contrast, Oakwood Homes is about failed business strategy and where, by all appearances, all hands are clean. As the district and appellate courts tell us, the company wasn’t hoodwinked or coerced by Credit Suisse, but, rather, was active in determining what course of action it would take to resolve its liquidity problems and restore the company to health. 

That active participation should have caused the Trust to lose, not because Oakwood Homes was blameworthy or culpable, and therefore in pari delicto, but because there was no proximate cause between anything negligent Credit Suisse may have done and the harm Oakwood Homes suffered. Oddly enough, the Third Circuit did rely on the lack of proximate cause in discussing the breach of fiduciary duty claim, stating explicitly that in pari delicto didn’t apply to that allegation, and then applying the exact same reasoning as it did in its discussion of negligence and in pari delicto.

In closing, I’ll admit to feeling like a voice in the wilderness on the subject of in pari delicto (save for some supportive messages I received on In Pari Delicto, Reconsidered) as it has been interpreted and applied over the last 20 years or so. But decisions like Oakwood Homes compel me to press on because the doctrine truly is overused and too often misapplied. Oakwood Homes is a perfect example of the doctrine being applied where the facts don’t warrant it, the law doesn’t support it and public policy isn’t subverted without it.

 
© 2010 by Steve Jakubowski (except for article, which is © 2010 by Cathy Vance)

To further complicate matters, take a look at a recent decision of Judge Laurel Isicoff, who held that regardless of whether the Pacor test was satisfied, the court had "related to" jurisdiction over a third party franchisor's claims against the debtor's principal where the proceeding arose out of same core of facts as one whose outcome could have a Pacor-type effect, and thus the prerequisites for exercise of "supplemental jurisdiction" were satisfied. Century 21 Real Estate, LLC v. Prestige Realty Group of Ohio & Florida, LLC (In re Prestige Realty Group of Ohio & Florida, LLC), 2009 WL 3817297 (Bankr. S.D. Fla. 11/13/2009).  Respectfully, Judge Isicoff's ruling is not the law in the 7th Circuit, however, so be sure to check your local practice first.  See, Banc of America Inv. Servs., Inc. v. Fraiberg (In re Conseco, Inc.), 305 B.R. 281 (Bankr. N.D. Ill. 2004) (bankruptcy court cannot exercise supplemental jurisdiction under § 1367(a) because it is not a district court.and such exercise would amount to "related to related to" jurisdiction).  It's also a position at odds with 3rd Circuit's decision in In re Exide Techs., 544 F.3d 196 (3d Cir. 2008), which expressly rejected the “intertwinement” theory under which otherwise non-core disputes among non-debtors could be treated as core bankruptcy matters based on the extent of their "intertwinement" with core disputes between those parties and the debtor.]

***

As noted in this post last June, it is fair to assume that the U.S. Supreme Court would not permit a bankruptcy court to adjudicate, settle, or enjoin claims against nondebtors that do not affect the debtor’s estate.  In perhaps the final bankruptcy decision of 2009, the Third Circuit rang in the new year with yet another important case--consistent with this general principle-- interpreting the scope of a bankruptcy court's subject matter jurisdiction.  W.R. Grace & Co. v. Chakarian (In re W.R. Grace & Co.), 2009 WL 5151089 (3d Cir. 12/31/09) (pdf).  In it, the Third Circuit both reaffirmed its previous holdings on the limited scope of a bankruptcy court's "related to" jurisdiction and further held that Code section 105(a) does not expand a bankruptcy court's subject matter jurisdiction beyond its statutory boundaries in 28 U.S.C. § 1334(b) (which grants bankruptcy courts "original but not exclusive jurisdiction of all civil proceedings arising under [the Bankruptcy Code] or arising in or related to a case under [the Bankruptcy Code]").

The Third Circuit's seminal opinion in Pacor, Inc. v. Higgins, 743 F.2d 984 (1984), is the most often cited case on the scope of a bankruptcy court's so-called "related to" jurisdiction under 28 U.S.C. § 1334(b). The "Pacor test," which has been nearly universally adopted by federal Courts of Appeal around the country, provides:

[In] determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.  Thus, the proceeding need not necessarily be against the debtor or against the debtor's property.  An action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.  Pacor, 743 F.2d 994.

The U.S. Supreme Court, too, looked to Pacor in its first discussion of the scope of a bankruptcy court's "related to" jurisdiction and agreed with Pacor that a bankruptcy court’s "related to" jurisdiction is broad, but "cannot be limitless."  Celotex Corp. v. Edwards, 514 U.S. 300, 308 (1995).

The Third Circuit fine-tuned the Pacor test in In re Federal-Mogul Global, Inc., 300 F.3d 368 (3d Cir. 2002), stating that “[t]he test articulated in Pacor for whether a lawsuit could ‘conceivably’ have an effect on the bankruptcy proceeding inquires whether the allegedly related lawsuit would affect the bankruptcy proceeding without the intervention of yet another lawsuit.”  Id. at 382.  Put another way, there's no "related to" jurisdiction over a third-party claim "if there would need to be another lawsuit before the third-party claim could have any impact on the bankruptcy proceedings."  W.R. Grace, 2009 WL 5151089 at *5 (Op. at 15). 

The Third Circuit further refined the boundaries of the Pacor test in In re Combustion Engineering, Inc., 391 F.3d 190, 225 (3d Cir. 2004), when it held that consideration of additional elements like "unity of interest," "shared production," and "shared insurance" among the debtor and its non-debtor affiliates failed to establish "related to" jurisdiction over third party claims against the non-debtor affiliates "when the third party claim did not directly result in liability for the debtor," but only a potential claim for contribution that "would require the intervention of another lawsuit to affect the bankruptcy estate."  Id. at 231-32.  (Op. at 16-17).

In the recently decided W.R. Grace case, the Third Circuit reaffirmed its holdings in Pacor, Federal-Mogul, and Combustion Engineering, and held that an injunction granted in 2001 (shortly after Grace filed for bankruptcy) against  further prosecution of a lawsuit against Grace for injuries caused by exposure to asbestos at a Montana mine over a 37 year period would not be extended to the State of Montana, who had also been sued by the same plaintiffs for negligence in failing to warn them of the asbestos risks at the mine.  The Montana Supreme Court held that the State of Montana in fact owed the plaintiffs a duty of disclosure of potentially adverse health risks, and so remanded the case back to the trial court for a "determination by the fact-finder of whether the State breached its duty to the [plaintiffs], and if so, whether such breach caused the damages claimed by them."  (Op. at 7).  Grace subsequently moved in the Bankruptcy Court to expand the 2001 injunction to include the plaintiffs' now remanded actions against the State of Montana.  The bankruptcy court refused to so extend the injunction, and the Third Circuit affirmed, holding:

In short, our recently reaffirmed precedent dictates that a bankruptcy court lacks subject matter jurisdiction over a third-party action if the only way in which that third-party action could have an impact on the debtor's estate is through the intervention of yet another lawsuit. Here, we are presented with state court actions that have only the potential to give rise to a separate lawsuit seeking indemnification from the debtor. Accordingly, we must affirm the Bankruptcy and District Courts' conclusion that subject matter jurisdiction does not exist for the purpose of expanding the § 105(a) injunction to preclude the Montana Actions.  (Op. at 18).

Significantly, the Third Circuit also rejected an alternative ground for expansion of the bankruptcy court's subject matter jurisdiction on the basis that "a bankruptcy court has subject-matter jurisdiction to adjudicate a motion in an adversary proceeding initiated by a debtor in its own bankruptcy case, regardless of the subject matter of that motion."  (Op. at 21).  Citing Celotex, the Third Circuit flatly rejected this opportunity to expand upon the bankruptcy court's subject-matter jurisdiction, stating:

If we were to accept Grace and Montana's position, however, a bankruptcy court would have power to enjoin any action, no matter how unrelated to the underlying bankruptcy it may be, so long as the injunction motion was filed in the adversary proceeding.  That notion stands in stark contrast to the basic premise that "federal courts are courts of limited jurisdiction; they exercise only the authority conferred on them by Art. III and by congressional enactments pursuant thereto."  Delaware v. Van Arsdall, 475 U.S. 673, 692 (1986).  The existence of a bankruptcy proceeding itself has never been and cannot be an all-purpose grant of jurisdiction.

Our conclusion finds support in the Supreme Court's decision in Celotex.  There, the Supreme Court was asked to determine whether a bankruptcy court had jurisdiction to issue a § 105(a) injunction that had the effect of enjoining an action pending in a district court in another judicial district.  Id. at 305.  Rather than assuming that the bankruptcy court's jurisdiction over the adversary proceeding provided it with the necessary jurisdiction to issue the injunction, the Supreme Court observed that bankruptcy court jurisdiction "is grounded in, and limited by, statute."  Id. at 307.  Thus, it explained, the bankruptcy court's jurisdiction to enjoin the other proceeding must be based on the "arising under, arising in, or related to language of §§ 1334(b) and 157(a)."  Id. (quotation marks omitted).  After reviewing several circuit court opinions, including our decision in Pacor, the Supreme Court concluded that the bankruptcy court had jurisdiction to issue the injunction, but only because the proceeding was "related to" Celotex's bankruptcy under the Pacor test.  Id. at 308-10.  If it were the case that a bankruptcy court's jurisdiction over an adversary proceeding was sufficient in and of itself to give it jurisdiction to enjoin third parties, as Grace and Montana now contend, the Supreme Court's entire analysis of related-to jurisdiction in Celotex would have been superfluous.  Clearly it was not.  The Supreme Court undertook the analysis it did because a bankruptcy court may not enjoin proceedings between third parties unless those proceedings arise in or under or are related to the underlying bankruptcy.  Id. at 307.

Thanks for reading, and best wishes for the new year!

© 2010 by Steve Jakubowski

As incredible as my Mother's story of survival is, as related in this previous post, my Father's stories stand apart.  In his 1995 interview with the USC Shoah Foundation, just two years before he died, he vividly retells his experiences before, during, and after the Holocaust.  Born in 1911, he was the first in his family to pursue secular study.  He graduated from Univ. of Krakow medical school, experienced violent antisemitism at many turns along the way, and was enlisted as a physician and captain in the Polish army when the war broke out.  He tended to hundreds of Polish soldiers while on the frontlines during the Nazi blitzkrieg and to thousands in the Warsaw Ghetto through the uprising of 1943.  He survived 5 Nazi concentration camps following the Warsaw Ghetto uprising. The "death march" to Dachau in 1945 put him "one step, not even that, ahead of the angel of death."  Following his liberation, he worked closely with teams from the US Armed Forces to establish and manage a number of hospitals and TB clinics for survivors. His hard and selfless work earned him not only accolades, but a Visa to the US, where he immigrated in 1949.  He eventually settled in Syracuse, NY, and built a medical practice that thrived--notwithstanding a severe heart attack that nearly killed him in 1961--until he finally retired in 1984.

My Dad's proud, fighting spirit is on magnificent display in this interview, which is split into eight segments (video links embedded at the end of this post):

• Part I - Schooling, Pre-War Antisemitism, Blitzkrieg, and Capture (1911-40)

• Part II - POW to Physician in the Warsaw Ghetto (1940-42)

• Part III - The Warsaw Ghetto Liquidation Through the Uprising (1942-43)

• Part IV - Warsaw Ghetto Uprising Ends, Surviving in the Camps (1943-44)

• Part V: Miracles Continue, Saving Warsaw's Chief Rabbi (1945)

• Part VI: Passover '45 (Pre-Liberation), Organizing Hospitals, USA (1945-49)

• Part VII: Settling Down & Building a Practice, Final Reflections (1950-95)

• Part VIII: Original Source Documents and Family Pictures

For those seeking excellent educational tools to teach about the experiences of those who lived through the Holocaust, you'll find them in the oral testimonies of my parents. I hope this personalizes the survivors' experiences in a way that provides additional insight into their indomitable spirit, as this University of Texas at Austin "forgiveness and resilience study" proves. 

One theme that resonates throughout their interviews is how they viewed their survival as a result of not just one "miracle," but many. As we ponder in this holiday season of miracles the meaning of life, I hope my parents' stories inspire you to find meaning and purpose each day. 

Happy holidays to all!

[The embedded photo is, of course, the famous "ARBEIT MACHT FREI" sign that was recently stolen from the entrance to the Auschwitz death camp.  According to this Wikipedia source, the political prisoners who constructed the sign made the upper bowl in the "B" of "ARBEIT" wider than the lower bowl as an act of defiance and to signal what was really going on there.]

Here are embedded links to each of the eight parts of my Dad's interview:

Interview w/ Holocaust Surivor Dr. David Jakubowski - Part I: Schooling, Pre-War Antisemitism, Blitzkrieg, and Capture (1911-40) from Steve Jakubowski on Vimeo.

Interview w/ Holocaust Survivor Dr. David Jakubowski - Part II: POW to Physician in the Warsaw Ghetto (1940-42) from Steve Jakubowski on Vimeo.

Interview w/ Holocaust Survivor Dr. David Jakubowski - Part III: The Warsaw Ghetto Liquidation Through the Uprising (1942-43) from Steve Jakubowski on Vimeo.

Interview w/ Holocaust Survivor Dr. David Jakubowski - Part IV: Warsaw Ghetto Uprising Ends, Surviving in the Camps (1943-44) from Steve Jakubowski on Vimeo.

Interview w/ Holocaust Survivor Dr. David Jakubowski - Part V: Miracles Continue, Saving Warsaw's Chief Rabbi (1945) from Steve Jakubowski on Vimeo.

Interview w/ Holocaust Survivor Dr David Jakubowski--Part VI: Passover '45 (Pre-Liberation), Organizing Hospitals, USA (1945-49) from Steve Jakubowski on Vimeo.

Interview w/ Holocaust Survivor Dr David Jakubowski - Part VII: Settling Down & Building a Practice, Final Reflections (1950-95) from Steve Jakubowski on Vimeo.

Interview w/ Holocaust Survivor Dr. David Jakubowski - Part VIII: Original Source Documents and Family Pictures from Steve Jakubowski on Vimeo.

To most Americans, this month is a reminder of miracles, great and small.  For Christians, Christmas lights are a reminder that "[a]t the moment when the darkness of human society is at its deepest, the Light of the World will come."  For Jews, Chanukah's lights are a reminder of the miracles of creation (light), of Mt. Sinai (where the Torah--likened to light--was delivered), and of the Second Temple's restoration and rededication in 164 BCE.  Chanukah's most conspicuous tradition--the Menorah--provides a simple, yet effective, reminder of the importance of rekindling and rededicating within ourselves the moral values represented by the light of creation (representing our partnership with the Almighty) and the light of the Torah (representing the moral precepts for everyday living).

This year, more than ever, my thoughts turn to two miracles that are very personal to me: those being both my parents' survival from the hell known as the Holocaust.  These thoughts were triggered this year by this recent short film from Richard Bloom and Karen Lynne Bloom that retells, through clips taken from the survivors' oral histories on file at the USC Shoah Foundation library (including my Dad's), the story of the Warsaw Ghetto uprising of Passover, 1943.  So this year, I decided to dedicate two blog posts in remembrance of the miracle of their survival.

This first post features my Mom's oral history, split into four parts (video links embedded at the end of this post):

• Part I - Childhood through the Initial "Judenrein" (1920's-43)

• Part II - Survival as a "Chemist" Through Ravensbruck (1943-44)

• Part III - Survival Through Bergen Belzen Liberation (1944-45)

• Part IV - Rebuilding a Life and Beating the Odds (1945-95)

Long time followers of this blog may remember my Mom's sudden passing in August, 2006 and this post of the eulogy I delivered where I summed up her essence (or Emes) as follows:

The proof of my mother’s greatness is not readily apparent, is it?  She received no awards.  No inscribed silver chalices or platters.  No dinners were sponsored in her honor.  No buildings named after her.  No honorariums established in her name. Seems quite an ordinary life. Yet, when we closely examine her life story, even in a brief eulogy, it resonates with a feeling that somehow, it was “meant to be,” as she often liked to say....

The first chapter, the “Formative Years,” were pastoral; indeed, idyllic.  Her memories are only happy and positive.  And the optimism and independence her parents and grandparents nurtured within her during the enlightened interwar period remained with her to the end, and very much defined the Emes of who she was.  

But those idyllic days passed quickly, and war overtook them, and imprinted within her an indelible mark… that of a survivor.  And to listen to her stories, and few have done so, is something you have to do.  They are stories you have to hear to believe, for there are none others like them.  But let me sum it up this way.  When my mother reached the fork in the road, to quote the famous philosopher Yogi Berra, she took it.  She didn’t turn around, she didn’t freeze.  She didn’t second guess herself and run.  No, she knew when there was a fork in the road, and she took it, wherever it may lead.  And it was by making those tough, smart, spontaneous decisions, by choosing a path and not looking back, when coupled with the ample blessings with which G-d protected her, that her choices were transformed into something that seemed “meant to be.”

In a world of fallen heroes, my Mom's story of survival proves that there's a potential hero in all of us.  And for the millions out there feeling despondent, I hope her story (and my Dad's soon to follow) proves the importance of maintaining dignity and hope in the face of seemingly insurmountable odds.

Happy holidays to all! 

[The inset picture is a fused glass, entitled "Remember—One for Each Million."  It's origin is described in this feature story about The University of Texas at Austin's "forgiveness and resilience study" for the 10th anniversary of the Holocaust Museum Houston.  In it, Professor Roberta Greene studied the lives of 133 survivors and concluded (no surprise here) :

Amazingly, this unique group of older adults—who experienced unprecedented separation and loss during the Holocaust, living through horrors most of us cannot imagine—built new productive lives. They are resilient survivors who were able to move into a better place, raise families, develop careers and contribute to their communities.]

Here are embedded links to each of the four-parts of my Mom's interview:

Shoah Foundation Interview with Holocaust Survivor, Helen Jakubowski: Part I - Childhood through the "Judenrein" (1920's-43) from Steve Jakubowski on Vimeo.

Shoah Foundation Interview with Holocaust Survivor, Helen Jakubowski: Part II - Survival as a "Chemist" to Ravensbruck (1943-44) from Steve Jakubowski on Vimeo.

Shoah Foundation Interview with Holocaust Survivor, Helen Jakubowski: Part III - Survival To Bergen Belzen Liberation (1944-45) from Steve Jakubowski on Vimeo.

Shoah Foundation Interview with Holocaust Survivor, Helen Jakubowski: Part IV - Rebuilding a Life and Beating the Odds (1945-95) from Steve Jakubowski on Vimeo.

© 2009 by Steve Jakubowski

Recent studies report a veritable explosion of intellectual property assets in the past quarter century, with intangible book value as a percentage of market capitalization for the S&P 500 increasing from 1.6% in 1975 to 15.5% in 2005, intangible book value as a percentage of total book value increasing from 1.9% in 1975 to 43.2% in 2005, and intangible market value as a percentage of total market value increasing from 16.8% in 1975 to 79.7% in 2005. Former Fed Chairman, Alan Greenspan, summed up this trend in a speech in 2004 (when his word was still gospel), saying:

In recent decades, the fraction of total output of [the US] economy that is essentially conceptual rather than physical has been rising. The trend has, of necessity, shifted the emphasis in asset valuation from physical property to intellectual property and to the legal rights inherent in intellectual property.

With intellectual property comprising a sizable chunk of reported intangible value, and with vast segments of the world and US economy teetering on the brink of balance sheet or equitable insolvency, it is imperative that IP lawyers understand how bankruptcy law interfaces with intellectual property law for each of the varied types of IP assets and agreements. 

This outline provides an overview of key bankruptcy terms of art, like “intellectual property” and “executory contracts.” It then looks at the rights of the debtor/trustee and nondebtor counterparties to IP licenses; first from the perspective of the debtor/trustee as IP licensee, and second, from the perspective of the debtor/trustee as IP licensor. It concludes with a review of various drafting and other strategic considerations that will assist both in upfront structuring of IP licensing transactions and in addressing the rights of the counterparties as the flames of bankruptcy torch the parties’ original understandings and intentions. Appendices at the back provide a handy “issue spotting checklist” and a select bibliography of some of my favorite scholarly works addressing these issues in greater depth.

Before the internet and explosion of online materials on every subject under the sun, there was PLI--a trusted and much appreciated resource to quickly learn about important topics.  It's a real privilege to have the opportunity to participate in PLI's Advanced Licensing series, and thanks especially to my fellow Union College grad, Ira Levy of Goodwin Proctor, co-chair of the seminar series for inviting me to participate in this event.

My next two holiday posts will be completely off topic, but certainly appropriate for this time of year when most people's  thoughts are fixated, one way or another, on lights; simple reminders of Divine miracles, both great and small, and of all we have to be thankful for.

[The inset picture, of course, is Salvadore Dali's 1931 masterpiece, only 10 x 13 inches in size, entitled "The Persistence of Memory," which came to mind from my latest race against time.  Apparently, Dali--only 27--conceived it while suffering from a headache and a bout of "painter's block" after focusing on some Camembert cheese that he had just eaten.  "The gooey softness of the cheese, the intensifying headache and Dalí’s general mindset all fused, and he came up with the concept of 'soft watches, one of them hanging lamentably.'"  Go figure!]

© 2009 by Steve Jakubowski

The petition for a writ of certiorari is granted.  The judgment is vacated, and the case is remanded to the United States Court of Appeals for the Second Circuit with instructions to dismiss the appeal as moot.  See United States v. Munsingwear, Inc., 340 U.S. 36 (1950).

One may be tempted (as this esteemed blogger was) to claim that Chrysler remains persuasive authority, but was simply “vacated on other grounds.”  I don’t think that's the case here, however.  For starters, the Supreme Court couldn't have vacated Chrysler on the basis that the matter was moot at the time the case was decided.  After all, the 2d Circuit's original order of 6/5/09 denying the appeal on the merits wasn’t moot at the time of entry since the effectiveness of the bankruptcy court's sale order had been stayed by the 2d Circuit itself until it had a chance to rule on the merits.  Additionally, the effectiveness of the 2d Circuit's judgment itself was stayed by the Supreme Court.  As such, there’s no basis for the Supreme Court now to have vacated Chrysler based on an argument that the matter was moot at the time of the original decision.

Perhaps then, a better reading of today's mysterious "summary disposition" is that the Court found merit in the petition, and hence granted it, and furthermore didn’t much care for the opinion on substantive grounds, so vacated it.  Having done so, however, the Court had nothing left to decide since the matter truly was moot because the sale had closed and couldn't be unwound.

One also may be tempted to say that the Court wasn’t tipping its hand in this way, but if not, then why not simply deny the petition as moot, which it clearly is at this point?  Why take the extra, unnecessary step of vacating the judgment and only then dismissing the appeal as moot?  Also, why cite to Munsingwear if the Court didn't intend to erase the precedential effect of the decision, for there the Court noted:

Our supervisory power over the judgments of the lower federal courts is a broad one.  As already indicated, it is commonly utilized in precisely this situation to prevent a judgment, unreviewable because of mootness, from spawning any legal consequences.  (Citations omitted, emphasis added).

If nothing else, reading the Court's summary disposition today as a spaying of Chrysler to "prevent a ... spawning of any legal consequences" surely neuters any reading of the Court's 2 page per curiam opinion from last June suggesting there wasn't a "fair prospect that a majority of the Court will conclude that the decision below was erroneous."

Given all the speeches, articles, and thought advanced about the significance and game-changing nature of Chrysler, it's amazing how two simple sentences from the highest court in the land can turn the bankruptcy world on its head.

I'd say the slow boat's finally catching some wind!

[Inset is an artist's rendition of the USS Constitution (a/k/a "Old Ironside"), the oldest commissioned naval vessel still afloat today.]

[12/15/09 Update:  Be sure to check out Steve Lubben's Credit Slips post linking to the Alvarez v. Smith case for further insights into the Court's practice of vacating lower court judgments that, by happenstance, are moot.]

© 2009 by Steve Jakubowski

What started out a couple months ago as a "Slow Boat to China," today feels more like the "Voyage of the Damned."

Yesterday I filed this "Opening Brief" (plus the Sale Opinion at Appendix A and the Sale Order and MPA at Appendix B) on behalf of my five clients in our appeal of the GM Sale Order:  Callan Campbell, et al., v. Motors Liquidation Company, Case No. 09-6818 (NRB) (S.D.N.Y.).  The brief's "Summary of the Argument" is at the end of this post.

This appeal is the only one pending that challenges the abhorrent treatment of preexisting products liability claims in either the GM or Chrysler bankruptcy cases.

When I first got involved in the case three months ago, I summarized here the injuries and the myriad adversities faced by my clients on a daily basis.  I wrote:

The sad, and all too tragic, stories of my clients, taken from the filed objection, are set forth below.  The only thing my clients did wrong here was buy a GM car.  For this act of brand loyalty, they have paid dearly.   It's not enough that people lose their lives and get severely injured from design defects and product flaws, now they and their loved ones get thrown under the bus!

Having now lived with GM for about 450 hours the past three months, I have to say I'm thoroughly appalled at the cold-hearted stinginess of those calling the shots at GM and Chrysler.  They have left helpless accident victims hanging out to dry for reasons I cannot fathom, while otherwise spending "whatever it takes" -- to whomever it takes -- "to get the 'deal' done."  (See Opening Brief, at p.7).

With the US Treasury paying a mind-boggling $92 billion for most of "Old GM" (see Opening Brief, at p.7 fn.4), would it really be such a burden for the Secretary and his Boss to set aside another $250 million or so (or about 1/4% of the total consideration paid in the deal) to make sure there's a small, but adequate, reserve to cover medical bills, assisted care, and other basic requirements of those (see, e.g.,  here, here, and Callan Campbell here) severely injured by the design defects built into cars manufactured by the same plants they're now the stewards of?   (See Opening Brief at p.8 fn.6, estimating total remaining products claims left behind at $233.2 million).

Put another way, imagine you've got $92.00 in quarters in a big bucket.  Now imagine that you can dramatically change for the better the lives of hundreds, maybe even thousands, of people your own mirror-image predecessor destroyed through no fault of their own.  And imagine further that all you have to do to achieve that wonderful act of kind-heartedness is to take just one of those 368 quarters and put it aside for the benefit of those whose lives have been damned as a result of mistakes made by some of the people and property you just bought -- and now control -- for those 368 quarters.

That's all that needs to be done in GM to make things right, and my guess is that only about a dime needs to be put aside to cover the outstanding products liability claims left to rot in Chrysler.  But no one seems to have the political or moral compunction to wrestle those thirty-five cents from the Boss's own clenched fist.

"Sad" and "pathetic" are the first words that come to mind as I ponder the fact that I'm not on the "Slow Boat to China," but on the "Voyage of the Damned" (Art Spiegelman's take on it).

• Brother, can you spare a dime? (classic Bing Crosby)
• or sung by Allison Moorer (great soul)
• or by the Gas House Gang Barbershop Quartet (great harmony; my favorite)
• or instrumentalized by the Dave Brubeck Quartet (for jazz buffs)

My brief's "Summary of the Argument" is below:

© 2009 by Steve Jakubowski

          Case law in this Circuit establishes three necessary conditions to a Court's authorizing a 363 sale "free and clear" of potential products liability claims against a successor purchaser.  The first condition, a legal one, is set forth in Back v. LTV Corp. (In re Chateaugay), 213 B.R. 633, 638 (S.D.N.Y. 1997), and Pittsburgh Food & Bev., Inc. v. Ranallo, 112 F.3d 645 (3d. Cir. 1997), and requires that a reviewing court determine whether the bankruptcy court could colorably assert that it had "related to" subject-matter jurisdiction based on a finding that the outcome of the dispute could have a "conceivable effect" on the debtor's bankruptcy estate.

          The second and third conditions, factual ones, are explained in In re Chrysler LLC, 576 F.3d 108 (2d Cir. 2009).  One requires a finding that the "free and clear" aspects of the sale order be a "critical inducement" to the purchaser's willingness to consummate the sale.  The second requires a finding that the 363 sale process not be structured in a manner "inconsistent with the Bankruptcy Code's priority scheme."  Chrysler, 576 F.3d at 126.

          Though failure to satisfy any one of these conditions should be sufficient to deny a purchaser the right to a "free and clear" order cleansing it of potential successor liability, none of these conditions were satisfied in this case.  First, the Bankruptcy Court lacked authority to render the findings and conclusions being challenged in this appeal because resolution of Appellants' products liability claims against New GM, as successor, lacked any "conceivable effect" on the Debtors' estates.  In this regard, most significant is the fact that Old GM has no obligation to indemnify New GM for liabilities that were not expressly assumed under the MPA yet might be charged to New GM post-Closing.  Second, the record clearly establishes that entry of a "free and clear" order barring successor claims against New GM in respect of Existing Products Claims was not a "critical inducement" to New GM's willingness to consummate the 363 Sale.  In fact, the Bankruptcy Court found it "doubtful" that New GM "would have lent and ultimately bid a lesser amount" had it been required to assume these "politically sensitive" claims.  (Sale Op. at 51 n.91).  Third, the principle that creditors of equal priority should be treated similarly was cast aside in favor of Treasury's single-minded focus on assuming any liability it deemed "necessary for the commercial success of New GM."  See, supra at 7 [of brief].  For this reason, over $60 billion in unsecured claims were assumed by New GM in whole or substantial part while, in marked contrast, Appellants and other similarly situated unsecured creditors will recover, at best, a paltry pari passu share of the few remaining assets left in Old GM.

          Arguments that this appeal is moot on statutory and equitable grounds also fail.  This appeal is not moot on statutory grounds because Bankruptcy Code section 363(m) does not prevent a reviewing court from reversing provisions of a sale order that were "not even colorably within its jurisdiction."  Ranallo, 112 F.3d at 650.  Nor, applying the five factors outlined in Frito-Lay, Inc. v. LTV Steel Co. (In re Chateaugay Corp.), 10 F.3d 944, 949-50 (2d Cir. 1993), is this appeal equitably moot.  Most significantly, the remaining Existing Products Claims left behind with the Old GM are de minimus relative to the approximately $92 billion purchase price paid by New GM.  Thus, striking the provisions of the Sale Order barring these claims will not "unravel intricate transactions" or impair New GM's viability.  Appellants' failure to seek a stay pending appeal is also not fatal to their cause.  Appellants sought, but were denied, expedited review.  Moreover, the "stay" factor carries little weight where-as here-granting the requested relief would in no way unravel or "knock the props out" from the consummated transactions.

If anyone knows anything about "stub" rent, it's Yitzhak, and I thank him for graciously providing us with his thoughtful analysis of this thorny issue of law in this post, which he entitles: 

In re Sportsman's: The Death Knell for Stub Rent?

"Stub" Rent

"Stub" rent is “the rent for the interim period between the day the order for relief was entered in the bankruptcy case and the end of that month.”  In re Stone Barn Manhattan LLC,  398 B.R. 359, 360-61 (Bankr. S.D.N.Y. 2008).  Stub rent issues arise because debtors generally file after the first of the month and prepayment of rent is due on the first of the month. § 365(d)(3) requires that the trustee “timely perform all the obligations of the debtor . . . arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected. . .”  “Congress passed § 365(d)(3) to relieve landlords of the uncertainty of collecting rent fixed in the lease in full, promptly, and without legal expense during the awkward postpetition prerejection period.”  HA-LO Industries, Inc. v. CenterPoint Properties Trust, 342 F.3d 794, 799 (7th Cir. 2003).

“Courts [even in the same district] have differed on whether an obligation to pay rent ‘arises’ on the day that rent is due (the ‘billing-date approach’), or on each day the tenant occupies the leased premises (the ‘proration approach’).”  Goody's, 401 B.R. at 663.  Courts adopting the proration approach conclude that stub rent arises during the post petition pre rejection period, and that § 365(d)(3) requires timely payment of stub rent.  Courts adopting the billing date approach conclude that stub rent arises prepetition.  

The Fall of Handy Andy and Decline of Proration in the Third, Sixth and Seventh Circuits.

While the Circuit Courts have not addressed the exact issue of stub rent, the Third, Sixth and Seventh Circuits have addressed § 365(d)(3) in other contexts. “  In re Handy Andy Home Improvement Centers, Inc., 144 F.3d 1125 (7th Cir. 1998)], [t]he Seventh Circuit Court of Appeals was the first Circuit Court to address § 365(d)(3).  Although the case involved the proration of taxes payable by the tenant-debtor under a commercial lease, Judge Posner's opinion endorsed a broad construction of § 365(d)(3) as requiring the proration of a lease obligation.”  Stone Barn, 398 B.R. at 362 (internal citations omitted).  However, the Seventh Circuit panel in HA-LO (with no overlap to the Handy Andy panel) adopted the billing date approach for post rejection rent, essentially eviscerating Handy Andy.

In Ha-Lo, the debtor rejected the lease on the fourth day of the month.  The Ha-Lo panel held that § 365(d)(3) required the debtor to timely pay the entire month’s rent because the rent arose on the first day of the month.  Ha-Lo relied upon the Sixth Circuit decision addressing post rejection rent.  See Koenig Sporting Goods, Inc. v. Morse Road Co., 203 F.3d 986, 989 (6th Cir. 2000) (holding that for the purposes of § 365(d)(3), the obligation to pay rent arose on the first of the month).

In In re Montgomery Ward Holding Corp., 268 F.3d 205, 209 (3d Cir. 2001), the Third Circuit followed suit adopting the billing date approach.  In Montgomery Ward, pursuant to the lease, the debtor was billed for taxes, including taxes that were accrued pre petition, during the post petition pre-rejection period.  The Third Circuit held that the debtor “had to pay the whole tax bill because, under the lease, the bill had become due and therefore arose, post-petition.”  Goody’s, 401 B.R. at 664.

Nevertheless, courts in these Circuits, generally, did not give a debtor a free ride and allowed an administrative claim for stub rent.  See Stone Barn, 398 B.R. at 367 (collecting cases); but see, e.g., In re Baby N' Kids, 2007 WL 1218768 (E.D. Mich. Apr. 24 2007).  Some courts went a step further, finding that if the Debtor occupied the premises, the lease’s rental-rate reflects the benefit received by the Debtor and, as such, these courts fixed the administrative claim in the amount of the rental rate.  See, e.g., Goody’s, 401 B.R. at 674 .

Goody’s: Hope for Landlords?

In Goody’s, the debtor appealed the bankruptcy court’s allowance of an administrative claim for stub rent.  On appeal, the District Court upheld the administrative claim and, therefore, was not required to decide the § 365(d)(3) issue.  However, Goody’s provided three ways to reconcile Montgomery Ward and the timely payment of stub rent: 

(i) “[R]ent might be viewed generally as a unique sort of obligation that “arises” each day of a tenant's occupancy.” Goody's, 401 B.R. at 664.  If the debtor fails to timely pay on the first of the month, “the month's rent obligation arises again, in full,… on every subsequent day of that month.” Id.;

(ii) The rent actually is due and arises during or at the end of the grace period.  Thus, if the grace period occurs or expires during the post petition pre petition period, a debtor is required to pay the entire month’s rent under § 365(d)(3); and

(iii) Default penalties create a “new obligation” and if the penalty is due during the post petition pre petition period,a debtor is required to pay the delinquent rent and penalties under § 365(d)(3). Id.

Goody’s noted that, as a matter of policy, it is “a perverse result that debtor-tenants could use § 365(d)(3) offensively to avoid timely rent payments.”  Id.  Moreover, Goody’s found it perplexing that the “statute's impact would turn upon such insignificant lease-drafting choices” of whether the rent was due daily, monthly or yearly.  Id.  “If commercial leases require full payment of the total rent obligation, with amortization in monthly installments … the entire rent obligation ‘arises’ pre-petition, thus depriving § 365(d)(3) of any practical effect.  Conversely, if a lease required that rent be due each day (say, allowing monthly payments for convenience), then § 365(d)(3) would presumably require full payment.”  Id.

The Seventh Circuit.

Judge Posner’s unequivocal support for the proration approach provides a powerful platform for landlords in the in the Seventh Circuit to seek stub rent premised on Goody’s.  Moreover, Ha-Lo focused on the debtor’s control over post petition rent.  A debtor has control over the timing of the rejection of a lease and could reject a lease on the last day of the previous month and not be liable for the next month’s rent.  In contrast, a landlord does not control the day that a debtor files its petition or rejects the lease.  But see In re UAL Corp., 291 B.R. 121 (Bankr. N. D. Ill. 2003) (post Handy Andy and pre Ha-Lo) (holding that § 365(d)(3) does not require the timely of payment of stub rent).

Sportsman’s.

Sportsman’s dimmed landlords’ expectations.  Most notable was the absence of any mention of Goody’s discussion of reconciling the timely payment of stub rent with Montgomery Ward.   In reliance upon the Goody’s lower (bankruptcy) court decision, Sportsman held that the debtor's obligation to pay that rent arose pre-petition and the stub rent is not allowable under section 365(d)(3).  Moreover, Sportsman held that the per se rule (the administrative claim is identical to the rental rate) advanced by Goody’s is a misapplication of the law.  Sportsman also held that a debtor can require an evidentiary trial through introducing evidence that the benefit to the estate is lower than the contract rent, including that “the contract rate fair market value of rent is less than the contract rent.”  Sportsman's WL 2382625 at ** 5-6.  Sportsman's thereby not only stripped the landlord of the § 365(d)(3) claim, it required that the landlord to go through the expense of an evidentiary hearing to receive any payment for stub rent.

© 2009 by Steve Jakubowski (except for article, which is © 2009 by Yitz Greenberg)

My Chrysler and GM posts over the last three months generated incredible traffic (around 100,000 page views since May 1 from about 50,000 unique sites), while my involvement in the GM case and appeal of the decision led to several media interviews and appearances, including this 20 minute podcast just posted on the LexisNexis communities / Bankruptcy Law Center webpage.  In it, I discuss the differences between 363 sales and reorganization plans, predictions of the "end of bankruptcy," why I got involved in GM, Judge Gerber's decision and my appeal, why I started blogging, and the implications of GM and Chrysler for bankruptcies generally and the economy at large.

Thanks to LexisNexis's Steve Berstler for the interview and to Erin Capellman and her colleagues at LexisNexis for making the podcast happen and for linking to my Chrysler and GM blog posts.  LexisNexis was the pioneer in online legal research and remains the premiere online legal research service.  And for those of you who are involved in litigation, get LexisNexis' CaseMap and Concordance litigation management software.  We use these products in every litigation matter we're involved in, and I can't recommend them strongly enough.

For posterity's sake, here's links to some other media interviews and quotes I've given in the past month or so.  As for the experience generally, I concur with these two architects of the GM sale, who recently summed up the experience as "entirely gratifying ... a 'once-in-a-lifetime' experience."

TV/Radio:

• with Judge Napolitano on Fox News Channel's Glenn Beck Show
• with Quinn Kiltfelter on Detroit Public Radio's, Detroit Today and rebroadcast in part nationally on NPR's Morning Edition (starting at 55:00 into the program)
• with Canada's BNN business news channel

Print / Blogs:

The Wall Street Journal    The New  York Times    NYT Dealblog    Bloomberg   

The Washington  Post   AmLaw Daily    National Law Journal    Financial Post

Lawyers USA    AP / Time    ABC    USA Today   Detroit Free Press  

Cleveland's Plain Dealer    Reuters / Forbes    PR News   

Lexblog's Real  Lawyers Have Blogs    Tom Lindmark / Seeking Alpha

The Pop Tort    China News    Viet Nam News

Thanks to everyone for reading, listening, or watching, and special thanks to the producers, reporters, and bloggers who made these interviews and appearances possible!

© 2009 by Steve Jakubowski

As for Judge Sotomayor's bankruptcy jurisprudence, Clean Slate's Andy Winchell (here and here) and Texas Bankruptcy Lawyer Steve Sather (here and here) were the first (and last) to canvass her opinions involving bankruptcy issues.  All in all, nothing to complain about, and certainly her decision in Official Comm. of Equity Sec. Holders v. Official Comm. of Unsecured Creditors (In re Adelphia Communs. Corp.), 544 F.3d 420 (2d Cir. 2008) (pdf), affirming dismissal of the equity committee's appeal was a notable one.  There, Bankruptcy Judge Gerber confirmed Adelphia's chapter 11 plan, which stripped the equity committee of standing previously granted to it to prosecute derivative claims and transferred those claims to a litigation trust established under the plan (the first about $6.5 billion of which would go to unsecured creditors until they were paid in full, leaving equity "hopelessly out of the money").  In affirming Judge Gerber's confirmation order (but don't forget to look at Judge Scheindlin's first crack at the appeal), Judge Sotomayor wrote that a court "may withdraw a committee's derivative standing and transfer the management of its claims, even in the absence of that committee's consent, if the court concludes that such a transfer is in the best interests of the bankruptcy estate."  In other words, she wrote, the "Equity Committee's derivative standing under STN [did not] vest it with ownership over its derivative claims."  Curiously, she never addressed the obvious question of whether the appeal was moot because the plan had been substantially consummated.  So maybe there is hope for those concerned that substantial consummation of a plan or sale moots all appeals (especially--as Steve Sather points out--given her having joined in last year's Manville decision that was just reversed on procedural grounds, as discussed here, by the Supreme Court in Travelers v. Bailey).

This is long-winded background to what I've been wanting to write about for a very long time.  And I figured as long as people are giving Judge Sotomayor tips on how to be a better Judge or Justice, I'd offer a tip of my own:

READ THESE BOOKS!

• Kenneth Klee's Bankruptcy and the Supreme Court; and

• Law Prof. Blogger M. Jonathan Hayes's Bankruptcy Jurisprudence from the Supreme Court.

One thing that leaves you wanting from Professor Klee's book, however, is the precise thing that Justice-to-Be Sotomayor continues to drive home in her confirmation hearings; that is, the importance of thoroughly understanding and delving into the facts of each case (see, today's questioning by (my law school classmate) Sen. Amy Klobuchar, who engages in an extended discussion with Judge Sotomayor about her being "tenacious about getting to the bottom of the facts").  Well, it's on the facts where Professor Hayes' book fills the gap.  His book is like a Casenote Legal Briefs to Supreme Court bankruptcy cases, but much better.  Like Ken's book, Jonathan's book is a labor of love that started modestly.  Jon started out planning to write an article about the "20 most important bankruptcy cases ever," and he ended up with a first edition covering 121 cases.  He's not stopping, he says, until he's briefed "every case the Supreme Court has ever published which deals with Bankruptcy."  His book starts at Sturges v. Crowninshield in 1819, concludes with Piccadilly Cafeterias in 2008, and includes about every case since 1984.  Along the way, he summarizes in each "brief" the issue before the Court, the holding of the case, and the key facts of the case.  Each "brief" also quotes extensively from the Court's opinion because, he writes, "how better to explain the court's reasoning than to use the court's words."  He ends each brief with a "tidbit" or two about the case, the Justice who authored the opinion, or the context in which the case was decided.

Knowing the "ins-and-outs" of Supreme Court precedent is essential for every bankruptcy practitioner.  While it's basically true that one can find a bankruptcy court opinion somewhere that'll stand for whatever proposition one wants to argue, there's only one Supreme Court, and for our purpose, it's the supreme law of the land.  Its holdings, reasonings, dicta, and dissents provide essential interpretive guideposts to bankruptcy practitioners, for while it may be a "constitution we are expounding," when it comes to bankruptcy, it's a "statute we are interpreting."

Best of luck, Justice-to-Be!

© 2009 by Steve Jakubowski

After putting in 20+ hour days for a full week, including reviewing 35+ Gigabytes of OCR'd documents from GM, deposing Fritz Henderson and the Auto Task Force's Harry Wilson over two days, attending three days of hearing, and giving everything I had in this closing argument, Judge Gerber's opinion approving the sale and his bench decision denying my motion for direct appeal to the Second Circuit ended the fray for me and put my clients' appeal on the "slow boat to China," as the old saying goes.  But in doing so, he issued a persuasive opinion that--on reflection--actually did my clients a favor, despite their having to endure an extra year of appeal by first passing through the district court. 

How so?  Well, Judge Gerber himself acknowledged that the successor liability issue was the “most debatable” and “most important” of the issues before the Court.  He also correctly observed that I’d like to see this issue decided by the Supreme Court (assuming I can't get the Second Circuit to reverse itself or at least distinguish GM from Chrysler on the facts).  After all, 363 sales are so common nowadays that Baird and Rasmussen's prediction in 2002 of the "end of bankruptcy" is now being viewed as a shocking--but inevitable--fact of life.  And the undeniable split in the circuits over whether 363 sales can be "free and clear" of successor liability claims makes the case ripe for Supreme Court review, particularly given the magnitude of the claims being left behind (GM and Chrysler alone have shed about $2 billion of these liabilities in the past 45 days). 

One thing we know about the Supreme Court, however, is that it doesn't like to get "ambushed."  As Justice Ginsburg pointedly reminded counsel during oral argument in the Travelers Casualty v. PG&E case (discussed here):

We are a court of review. So no matter how well it's been aired [in other circuit cases], we wait to see what the lower courts have said on a question. We don't take it in the first instance.

Judge Gerber echoed these thoughts in his opinion denying my motion for direct appeal when he asked:

How could a decision presented and decided to the Second Circuit in two days (or on any other expedited basis) be helpful to the bankruptcy community, or the public, or the Supreme Court?   If the Supreme Court is to decide an issue that’s the subject of a Circuit split, doesn’t it deserve the best decision the Second Circuit can provide?

Hard to argue with that.  So, per Judge Gerber's sound instruction, we'll leave the "supercharged" Corvette ZR3 6.2L / 638 hp V8 at the dock and instead board the luxurious, brand-spanking-new, Bohai Zhenzhu, destination SCOTUS, with stops at the SDNY and 2d Circuit ports of call.

Bon Voyage!

© 2009 by Steve Jakubowski

In today's depressed environment, Howard Beale's famous rant in Network--the 1976 movie that took several academy awards against stiff competition (Rocky, All the President's Men, and Taxi Driver)--sure reads like something that could have been written today:

I don't have to tell you things are bad. Everybody knows things are bad. It's a depression. Everybody's out of work or scared of losing their job. The dollar buys a nickel's worth; banks are going bust; shopkeepers keep a gun under the counter; punks are running wild in the street, and there's nobody anywhere who seems to know what to do, and there's no end to it.

We know the air is unfit to breathe and our food is unfit to eat. And we sit watching our TVs while some local newscaster tells us that today we had fifteen homicides and sixty-three violent crimes, as if that's the way it's supposed to be!

We all know things are bad -- worse than bad -- they're crazy.

It's like everything everywhere is going crazy, so we don't go out any more. We sit in the house, and slowly the world we're living in is getting smaller, and all we say is, "Please, at least leave us alone in our living rooms. Let me have my toaster and my TV and my steel-belted radials, and I won't say anything. Just leave us alone."

Well, I'm not going to leave you alone.

I want you to get mad!

I don't want you to protest. I don't want you to riot. I don't want you to write to your Congressman, because I wouldn't know what to tell you to write. I don't know what to do about the depression and the inflation and the Russians and the crime in the street.

All I know is that first, you've got to get mad.

You've gotta say,

"I'm a human being, goddammit! My life has value!"

So, I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window, open it, and stick your head out and yell,

"I'm as mad as hell, and I'm not going to take this anymore!!" 

Well, Howard's rant is what a lot of panicked plaintiffs' lawyers involved in cases against GM are screaming these days as they watch years of toil on behalf of people seriously injured by defective GM products (like crushed roofs, exploding "side saddle" gas tanks, and collapsing seat backs) potentially go for naught as GM makes its grandest attempt ever to crush an entire class of former customers (presumably including anybody who buys a GM car between now and the closing date of the sale) and existing and future products liability claimants (including those who haven't even been injured yet!) in a sale that many plaintiffs lawyers of record only received written notice of in the past couple of days. 

Those following this blog know my rising concern (even anger) over how products liability claimants were completely stiffed in Chrysler, so much so that Howard's famous rant came to mind!

So, I decided to do something about it, and officially stepped into the fray by filing this Objection to the GM Sale and this Memorandum in Support.  On the brief with me is Public Citizen's Adina Rosenbaum and Allison Zieve, counsel for the Center for Auto Safety, Consumer Action, Consumers for Auto Reliability and Safety, National Association of Consumer Advocates, and Public Citizen.

We should win; whether we do is a "horse of a different color."

***

Many thanks to the Center for Auto Safety's Executive Director, Clarence Ditlow, for his help in organizing the team, Public Citizen's Adina Rosenbaum and Allison Zieve for their tremendous assistance in framing the legal arguments and drafting the pleadings, and to Public Citizen's Director, Brian Wolfman, for his support.

And, of course, special thanks to The Coleman Law Firm's own Bob Coleman for his generosity in dedicating the firm's resources to this important pro bono effort.

The sad, and all too tragic, stories of my clients, taken from the filed objection, are set forth below.  The only thing my clients did wrong here was buy a GM car.  For this act of brand loyalty, they have paid dearly.   It's not enough that people lose their lives and get severely injured from design defects and product flaws, now they and their loved ones get thrown under the bus!

If their stories don't bring a tear to your eye, then you probably support the sale's treatment of product liability claimants too!

• Callan Campbell is a GM tort victim. On August 17, 2004—a week before she was to start college—18 year old Callan was a front-seat passenger in a 1996 GMC Jimmy when the driver of the vehicle lost control while attempting to make a left turn. The vehicle entered a driver-side leading roll and rolled 1.5 times before ending on its roof. The roof collapsed over Callan’s seat, partially paralyzing her. The strength to weight ratio of the GMC Jimmy roof is about 1.9, which is among the lowest of all GM vehicles. GM’s own tests revealed that roof strengths in rollovers should be 3W to 4W. Callan’s paralysis could have been avoided at a mere fifty dollar cost to GM. Callan’s medical bills total $200,000 for the life-saving treatment she received immediately after the crash. Additionally, Callan’s parents have spent $160,000 renovating their home to accommodate Callan’s physical and medical needs as a C6 incomplete quadriplegic. A life care planner has estimated Callan’s current and future needs for extra doctor visits, medicine, durable equipment and home modifications at $4,518,831.00. An economist has predicted her work loss based on total disability at $4,120,538. Callan is also entitled to significant compensation for pain and suffering including loss of life’s pleasures, loss of dignity and independence, loss of the use of her limbs, and disfigurement.

• Kevin and Nikki Junso are the parents of Tyler, Matt, and Cole Junso. On April 25, 2006, Tyler and Cole Junso were involved a single car rollover accident while driving a 2003 GMC Envoy. During the rollover, the windshield and side windows were knocked out, reducing the strength of the roof structure. The Envoy sustained catastrophic damage to the roof structure, which buckled violently inwardly toward Tyler and Cole. Despite being belted, both occupants were partially ejected from the vehicle during the roll over. Seventeen year old Tyler, the driver, sustained massive skull and neck injuries and died at the scene of the accident. The evidence showed that Tyler’s head was partially outside the vehicle during the roll over sequence, due to the broken window and lateral displacement of the roof structure, and made contact with both the ground and the roof during the accident. The paramedics found Kevin, the passenger, with his left leg out the windshield and his right leg out the passenger side window. Kevin sustained serious injuries to his arms and legs, which eventually led to the amputation of his right leg below the knee.

• GM has been aware of the significant risks of “occupant excursion” if the safety mechanisms in its vehicles fail. Despite this knowledge, GM failed to introduce cost effective safety measures into its designs, which could have included side window plastics or laminates or seat belts resistant to excessive spool out. Not only has the Junso family lost a son as a result of GM’s failure to correct the strength instabilities in its SUVs, but Kevin has also lost his right leg. To date, Kevin has incurred medical bills totaling $555,204.19, and his future medical expenses are predicted to exceed $800,000.

• Edwin Agosto was driving his 2000 Chevrolet Blazer on September 22, 2008, when he lost control of his vehicle causing him to cross the center line and strike a tree. After striking the tree, the car once again crossed the center line and collided with a guardrail where it finally came to rest. Edwin’s airbags failed to deploy throughout the course of the entire accident. Because of that failure, Edwin suffered injuries including multiple spinous process fractures, a heavily comminuted fracture of the left scapula extending into his scapular spine and glenoid, multiple rib fractures, a humerus fracture, a subclavian vein injury, and a post traumatic subdural hygroma upon striking his head on the windshield. Due to these injuries, Edwin spent the next two and a half months of his life in a coma.

• Joseph Berlingieri was parked in a driveway on September 21, 2006 when the driver side impact airbag in his 1998 Cadillac DeVille malfunctioned and deployed. The air bag struck Joseph in his left ear, arm, and shoulder causing trauma injuries including hearing loss, tinnitus, and other serious injuries. The vehicle had previously been recalled for faulty side airbags, and after its repair was warranted to Joseph as being free from defect and suitable for purchase. However, the vehicle was not suitable for use, and was sold to Joseph despite the defective airbag mechanism. 

© 2009 by Steve Jakubowski

Here's the "Reader's Digest" version of the holding, written by Justice Souter for a 7-2 majority:

The Second Circuit erred in holding the 1986 Orders unenforceable according to their terms on the ground that the Bankruptcy Court had exceeded its jurisdiction in 1986.  On direct appeal of the 1986 Orders, any objector was free to argue that the Bankruptcy Court had exceeded its jurisdiction, and the District Court or Court of Appeals could have raised such concerns sua sponte.  But once those orders became final on direct review, they became res judicata to the parties and those in privity with them.

As I learned early on in law school from one of the smartest guys around, if you really want to find out what the case is about, read the dissent.  And if you want to know "what's bothering Ruthie?", you'll find it in dissent of Justice Stevens, in which she joined.  Justice Stevens dissented, he wrote, because:

In my view, the injunction bars only those claims against Manville’s insurers seeking to recover from the bankruptcy estate for Manville’s misconduct, not those claims seeking to recover against the insurers for their own misconduct.  This interpretation respects the limits of the Bankruptcy Court’s power....

We should not lightly assume that the Bankruptcy Court entered an order that exceeded its authority.  When a bankruptcy proceeding is commenced, the bankruptcy court acquires control of the debtor’s assets and the power to discharge its debts.  A bankruptcy court has no authority, however, to adjudicate, settle, or enjoin claims against nondebtors that do not affect the debtor’s estate.  Because Travelers’ insurance policies were a significant asset of the Manville bankruptcy estate, the Bankruptcy Court had the power to channel claims to the insurance proceeds to the Manville Trust.  But this by no means gave it the power to enjoin claims against nondebtors like Travelers that had no impact on the bankruptcy estate.  Thus, even accepting the Bankruptcy Court’s representation in 2004 that it had “meant to provide the broadest protection possible” to the settling insurers, such relief could not include protection from independent actions. (Emphasis added.)

The limits of the Bankruptcy Court's power will be on display in the GM case as Judge Gerber is asked to do what Judge Gonzalez was unwilling to do in the Chrysler case; that is, respect the jurisdictional boundaries of the Court and the statutory directives of Congress and refuse GM's request to bar present and future claims of product liability claimants from being asserted against the purchaser post-closing under applicable state law theories of successor liability. 

Much more on that to follow.

Happy hunting!

© 2009 by Steve Jakubowski

[See Part I of my analysis of Judge Gonzalez's sale opinion here.]

The brilliant lawyer, author, and ex-blogger, Bill Patry (now senior copyright counsel at Google), wrote on his Patry Copyright Blog back in 2005 about the greatest Biblical scholar of all time, Rabbi Shlomo Yitzhak (whom everyone affectionately calls "Rashi").  Bill wrote:

Rashi is used as a learning device for children not because he is simple (he isn't) but because of the unusual nature of his commentary.  His commentary consists of very terse conclusions, but without the questions that prompted the conclusions.  Children are left with the task of asking "What's Bothering Rashi?"  ...  The "What's Bothering Rashi?" approach to learning text is useful in analyzing statutes because it teaches one to ask the why of things, rather than as we almost always do, just read the literal words divorced from what the law would be like in their absence.

Bill's post came to mind in thinking about "What's Bothering Ruthie?" that would prompt her to write a one-liner calling a halt to a sale that remarkably worked its way from bankruptcy filing to cert. review in less time than it takes the average person to buy a used Town & Country.  Here are a few ideas:

• Maybe she doesn't like the lawyers down the street telling her (as reported here by SCOTUS Blog) that "no court, including the Supreme Court, has the authority to hear a challenge by Indiana benefit plans to the role the U.S. Treasury played in the Chrysler rescue."  Tell that to Justice Marshall!

• Or maybe, like her predecessors during the Depression in the Schechter Poultry Corp. v. US case, she's wondering whether (as argued here by Ralph Nader) Congress abdicated the essential legislative functions with which it is vested by letting the Executive Branch alone structure and implement the deal.

• As noted in my Part I analysis, however, I doubt she's losing sleep over whether the sale is a sub rosa plan or whether the absolute priority rule was violated. 

I'm guessing, though, that what bothers her most -- and frankly what's really been bothering me most (hence Part II) -- is the sale's treatment of tort claimants, both present and future, and Judge Gonzalez's cursory justification for such treatment.  He wrote:

Various objections were raised related to property damage claims and personal injury and wrongful death claims, including those which have not yet occurred.  Some of these objectors argue that their claims are not "interests in property" such that the purchased assets can be sold free and clear of them.  However, the leading case on this issue, In re Trans World Airlines, Inc., 322 F.3d 283 (3d Cir.2003) ("TWA"), makes clear that such tort claims are interests in property such that they are extinguished by a free and clear sale under section 363(f)(5) and are therefore extinguished by the Sale Transaction.  The Court follows TWA and overrules the objections premised on this argument.  Even so, in personam claims, including any potential state successor or transferee liability claims against New Chrysler, as well as in rem interests, are encompassed by section 363(f) and are therefore extinguished by the Sale Transaction.  See, e.g., In re White Motor Credit Corp., 75 B.R. 944, 949 (Bankr. N.D. Ohio 1987); In re All Am. Of Ashburn, Inc., 56 B.R. 186, 190 (Bankr. N.D. Ga. 1986). The Court also overrules the objections premised on this argument.

Additionally, objections in this category touching upon notice and due process issues, particularly with respect to potential future tort claimants, are overruled as to those issues because, as discussed elsewhere in this Opinion, notice of the proposed sale was published in newspapers with very wide circulation.  The Supreme Court has held that publication of notice in such newspapers provides sufficient notice to claimants "whose interests or whereabouts could not with due diligence be ascertained."  Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 317 (1950).  Accordingly, as demonstrated by the objections themselves, the interests of tort claimants, including potential future tort claimants, have been presented to the Court, and the objections raised by or on behalf of such claimants are overruled....

Another objection related to an asbestos claim raised both the failure to comply with section 524(g) and that the Sale Transaction improperly provides for the release of third parties, but this objection is overruled as to both issues because section 524(g) is inapplicable to a free and clear sale under section 363 and the Sale Transaction does not contain releases of third parties.  Such claims can still be asserted against the Debtors' estate.

There's far more to say about this issue than can be summarized in a blog post that only an insomniac at Zero Hedge can appreciate (as attested by the two redwells on my desk relevant to successor liability issues in bankruptcy, one stuffed with about 25 articles and the other with about 110 cases ).  Here, for example, is an overview of the successor liability issues, written last September after reading about an asset purchaser's claim that it had no responsibility to comply with the Simplicity crib recall. 

Suffice it to say, however, as touched upon in part in these two briefs filed with the Supreme Court by attorneys for some tort claimants, there are a number of decisions out there -- both state and federal -- holding that Section 363(f)'s reference to a sale "free and clear of interests" doesn't permit a court to enter an sale order "free and clear of claims."  As such, the argument goes, Section 363(f) can't be the basis for enjoining a tort claimant's well-established state law rights to assert successor liability claims under the "product line" and "business continuity" exceptions (and all the more so, even Professor Lubben would agree, for future claimants whose injuries arise or become manifest only after the sale).

And why should all this bother Justice Ruthie so much?  Well, maybe because an opinion deciding the seminal case that opened the door to this variation of the so-called "channeling injunction" against non-consenting tort claimants is in its final draft on one or more of the Justices' desks (maybe even hers given the way she pounced from the gate at oral argument before petitioner's counsel had gotten halfway through the second sentence of his opening remarks).  As explained in this neat little summary, the Court is on the verge of deciding Travelers Indemnity Co. v. Bailey, an appeal from the Second Circuit's decision in modern bankruptcy's first mega-case, In re Johns-Manville, in which the Second Circuit held that "while there is no doubt that the bankruptcy court had jurisdiction to clarify its prior [1986] orders [enjoining all third-party derivative claims against Travelers], that clarification cannot be used as a predicate to enjoin claims over which it had no jurisdiction [i.e., direct claims against Travelers by the asbestos plaintiffs that Travelers, as Manville's primary insurer, conspired with Manville to withhold knowledge of the ill effects of asbestos]."  Travelers Cas. and Surety Co. v. Chubb Indem. Ins. Co., 517 F.3d 52, 60-61 (2d Cir. 2008).

The implications of this decision are ginormous (an official word), to say the least, and in many ways the arguments in that case echo those made by the tort claimants in their objections to the Chrysler sale.  I think that's "what's bothering Justice Ruthie" and I think that's what prompted her to stay the sale above all else.

***

Thanks for reading, and please excuse the late night errors (though I don't think anyone on the sale side will be excusing this particular one)!  And a special shout-out to my favorite Judge Ruthie, the first to read my blog, who once met Justice Ginsburg at the National Women's Judges Conference and introduced herself as the "other Judge Ruth" and who I know joins me in hoping that Mom and Dad, of blessed memory, are enjoying this all from their perch!

© 2009 by Steve Jakubowski

Well it's official, and really no surprise:  Judge Gonzalez in this opinion (WL) approved the sale of Chrysler's assets in the Fiat Transaction "free and clear of liens, claims, interests and encumbrances."

Part I of my quick take on the opinion focuses on the most discussed elements of the case that have caused so much unnecessary heartburn (some caused, I admit, by my own three previous posts).  Here's my thoughts on a few of the key issues in the opinion that I touched upon in prior posts:

• Was it a sub rosa plan (as questioned here)?  The Court said no.  And I actually agree.  It's hard to argue something circumvents the chapter 11 plan process when the debtor wouldn't have survived long enough to be able to propose a plan in the first place.  Arguments that a sale is a sub rosa plan make sense when the debtor can survive to confirmation; they are irrelevant where the debtor can't.

• Was the absolute priority rule violated (as questioned here)?  The Court danced around this issue pretty well, taking the position, well stated in this Credit Slips blog post, that "the allocation of ownership interests in the new enterprise is irrelevant to the estates' economic interests" and that "in addition, the UAW, VEBA, and the Treasury are not receiving distributions on account of their prepetition claims ... [but] under separately-negotiated agreements with New Chrysler ... [that are] not value which would otherwise inure to the benefit of the Debtors' estates." 

Everyone cares about the retirees' medical claims under VEBA, but it's hard to see why this group should get any consideration from the New Chrysler since they will provide no value to the new enterprise.  Moreover, it's quite common in bankruptcy cases (see In re UAL, discussed here) for the current employees to leave the retirees hanging out to dry precisely because they'll provide no value to the new enterprise and the existing employees want to retain whatever benefits they can eke out for themselves.  To this limited extent, therefore, perhaps the flow of consideration does violate the absolute priority rule.  The auto workers union is obviously a tighter and more cohesive group, however, and they refused to do what their comrades in the pilots union did to the retiree pilots, thus enabling the Court here to find that the "unprecedented modifications to the collective bargaining agreement, including a six-year no-strike clause" were sufficient to justify New Chrysler's assumption of obligations to all VEBA claimants, as demanded by the union.

• What are the rules of the game for "last-resort" lenders?  One thing I said in my 10 minute interview with Anthony Mason that didn't make it on TV was that "what goes around, comes around" (as the apparently not so old saying goes) and that here, the secured lenders were getting a taste of their own medicine, so it was hard to feel too sorry for them.  After all, in most bankruptcy cases, the existing secured lender is the lender of last resort, and it is the existing secured lender that takes the hard-line, "take it or leave it" position described by Judge Gonzalez that leaves everyone else gasping for air as it stuffs its demands down everyone's throat, including the court's.  Such practices, Judge Gonzalez tells us, are "troubling to some, but such is the harsh reality of the marketplace."  Further, as I was quoted in my 7 seconds of  fame, "the [governments'] providing the money, and they're the ones who are ultimately going to decide how that money's going to be spent."  And that's pretty much what Judge Gonzalez said, though far more articulately:

The absence of other entities coming forward to fund any transaction highlights the risk presented to distressed companies that are situated similarly to Chrysler.  Accompanying that risk is the lender's ability to dictate many of the key terms upon which any funding will occur.  The hard-fought "take it or leave it" approach that often drives the outcome of this type of negotiation is troubling to some, but such is the harsh reality of the marketplace.  Here, the Governmental Entities, as lenders of last resort, are dictating the terms upon which they will fund the transaction, thereby leaving the Debtors with few options.  Nevertheless, the usual marketplace dynamics play out and the Court applies the same bankruptcy law analysis.  Moreover, the Debtors' CEO testified that the demands from the Governmental Entities were not greater than that presented by other lenders, and in some aspects were not as onerous.... 

[T]he ordinary marketplace dynamic played out with respect to the lenders and whatever ability they had to dictate terms.   The fact that the lenders of last resort happened to be Governmental Entities did not alter that dynamic.  The Governmental Entities did not preclude other entities from participating or negotiating, they merely set forth the terms that they required to provide financing and the parties were either amenable to them or not.  Finally, as noted, the Governmental Entities had no obligation to fund the transaction and Chrysler and Fiat were free to walk away from the negotiations.

• Has the "Rule of Law" Been Withered (as questioned here)?  Maybe, as I'll discuss later in Part II, but not for the reasons the Indiana Pension Funds are arguing on appeal.  In fact, if anything, the following well-worn rules have been affirmed in this case:

  1.  You can't circumvent chapter 11's plan process when you can't even fund next week's payroll.

  2.  You can't violate the absolute priority rule if junior creditors necessary to the new enterprise get something out of the deal.

  3.  Lenders of last resort owe no duty to anyone but themselves and can dictate the terms of a plan or sale so long as the terms aren't unconscionable, which they aren't here.

More to follow, and thanks as always for reading!

© 2009 by Steve Jakubowski