Stoel Rives Bankruptcy Partner Participates in Panel at ABI’s Southwest Bankruptcy Conference

Bankruptcy partner Oren Haker was a recent attendee at the American Bankruptcy Institute’s 26th Annual Southwest Bankruptcy Conference, where he participated in the panel “Be Careful What You Ask For: Risks and Benefits of Involuntary Bankruptcy Filings.” The other panelists included the Honorable Martin Barash, U.S. Bankruptcy Court, CD Cal.; Janet Chubb, Esq., Of Counsel, Kaempfer Crowell, Reno; and Jordan Kroop, partner, Perkins Coie, Phoenix.

The session provided an overview of (i) the statutory requirements that petitioning creditors must satisfy to file an involuntary bankruptcy petition against a business, (ii) the options that a business has in responding to an involuntary petition, and (iii) alternatives to dismissal of the petition or entry of an order for relief.  Key points from the presentation included:

  • When creditors file an involuntary petition against a corporate debtor, they should understand the potential ramifications if the debtor contests the filing, or alternatively, if other creditors of the corporate debtor move to dismiss the involuntary petition, which include suspension under 11 U.S.C. § 305.
  • Suspension is a bespoke alternative within the Bankruptcy Court’s discretion if the Court determines that abstention is in the best interests of the debtor and its creditors. However, suspension can invite significant litigation in non-bankruptcy courts and risk causing loss in value for the corporate debtor’s business due to uncertainty around the suspended case.
  • In addition, if the petitioning creditors do not satisfy the specific requirements of section 303, those creditors who filed the involuntary could be subjected to a damages claim by the corporate borrower caused by the filing, as well as punitive damages.
  • Moreover, while the motivation of unsecured creditors for the involuntary filing may be nonpayment on their valid claims, an involuntary petition is a litigation approach to debt collection. It is not a value-enhancing approach; it rarely, if ever, drives up the value of the debtor’s assets for distribution to creditors.  On the other hand, bankruptcy may provide unsecured creditors with potential recoveries from certain causes of action that may otherwise not exist or not be brought by individual creditors outside of a bankruptcy process.
  • Attorneys who agree to file a petition on behalf of more than one unsecured creditor should consider the ethical issues relating to representing more than one party in the petition filing.  If, for instance, one of the petitioning creditors is disqualified, does the attorney’s engagement with that creditor terminate automatically?  Does the attorney have advance consent from the disqualified creditor to continue representing the other petitioning creditors?
  • What exactly does it mean to have a non-contingent, undisputed claim as to amount?
  • Creditors should beware – filing an involuntary petition may seem simple, but once filed, it is very hard to dismiss the case, and the outcome is rarely in any one party’s control.

Oren Haker focuses on the representation of a wide range of parties in workouts, debt restructurings, receiverships and bankruptcy cases, including corporate debtors, trade and financial creditors, creditors’ committees, lessors, and strategic and financial investors acquiring assets of troubled companies.

The attorneys of Stoel Rives’ bankruptcy practice represent all sides and angles of an insolvency or distressed equation. They are trusted counsel to the firm’s corporate clients on their out-of-court financial or operational restructurings and court proceedings in Chapter 11. They also represent sponsors and strategic and financial investors in out-of-court financial restructurings and in-court bankruptcy cases; secured and unsecured creditors in large and small Chapter 11, 7 and 13 cases; and creditors’ committees and equity interests in Chapter 11 cases.

Bankruptcy Discharge Violations: Contempt Requires Actual Knowledge

On April 23, 2018, the Ninth Circuit held in In re Taggart (the “Opinion”) that a creditor will not be held in contempt for violating the bankruptcy discharge injunction if it has a good-faith belief, even if unreasonable, that the discharge injunction does not apply to it.  A copy of the Opinion is available here.  This is one of very few instances where mistake of law may be an effective defense.

Background

The Debtor, Bradley Taggart, was a property developer who co-owned a business center organized as a limited liability company (the “LLC”) with Terry Emmert and Keith Jehnke.  Prior to his bankruptcy filing, Taggart transferred his membership interests in the LLC to his attorney, John Berman, in violation of Emmert and Jehnke’s right of first refusal.  Emmert and Jehnke sued Taggart and Berman in state court (the “State Litigation”) for failing to allow them to exercise their right of first refusal.  Just before the trial in the State Litigation began, Taggart filed for bankruptcy under chapter 7. The filing of Taggart’s bankruptcy petition triggered the “automatic stay,” staying the State Litigation.

On February 23, 2010, Taggart received his bankruptcy discharge, at which point the State Litigation resumed.  Despite his bankruptcy discharge, the state court held that Taggart was a necessary party and did not dismiss him from the State Litigation.  However, in light of his bankruptcy discharge, the parties agreed that no monetary judgment could be awarded against him.  After trial, the state court held that the Debtor violated Emmert and Jehnke’s right of first refusal and it unwound Taggart’s prepetition transfer of his membership interests in the LLC and expelled him from the LLC.  Emmert and Jehnke’s attorney, Stuart Brown (together with Emmert and Jehnke, the “Creditors”), filed a petition for attorneys’ fees, limiting the request for fees against Taggart to those fees incurred after his bankruptcy discharge, alleging that Taggart had “returned to the fray” – or willingly resumed litigation by participating in the State Litigation after obtaining his discharge.  Taggart opposed the Creditors’ petition.  He also filed a motion in the bankruptcy court to reopen his bankruptcy case, seeking to hold the Creditors in contempt for violating his discharge.

The state court ruled that Taggart could be held liable for attorneys’ fees that were incurred after his bankruptcy discharge because he had returned to the fray.  Subsequent to the state court’s ruling, the bankruptcy court denied Taggart’s motion for contempt, finding that the state court had correctly decided that he had voluntarily resumed litigation.  Taggart appealed the state court’s decision to the Oregon Court of Appeals and appealed the bankruptcy court’s decision to the district court.  The district court reversed, holding that Taggart did not “return to the fray.”  It then remanded the case to the bankruptcy court for a determination of whether the Creditors knowingly violated the discharge injunction in seeking attorneys’ fees.  Continue Reading

Ninth Circuit Allows Property Sale Free and Clear of Leases

Section 365(h) of the Bankruptcy Code provides tenants special protections in the event their landlord files for bankruptcy, by giving tenants the option of retaining their possessory rights under their leases, notwithstanding the landlord’s rejection of such leases.  A question that has divided courts across the county is what happens to a tenant’s possessory interest in the leasehold when the debtor-in-possession (“DIP”) or a trustee seeks to sell the underlying real property free and clear of all “interests” pursuant to section 363(f)?  In other words, does a sale of the property “free and clear” extinguish a tenant’s possessory interests in the real property notwithstanding section 365(h)?  Nearly all courts that have considered the issue had held that section 365(h) trumps section 363(f) under the canon of statutory construction that “the specific prevails over the general,” and that a section 363(f) sale order cannot extinguish a lessee’s possessory interest in the real property being sold.

On July 13, the Ninth Circuit weighed in on the interplay between sections 363(f) and 365(h) of the Bankruptcy Code in a dispute between the undersecured lender, which purchased certain estate assets from the chapter 7 trustee (including real property leased by the debtor to non-debtor tenants Pinnacle and Opticom) and Pinnacle and Opticom.  In Pinnacle Restaurant at Big Sky, LLC v. CH SP Acquisitions, LLC (In the Matter of Spanish Peaks Holdings II), No. 15-35572 (hereinafter “Spanish Peaks”), the Ninth Circuit held that a non-ordinary course sale of estate assets pursuant to sections 363(b) and 363(f) was free and clear of the possessory rights of a non-debtor tenant codified in section 363(h) of the Bankruptcy Code.  By so holding, the Ninth Circuit deviated from the “majority approach” and instead followed the approach of the Seventh Circuit in Precision Industries, Inc. v. Qualitech Steel SBQ, LLC (In re Qualitech Steel Corp. & Qualitech Steel Holdings Corp.), 327 F.3d 537 (7th Cir. 2003) (hereinafter “Qualitech”). Continue Reading

U.S. Supreme Court Holds that FDCPA Does Not Apply to Debt Purchasers

This post was authored by Gabrielle Glemann and summer associate Deniz Irgi.

On June 12, the U.S. Supreme Court significantly restricted the universe of companies subject to the restrictions of the Fair Debt Collection Practices Act.   In the first opinion authored by new Justice Neil Gorsuch the court unanimously ruled, in Henson v. Santander Consumer USA, Inc., that purchasers of debt who seek to collect on it for their own account are not “debt collectors” subject to the Fair Debt Collection Practices Act (FDCPA).

The FDCPA was enacted in 1978 to rein in abusive, deceptive, predatory and unfair debt collection practices, including ”disruptive dinnertime calls,” false reporting, and “downright deceit.”  The Act establishes guidelines under which debt collectors may conduct business, prescribes penalties and remedies for violations of the act, and authorizes enforcement of the act by the Federal Trade Commission (“FTC”), the Consumer Financial Protection Bureau (“CFPB”), and through private lawsuits commenced by the targeted consumer.  As a threshold matter, however, the act only governs the practices of a “debt collector,” defined in the statute as anyone who “regularly collects or attempts to collect . . . debts owed or due . . . another.”   To the extent the party whose actions are at issue does not qualify as a debt collector, the statute provides no enforcement provisions or remedies either for the consumer or the federal agencies charged with enforcing the FDCPA. Continue Reading

WASHINGTON’S NOT QUITE UNIFORM VOIDABLE TRANSACTIONS ACT TAKES EFFECT JULY 23

UVTA. Washington’s version of the Uniform Voidable Transactions Act (UVTA) will become effective on July 23.  The Uniform Law Commission (ULC) adopted amendments and a new name for the Uniform Fraudulent Transfer Act (UFTA) in 2014, and Washington will become the 15th state to enact the new version.  As Professor Ken Kettering, the reporter for the ULC project, has written, while the name has changed,

the renaming should not be taken to imply that the UVTA is a new and different act, or that the amendments make major changes to the substance of the UFTA. Nothing could be further from the truth. The UVTA is not a new act; it is the UFTA, renamed and lightly amended.

The impetus behind the project was an article Professor Kettering wrote in 2011 suggesting that UFTA be amended to include a choice of law rule.  Most of the rest of the re-drafting project focused on small changes to UFTA, while retaining the basic intent of the statute.  It is likely that UVTA will have more effect on litigation involving what are now called “voidable transactions” than it will on the substance of what is voidable.  By clarifying the choice of law, standards of both pleading and proof, and the burden of proof—provisions not contained in UFTA or its predecessors—parties to litigation under UVTA should be afforded more certainty than they had before.

Choice of Law Rule. Under UVTA, the choice of law is the location of the debtor, i.e., the person whose transfers are being examined to determine if they are voidable.  The location of the debtor is determined as follows:

  • For individuals, their principal residence
  • For organizations, their place of business, and, if they have more than one, their chief executive office

This rule will be familiar to those who know the choice of law rules under the Uniform Commercial Code, except that there is no special rule for “registered organizations.” In other words, a corporation organized under Delaware law but whose headquarters are in Prosser, Washington will be, for UVTA purposes, subject to Washington law.

Washington Variants. Washington adopted three variants to the uniform version of UVTA.  One Washington variant in particular may lead to some interesting results when the choice of law rule is applied.  Under UVTA (as under UFTA and every fraudulent conveyance law going back to the Statute of 13 Elizabeth in 1571), a transfer is voidable if made with actual intent to “hinder, delay or defraud” any creditor of the debtor.  Section 8(a)(1) of UFTA granted  a defense to such a claim to a transferee who acted in good faith and paid reasonably equivalent value for the asset.  Continue Reading

Gabrielle Glemann: A Welcome Addition to Our Bankruptcy Practice

Stoel Rives is pleased to welcome Gabrielle Glemann as Of Counsel in our Corporate Group in Seattle. Her arrival solidifies our bankruptcy practice both in the Pacific Northwest and nationally.

Our clients will greatly benefit from Gabrielle’s significant experience in national and international corporate bankruptcy and bankruptcy litigation matters. Before joining the Stoel Rives team, Gabrielle was counsel at  Hughes Hubbard & Reed LLP in New York City, representing debtors, trustees, examiners, and secured and unsecured creditors in Chapter 7 and Chapter 11 bankruptcies for over 10 years.

Corporate-Focused Legal Counsel

Gabrielle’s extensive experience in corporate restructuring and distressed debt transactions makes her an ideal advisor for our corporate clients. She will advise clients from a variety of industries on commercial and regulatory matters, including:

  • Financing transactions
  • Asset sales and acquisitions
  • Risk assessment and mitigation
  • Corporate governance
  • Regulatory compliance

Gabrielle’s expertise in a wide range of corporate and bankruptcy-related areas enable her to meet the complex needs of our clients.

“Corporate bankruptcy and debt restructuring require an attorney to develop a detailed knowledge of the client’s finances and management,” Gabrielle said. “Gaining an understanding of the business that is necessary to help guide a corporate restructuring requires a great deal of trust on behalf of the client.”

One of the qualities that drew Gabrielle to Stoel Rives is our excellent reputation for client service, so she is excited to join Stoel Rives and welcomes the task of growing its bankruptcy practice. For the benefit of our family of corporate clients (and beyond), she plans to contribute to Restructuring Debt Review to provide ongoing insight into legal developments regarding bankruptcy law.

Don’t Panic! Even Though Oregon Changed from Alternative B to Alternative A on January 1, 2016

On January 1, 2016, the Oregon legislature amended ORS 79.0503 to adopt Alternative A in the 2010 Amendments to Article 9 of the UCC.  What does that mean and should you be worried?

The 2010 Amendments to Article 9 gave states a choice between two approaches regarding how to handle individual names in UCC financing statements.  These alternatives are referred to as Alternative A and Alternative B.  Oregon adopted the 2010 Amendments, including Alternative B, effective July 1, 2013.  Under Alternative A, a financing statement naming a debtor who is an individual is effective “only if” the name exactly matches the name on a particular document (ordinarily a driver’s license).  Alternative A is also known as the “only if” alternative.  Under Alternative B, a financing statement naming a debtor who is an individual is effective if it matches the name on that document, but also if it gives “the individual name of the debtor” or “provides the surname and first personal name of the debtor.”  Alternative B is also known as the “safe harbor” alternative.

The ramifications of this change will likely be minor for a number of reasons. Continue Reading

Petters Strikes Again: Amended Minnesota Fraudulent Transfer Act Does Not Shelter Certain Charitable Contributions

The latest turn in the ongoing Petters bankruptcy saga came on June 11, when U.S. Bankruptcy Judge Gregory Kishel issued a 46-page order examining 2012 amendments to the Minnesota Uniform Fraudulent Transfer Act (MUFTA). Specifically, Judge Kishel reviewed whether the MUFTA amendments created a complete defense and barred the Petters trustee’s avoidance claims against several charitable organizations. In the end, Judge Kishel denied motions to dismiss filed by the charities and permitted the trustee’s suits to move forward.

These cases arose from an unraveling of one of the largest Ponzi schemes in U.S. history, which was primarily perpetrated by Minnesota businessman Tom Petters. In the course of the Petters Chapter 11 bankruptcy cases, a trustee was appointed to remediate damages caused by the scheme. With that charge, the trustee has proceeded to engage in numerous lawsuits; among those, the trustee filed suit against several charitable organizations seeking to avoid specific transfers made to them by Petters or his affiliated entities under MUFTA (invoked through 11 U.S.C. 544).

While those suits were pending, the Minnesota Legislature amended MUFTA in 2012 to add a retroactively-effective provision limiting the scope and nature of transfers to qualifying charitable organizations that may be subjected to avoidance claims. Following that, those charities sued by the Petters trustee moved to dismiss the complaints on grounds that the amendments sheltered the transfers at issue and barred the trustee’s claims. Continue Reading

Have You Hugged Your Bankruptcy Attorney Today? We’re Feeling a Little Unloved

The U.S. Supreme Court has issued its opinion in Baker Botts v. Asarco, holding that professionals retained in bankruptcy cases cannot receive compensation for the costs of defending their fee applications. Even if you aren’t a bankruptcy professional, there are two things to keep in mind about this opinion. First, it won’t stop us restructuring professionals from doing our jobs. Second, the reality of commercial bankruptcy practice is often at odds with the pure textual analysis favored by the Supreme Court.

The holding itself is straightforward. Section 330 of the Bankruptcy Code authorizes retained professionals to receive reasonable compensation for “actual, necessary services rendered”. The Court, reviewing the statue, held that the language did not authorize a deviation from the ubiquitous “American Rule” which mandates that unless a statute or a contract provides otherwise, each party bears the costs of his own attorneys’ fees. Services rendered, it held, are those rendered to the client, not in defense of one’s own fee application. To be sure, this case did not have the kind of facts that engender sympathy for poor bankruptcy professionals. The primary firms in question received a combined award of $120 million in fees and a $4.1 million enhancement for exceptional performance (truly exceptional in the sense that all creditors in the case were paid in full). On top of this, however, the Bankruptcy Court also awarded $5 million for the costs of defense of the original fee applications. It was that additional attorneys’ fee award that the Supreme Court overturned. Continue Reading

Dewsnup Lives On: Debtors May Not Strip Underwater Junior Liens

On Monday, June 1, 2015, the Supreme Court of the United States issued its opinion in Bank of America v. Caulkett, a closely watched matter concerning whether Section 506(d) of the Bankruptcy Code permits junior lien stripping in the context of Chapter 7 bankruptcy.  Addressing two consolidated cases, Justice Clarence Thomas—writing for a virtually unanimous Supreme Court—held that Section 506(d) forbids debtors from voiding junior liens, even when such liens are wholly underwater.

In Caulkett, the individual debtors owned homes worth less than the amount each owed on a senior mortgage. The debtors had junior mortgage liens, for which the junior mortgagor—Bank of America—would receive nothing if the homes were sold today as a result of (1) subordination to a senior mortgage, and (2) a decline in each home’s market value. To strip those junior liens in bankruptcy, the debtors relied on Section 506(d) of the Bankruptcy Code, which provides: “To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.”

The debtors prevailed in the lower courts on their argument that wholly underwater junior mortgage liens were no longer “secured” because the collateral had no value relative to the claim. The Supreme Court reversed those decisions.

In doing so, the Supreme Court credited the debtors’ argument that a straightforward reading of Section 506(a)(1)—which provides that “an allowable claim . . . is a secured claim to the extent of the value of such creditor’s interest in . . . such property”—would void an underwater junior mortgage lien.

But the Supreme Court also found that it had already adopted a construction of “secured claim” in its Dewsnup v. Timm opinion. In that case, the Supreme Court rejected an argument that a claim was “secured only to the extent of the judicially determined worth of the real property,” and instead defined the term “secured claim” to mean “a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.”

The debtors’ in Caulkett sought to distinguish Dewsnup because those secured liens in question were only partially underwater, as opposed to wholly underwater. The Supreme Court declined to draw that distinction because of the odd framework it would enact. In essence, had the Supreme Court accepted the Caulkett debtors’ distinction, a debtor could not strip down a junior lien if the collateral was valued at one dollar more than a senior lien, but a debtor could strip a junior lien if the collateral was valued at one dollar less. Such a framework would lead to arbitrary results, particularly given constant fluctuations in property values.

It is unclear from the Supreme Court’s decision why the debtors chose not to attack Dewsnup head on.  After all, they had a spirited dissent in Dewsnup from Justice Scalia behind them.  And the Supreme Court appears to go out of its way, repeatedly, to highlight that the debtors have not asked the Court to overrule Dewsnup.  Future litigants should take note.

By Andrew Pieper (andrew.pieper@stoel.com) and Jamila Toussaint.  Ms. Toussaint is a Summer Associate with Stoel Rives LLP and is not currently licensed to practice law.

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