Daily Bankruptcy & Restructuring Newsletter for May 29, 2015

Press Release: CanAm’s Alabama Subsidiaries File Voluntary Petition under Chapter 11 to Complete Financial and Operational Restructuring and Intend to Continue Serving Customers Without Interruption

Calgary Herald: Lenders file to throw Southern Pacific into receivership

AOL Travel UK: Malaysia Airlines placed into administration

Reuters: Stockton, Calif., argues against appeal of its bankruptcy plan

Commercial Bankruptcy Investor: Appointment of Official Committee of Equity Holders in Xinergy Bankruptcy Denied

Bloomberg: Teck to Idle Six Canada Coal Mines in Response to Slump

Wall Street Journal: Defense Puts Spotlight on Dewey & LeBoeuf Emails

Law360: Dewey & LeBoeuf Trial Live Blog for Day Three

Commercial Bankruptcy Investor: Family Christian Reports Results of Auction for Sale of All its Assets

Bloomberg: Skymark Airlines Said to Submit Restructuring Plan on Friday

New York Post: Suitors emerge in $2 billion Hostess bidding

Northwest Georgia News: Hutcheson Medical Center had a healthy April

Commercial Bankruptcy Investor: Creditors’ Committee Appointed in Golden County Foods Bankruptcy

Reuters: SEC commissioners order affidavits on hiring of in-house judges

Reed Smith: Schemes of Arrangement for Distressed Shipping Companies – a viable (and cheaper) alternative to chapter 11?

Weil, Gotshal & Manges: What the Future Holds for Make-Whole Claims in Bankruptcy: Examining the Energy Future Holdings EFIH First Lien Make-Whole Decision – Part 2

Daily Bankruptcy & Restructuring Newsletter for May 28, 2015

Court Docket (Bankr. D. Del.): Notice of Appointment of Committee of Unsecured Creditors in Golden County Foods, Inc. Bankruptcy Cases

Court Docket (Bankr. D. Del.): Notice of Withdrawal of Professionals Representing the Official Committee of Equity Security Holders Appointed in the Allied Nevada Gold Corp. Bankruptcy Cases

High Yield Bond: Colt again extends deadline on distressed bond swap, Ch. 11 vote

S&P Capital IQ/Forbes: Creditors Say Energy Future Privately Aims To Thwart Alternate Reorganization Plans

Reuters: U.S. trustee doubts KIOR’s turnaround, seeks to block Chapter 11 exit

Debtwire/Forbes: DTEK Restructuring Scheme Opens Door For Global Bond Issuers To Bypass Chapter 11

SEC Filing: Overseas Shipholding Group Presentation to May 27, 2015 Lenders’ Conference Call

Wall Street Journal: Struggling Companies, Creditors Weigh REIT Conversions

Reuters: Big demand slices yields for $674 mln of Chicago bonds

Bloomberg: Puerto Rico Tax-Increase Plan Fuels Longest Debt Rally of 2015

BostInno: Karmaloop Names New CEO to Replace Greg Selkoe

Bloomberg: Yen Falls to 12-Year Low as European Futures, China Stocks Drop

Weil, Gotshal & Manges: Well Well Wellness: The Supreme Court’s Most Recent Decision Regarding Stern v. Marshall and its Progeny

Daily Bankruptcy & Restructuring Newsletter for May 27, 2015

U.S. Supreme Court: Opinion Issued in Wellness Int’l Network, Ltd. v. Sharif

Weil, Gotshal & Manges: Some Guidance from SCOTUS on Stern v. Marshall! (And What You Really Need to Know)

Wall Street Journal: Judge Approves Sale of Doral Insurance Unit

Wall Street Journal: Prosector Alleges Dewey & LeBoeuf Cooked the Books for Years

Washington Times: Battle between Stockton, Showboat heads to bankruptcy court

CNBC: New Revel owner: ‘No way’ casino reopens this summer

SEC Filing: Warren Resources, Inc. Enters Into New Credit Agreement

Wall Street Journal: Highland Capital Sues Credit Suisse Over Soured Loans

Bloomberg: First Solar Slides Most Since November as RBC Downgrades Shares

Wall Street Journal: Chinese Play for Fortescue Keeps Iron Man Standing

NewOak Capital: Chicago and the Strange Politics of Ratings

Malhar Pagay, Partner, Pachulski Stang Ziehl & Jones LLP, via LinkedIn: More Bad News for Suppliers to Companies That End Up in Bankruptcy

New Bankruptcy Opinion: SCHWAB INDUSTRIES, INC. v. Huntington National Bank – Dist. Court, ND Ohio, 2015

Schwab Industries, Inc., Appellant,


Huntington National Bank, et al., Appellees.

Case Nos. 5:14cv2578, 5:14CV2586

United States District Court, N.D. Ohio, Eastern Division.

May 19, 2015.


JOHN R. ADAMS, District Judge.

These two matters arise from orders of the bankruptcy resolving two adversary proceedings that relate to the same issue. While not formally moving for leave to appeal, Appellant Schwab Industries, Inc. has asked this Court to consider its notice of appeal as a motion for leave to appeal. In turn, Appellees Hahn Loeser & Parks, Andrew Krause, Lawrence E. Oscar, and Huntington National Bank have sought to dismiss both appeals. The Court finds no basis to permit an interlocutory appeal in these matters. Accordingly, both Case No. 5:14CV2578 and Case No. 5:14CV2586 are hereby DISMISSED.

Appellant Schwab seeks to have this Court review the bankruptcy court’s October 24, 2014 order that denied its motion to withdraw the reference and remand the matter to state court. In its order, the bankruptcy court examined whether it had jurisdiction under 28 U.S.C. § 1334(b) which grants district courts “original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” In resolving the issue, the bankruptcy court first noted that it “must determine whether it has at least original jurisdiction over Plaintiff’s claims for malpractice and breach of fiduciary duty because they are either civil proceedings that arise under, arise in or are related to a case under title 11.” The Court then reviewed the matter and concluded that “it profoundly believes that it has, at a minimum, related-to jurisdiction over this proceeding[.]”

Schwab requests that this Court review the bankruptcy court’s interlocutory order denying it motion, asserting that review is proper because whether the bankruptcy had subject matter jurisdiction is a controlling issue of law that would resolve the underlying bankruptcy proceedings.

28 U.S.C. § 158(a)(3) provides for appeal of interlocutory orders upon leave of the district court. “[I]nterlocutory appeals are very rarely permitted and generally only in extraordinary circumstances.” Bricker v. Official Committee of Administrative Claimants, 2007 WL 963290, at *4 (N.D.Ohio 2007) (citations omitted). “[D]oubts regarding appealability . . . [should be] resolved in favor of finding that the interlocutory order is not appealable.” United States v. Stone, 53 F.3d 141, 143-144 (6th Cir. 1995) (citation omitted).

28 U.S.C. § 158(a)(3) does not list any factors to determine whether an interlocutory appeal is appropriate. Courts, therefore, use 28 U.S.C. § 1292(b) by analogy. See In re Taranto, 365 B.R. 85, 87 (6th Cir. BAP 2007) (“[w]hile we are not constrained by the standards set forth in 28 U.S.C. § 1292(b) . . . they are instructive”). This statute governs interlocutory appeals to federal courts of appeals from district court orders and specifies factors to determine when interlocutory appeals are appropriate.

Section 1292(b) provides that:

When a district judge, in making in a civil action an order not otherwise appealable under this section, shall be of the opinion that such order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation, he shall so state in writing in such order.

In the instant matter, the bankruptcy court’s Order does not involve a controlling question of law. A legal issue can be deemed controlling “if it could materially affect the outcome of the case.” In re City of Memphis, 293 F.3d 345, 351 (6th Cir. 2002) . However, factual determinations are not appropriate for interlocutory review. “A legal question of the type envisioned in §1292(b) . . . generally does not include matters within the discretion of the trial court.” Id. “Interlocutory appeals are intended `for situations in which the court of appeals can rule on a pure, controlling question of law without having to delve beyond the surface of the record in order to determine the facts.'” Sanderson Farms, Inc. v. Gasbarro, 2007 WL 3402539, *3 (S.D.Ohio 2007), quoting In re Pilch, 2007 WL 1686308, at *4 (W.D.Mich. 2007) . “An appeal that presents a mixed question of law and fact does not meet this standard.” In re Pilch at *4. “Orders which are purely procedural or ministerial do not satisfy the interlocutory test.” Bricker 2007 WL 963290 at *4 (citing Lovelace v. Rockingham Mem. Hosp., 299 F.Supp.2d 617, 623 (W.D.Va. 2004) ).

In the instant matter, the bankruptcy court found that it had related-to jurisdiction. A proceeding is “related to” the bankruptcy if “`the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.'” In re Wolverine Radio Co., 930 F.2d 1132, 1142 (6th Cir.1991) (quoting In re Pacor, Inc., 743 F.2d 984, 994 (3d. Cir. 1984) ). “Related to” jurisdiction is the most expansive category, covering any proceeding that could have a conceivable effect on the administration of the estate. See id. at 1141. Because “related to” jurisdiction covers any proceeding that would fall under the other forms, Courts assessing § 1334(b) jurisdiction therefore need only determine whether the matter is “related to” the bankruptcy. Id.

In asserting that a controlling issue of law is presented, Schwab cites only to the general proposition that whether a court has subject matter jurisdiction presents a controlling question of law. In so doing, Schwab ignores the nature of the factual analysis required to determine related-to jurisdiction. “What will or will not be sufficiently related to a bankruptcy to warrant the exercise of subject matter jurisdiction is a matter that must be developed on a fact-specific, case-by-case basis.” In re W.R. Grace & Co., 591 F.3d 164, 174 n. 9 (3d Cir. 2009) . Such a fact-specific inquiry would require this Court to delve far beyond the surface of the litigation to review the bankruptcy order. At a minimum, the review would entail a mix of factual and legal questions and therefore does not properly support granting leave to file an interlocutory appeal.

Moreover, there is nothing in the record to suggest that there is some substantial ground for difference of opinion related to the bankruptcy court’s determination regarding jurisdiction. While Schwab contends that there is a circuit split on the issue presented, it has wholly failed to identify any circuit that has concluded differently than the result reached by the bankruptcy court. While the Sixth Circuit may not have addressed the precise issue, it appears from review that every circuit court that has addressed the matter has reached the same conclusion — namely that legal malpractice claims stemming from bankruptcy proceedings are core proceedings arising in bankruptcy. See, e.g., See, e.g., Frazin v. Haynes & Boone, L.L.P., 732 F.3d 313, 321-22 (5th Cir. 2013) ; Baker & Simpson, 613 F.3d 346, 350-51 (2d Cir. 2010); Geruschat v. Ernst & Young LLP, 505 F.3d 237, 260-61 (3d Cir. 2007) .

This Court also finds that resolution of an appeal would not materially advance the ultimate termination of this litigation. As a colleague in the Southern District of New York noted under similar facts:

At most, the resolution of this appeal would finally determine whether this action proceeds in the Bankruptcy Court or New York state court. If that were a sufficient concern to grant leave to appeal an interlocutory order, then every decision not to abstain and remand would be immediately appealable.

In re Extended Stay, Inc., 2012 WL 4914356, at *3 (emphasis sic). Accordingly, Schwab has not its burden to demonstrate that an interlocutory appeal is warranted under the facts and circumstances presented herein.

Both appeals filed by Schwab, 5:14CV2578; 5:14CV2586, are hereby DISMISSED.


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New Bankruptcy Opinion: IN RE NORTEL NETWORKS, INC. – Bankr. Court, D. Delaware, 2015

In re: NORTEL NETWORKS, INC., et al., Chapter 11, Debtors.

Case No. 09-10138 (KG), Jointly Administered.

United States Bankruptcy Court, D. Delaware.

May 21, 2015.


Re: Dkt. No. 9362

KEVIN GROSS, Bankruptcy Judge.

The Court is ruling on the motion of the “Ad Hoc Committee of Canadian Employees Terminated Pre-Petition” (the “Canadian Employees”) seeking leave to file proofs of claim after the expiration of the Bar Date (defined below) [1] . For the reasons set forth below, the Court will deny the Motion.


The Court has jurisdiction over this matter and the judicial authority to issue a final order pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b).


Except as otherwise noted, the relevant facts are not the subject of genuine dispute. It is the emphasis on and interpretation of the facts and the application of the law that are disputed. On January 14, 2009 (the “Petition Date”), Nortel Networks, Inc. and certain of its U.S.-based affiliates (collectively, the “U.S. Debtors”) filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code [2] (the “U.S. Proceedings”). Also on the Petition Date, certain of the U.S. Debtors’ Canada-based affiliates (the “Canadian Debtors”) initiated insolvency proceedings (the “Canadian Proceedings”) in the Ontario Superior Court of Justice (the “Canadian Court”) under Canada’s Companies’ Creditors Arrangement Act (the “CCAA”). As is required under the CCAA, at the outset of the Canadian Proceedings the Canadian Court appointed a monitor, Ernst & Young Inc. (the “Monitor”). [3] The Canadian Court also appointed Canadian law firm Koskie Minsky, LLP (“Koskie Minsky”) to represent the interests of approximately 20,000 former employees of the Canadian Debtors, including the Canadian Employees. Finally, on the Petition Date, certain of the U.S. Debtors’ affiliates based in Europe, the Middle East, and Africa (the “EMEA Debtors,” together with the U.S. Debtors and the Canadian Debtors, the “Nortel Debtors”) initiated insolvency proceedings in the United Kingdom.

Prior to the Petition Date, the U.S. Debtors, along with the Canadian and EMEA Debtors, operated as an integrated, global networking solutions and telecommunications enterprise (“Nortel”). Nortel was headquartered in Canada but also had significant operations in the U.S., Europe, the Middle East, and Africa.

On August 4, 2009, the Court entered an order (the “Bar Date Order”) establishing September 30, 2009 (the “Bar Date”), as the claims bar date in the U.S. Proceedings. [D.I. 1280]. The U.S. Debtors subsequently served notice of the Bar Date on all known creditors in compliance with the Bar Date Order, ¶ 11. Further, the U.S. Debtors published notice of the Bar Date in The Globe and Mail and The Wall Street Journal (national and global editions) in compliance with the Bar Date Order, ¶ 15 (the “Published Notice”). The Published Notice was substantially in the form attached as Exhibit C to the Bar Date Order and, as is relevant here, contained the following language:

Pursuant to the Bar Date Order, all persons and entities . . . who have a claim or a potential claim against the [U.S.] Debtors that arose prior to January 14, 2009, no matter who remote or contingent such right to payment or equitable remedy may be, MUST FILE A PROOF OF CLAIM so as to be actually received . . . on or before September 30, 2009. . . .

* * *

NOTE: These procedures for filing claims apply only to claims against the Debtors in these chapter 11 cases. Several of the [U.S.] Debtors affiliates are subject to creditor protection proceedings in other jurisdictions, including Canada. Separate proceedings and deadlines have been or will be established in these other jurisdictions for the filing of claims. . . . If you believe you have claims against [the Canadian Debtors], any such claims shall be filed in, and only in, the Canadian proceedings with the court appointed Monitor.

* * *

[D.I. 1280-3]. The Bar Date Order further provided that the Published Notice “is hereby approved and shall be deemed good, adequate and sufficient publication notice of the [Bar Date].” [4]

On August 14, 2009, the Canadian Court entered an order pursuant to Section 18.6 of the CCAA recognizing the Bar Date Order (the “Recognition Order”). Various parties related to the Canadian Proceedings, including Koskie Minsky, received notice of the Recognition Order. Further, the Bar Date was well publicized in connection with the Canadian Proceedings, including in publicly filed documents, on the Monitor’s website, in weekly news bulletins issued to former employees of the Canadian Debtors by Koskie Minsky, and through a LinkedIn group set up by former employees of the Canadian Debtors for purposes of information dissemination.

Soon after the Petition Date, the Nortel Debtors proceeded with an orderly and coordinated liquidation of Nortel assets. Of particular note, from 2009 to 2011, the Nortel Debtors executed a series of sales which both the Court and the Canadian Court approved in joint hearings. The sales have come to be known as the “Line of Business” and “Patent Portfolio” sales. The Line of Business and Patent Portfolio sales ultimately generated approximately $7.3 billion in net proceeds (the “Sale Proceeds”).

In the years after the Nortel Debtors consummated the Line of Business and Patent Portfolio sales, representatives for the U.S., Canadian, and EMEA insolvency estates were unable to agree on how to allocate the Sale Proceeds between each estate (the “Allocation Dispute”). Over several years, the parties to the Allocation Dispute engaged in protracted settlement discussions, including three failed mediations, the most recent of which ended in late January 2013. The Court, jointly with the Canadian Court, conducted a multi-week trial regarding the Allocation Dispute in May and June of 2014 and took the matter under advisement. On May 13, 2015, the Canadian Court and the Court issued their rulings on the Allocation Dispute, both adopting a pro rata methodology. Consequently, the plan confirmation process in the U.S. Proceedings has yet to begin in earnest.

The Canadian Employees are a self-styled “Ad Hoc Committee” of approximately 170 [5] former employees of the Canadian Debtors. Prior to the Petition Date, each of the Canadian Debtors terminated the employment of the Canadian Employees who received a termination letter (the “Termination Letters”) which, as is relevant here, proposed a severance payment in return for releases benefitting the Nortel Entities (the “Releases”). “HR Shared Services,” a Nortel entity based in North Carolina which handled certain human resources functions for all Nortel Entities prepared the Termination Letters. In order to receive the proposed severance payment, the terminated employee was required to counter-sign the Termination Letter, thus agreeing to the Releases, and return it to HR Shared Services. The Termination Letters provided, in part, that:

As used in this letter, the term “Corporation” shall mean Nortel Networks Corporation, [6] its subsidiaries and affiliates, their successors and assigns, and all of their past and present officers, directors, employees and agents (in their individual and representative capacities), in every case, individually and collectively.

E.g., Exhibit 21. Finally, under the terms of the Termination Letters “the Corporation,” as defined above, “shall . . . pay” the severance payment proposed therein.

The Termination Letters were signed on behalf of Nortel by or “for” the terminated employee’s supervisor. Some of these supervisors were based in the U.S. or employed by a U.S. Debtor entity. While certain of the Canadian Employees may have been employed by a U.S. Debtor entity at some point prior to the Petition Date, they concede that at the time of termination of their employment, the Canadian Employees were employed by Canadian Debtor entities only. None of the Canadian Employees received actual notice of the Bar Date, [7] nor did they timely file proofs of claim in the U.S. Proceedings.

In connection with the Canadian Proceedings, former employees of the Canadian Debtors, including the Canadian Employees, were repeatedly advised by Koskie Minsky not to file claims against the Canadian Debtors, but instead to wait for an employee-specific “process.” [8] Under this process the Monitor collected various documents related to the former employees’ claims, including, for example, the Termination Letters, and determined if each former employee held a claim against the Canadian Debtors. Only if the former employee disagreed with the Monitor’s determination as to his or her claim was he or she required to file a proof of claim against the Canadian Debtors. This employee-specific claims process in the Canadian Proceedings played out well after the Bar Date, into late 2012.

According to the Canadian Employees, sometime in early 2012 the Monitor identified approximately 300 former employees of the Canadian Debtors, of which the Canadian Employees are a subset, who received Termination Letters and thus, in the Monitor’s view, held a claim against the U.S. Debtors related to the severance payments proposed therein. Thereafter, in mid-2012, Koskie Minsky reached out to the U.S. Debtors in an effort to come to a tolling agreement with respect to the Canadian Employees’ potential claims against the U.S. Debtors. The U.S. Debtors did not respond. Ultimately, the Canadian Employees retained U.S. counsel and, on February 1, 2013, filed a motion seeking leave to file proofs of claim after the expiration of the Bar Date (the “Motion”) [D.I. 9362]. On February 12, 2013, the U.S. Debtors filed an objection to the Motion. Both the Canadian Employees and the U.S. Debtors subsequently filed briefs in support of their respective positions. [9] According to the Canadian Employees, their claims, if allowed in full, would total less than $18 million. The parties, i.e., the U.S. Debtors and the Canadian Employees, agreed to continue the hearing on the dispute until the Court ultimately scheduled the hearing which it held on March 26, 2015 (the “Hearing”).

At the Hearing three of the Canadian Employees testified. The Court further admitted several dozen documentary exhibits into evidence. In connection with the Motion, and prior to the Hearing, the U.S. Debtors attempted to take discovery from Koskie Minsky. According to the U.S. Debtors, Koskie Minsky refused to cooperate with such discovery. [10] The Canadian Employees did not seek to compel Koskie Minsky to cooperate with the U.S. Debtors’ discovery requests or attend the Hearing, nor did Koskie Minsky attend the Hearing or participate in this matter except to audit the hearing by telephone. At the conclusion of the Hearing, the Court took the Motion under advisement.

The following evidence is uncontroverted. The Canadian Employees:

1. were based in Canada; [11]

2. were paid in Canadian dollars; [12]

3. knew they were employed by a Canadian entity; [13]

4. expected to receive severance from the same entity that paid their paycheck; [14]

5. with one exception were never employed by a U.S. Debtor and never received a U.S. paycheck; [15]

6. did not think that the Termination Letter meant a U.S. Nortel entity would pay their severance; [16]

7. never thought until 2012 that they might have a claim against a U.S. Nortel entity; [17]

8. were told by Koskie Minsky at least as early as July 22, 2009, and numerous times thereafter, that “A U.S. claims process has been released;” [18] and

9. did not submit any evidence or testify that the Publication Notice was confusing in any way.

The testimony of the witnesses at the Hearing was consistent that they were aware in 2009 of the U.S. claims process but did not think they had a claim until 2012 when Koskie Minsky told them the possibility of a claim in the U.S. Proceedings existed.

The representative witnesses for the Canadian Employees were Ms. Paula Klein, Ms. Jennifer Longchamps and Mr. Michael A. Campbell. They testified forthrightly and consistently about the key facts:

1. At all times they were employed in Canada by Canadian Debtors. [19]

2. They knew in July 2009 about the claims process and Bar Date in the U.S. Proceedings. [20]

3. Their entitlement to severance and severance payments came from their Canadian employer. [21]

4. They reviewed their Termination Letter with attorneys, including Koskie Minsky. [22]

5. Until 2012, they did not think they had any rights from the U.S. Proceedings. [23]

6. Canadian Employees had full access to information from LinkedIn and the Canadian Monitor’s website. [24]

7. They were surprised when in 2012 Koskie Minsky told them they should seek the right to file claims in the U.S. Proceeding. [25] The Canadian Employees relied on their court-appointed lawyers, Koskie Minsky, to advise them on their rights.

8. It was clear in 2009 that in order to file a claim in the U.S. proceedings, Canadian Employees had to file a claim utilizing a Delaware lawyer. [26]

9. From the time the Canadian Employees were advised they may have a claim in the U.S. Proceedings and the time they sought relief was approximately six months. [27]

The testimony of Ms. Klein, Ms. Longchamps and Mr. Campbell makes a number of salient facts abundantly clear. First, the Canadian Employees (as they refer to themselves) were just that, Canadian not U.S. Employees. They had the benefit of counsel, the august law firm, Koskie Minsky, appointed by the Canadian Court to represent the approximately 20,000 Canadian Employees. The Canadian Employees knew about the U.S. claims proceedings and Bar Date by July 2009. Their lawyers told them to do nothing until a sudden pronouncement in 2012 that they should file claims in the U.S. Proceedings. Between July 2009 and 2012 nothing changed to cause the about face by Koskie Minsky and its advice to file claims in the U.S. proceedings. The 2009 Termination Letters did not just appear, Koskie Minsky had reviewed them in 2009. No ruling by either the U.S. Court or the Canadian Court put matters in a different light. The Court can only speculate on the reason for Koskie Minsky’s new stance.


The Motion sets forth two bases on which the Court should grant the Canadian Employees leave to file proofs of claim after the Bar Date. First, the Canadian Employees argue that they did not receive proper notice, either actual or constructive, of the Bar Date and thus are not bound thereby under basic principles of due process. Second, the Canadian Employees argue that even if they did receive proper notice of the Bar Date, the Court should grant them leave to file proofs of claim after the Bar Date based on a theory of excusable neglect. For the reasons set forth below, the Court finds that the Canadian Employees received proper notice of the Bar Date and their failure to file proofs of claim prior to the Bar Bate was not the result of excusable neglect.

A. Notice

The notice provisions of the Federal Rules of Bankruptcy Procedure strike a delicate balance between each potential claimant’s due process rights and “one of the principal purposes of bankruptcy law, to secure within a limited period the prompt and effectual administration and settlement of the debtor’s estate.” Chemetron Corp. v. Jones, 72 F.3d 341, 346 (3d Cir. 1995) (“Chemetron I”) . On the one hand, FED. R. BANKR. P. 3003(c)(3) empowers the Court to establish a claims bar date, thus setting an outside date by which creditors must file proofs of claim. See id.; In re Smith & Co., 413 B.R. 161, 165 (Bankr. D. Del. 2009) . [28] On the other hand, “[d]ue process requires notice [of the claims bar date] that is reasonably calculated to reach all interested parties, reasonably conveys all the required information, and permits a reasonable time for a response.” Chemetron I, 72 F.3d at 346 (quotation omitted). A creditor who does not receive proper notice of the claims bar date is not bound thereby. See City of New York v. New York, N.H. & H.R. Co., 344 U.S. 293, 296 (1953) . For purposes of notice, bankruptcy law differentiates between “known” and “unknown” creditors. Chemetron I, 72 F.3d at 346 . Known creditors are entitled to actual notice of the applicable claims bar date. Id. As for unknown creditors, notice by publication is generally sufficient. Id.

The law regarding whether a creditor is known or unknown is well settled and discussed at length by the United States Court of Appeals for the Third Circuit in Chemetron I. A known creditor “is one whose identity is either known or `reasonably ascertainable by the debtor.'” Chemetron I, 72 F.3d at 346 (quoting Tulsa Prof’l Collection Serv., Inc. v. Pope, 485 U.S. 478, 490 (1988) ). An unknown creditor “is one whose `interests are either conjectural or future or, although they could be discovered upon investigation, do not in due course of business come to knowledge [of the debtor].'” Id. (quoting Mullane v. Central Hanover Bank & Trust, Co., 339 U.S. 306, 317 (1950) ). The Third Circuit further explained the “reasonably ascertainable” standard as follows:

A creditor’s identity is “reasonably ascertainable” if that creditor can be identified through reasonably diligent efforts. . . . Reasonable diligence does not require impracticable and extended searches . . . in the name of due process. . . . A debtor does not have a duty to search out each conceivable or possible creditor and urge that person or entity to make a claim against it. . . . The requisite search instead focuses on the debtor’s own books and records. Efforts beyond a careful examination of these documents are generally not required . . .

Id. at 346-47. (internal quotation marks and citations omitted). Ultimately, a debtor “need not be omnipotent or clairvoyant,” In re New Century TRS Holdings, Inc., 465 B.R. 38, 46 (Bankr. D. Del. 2012), or conduct “a vast, open-ended investigation,” Chemetron I, 72 F.3d at 346 . The focus is instead on whether the debtor did what was “reasonable under the circumstances to provide notice to ascertainable creditors.” New Century, 465 B.R. at 46 .

The Canadian Employees argue that they are creditors whose identities were reasonably ascertainable by the U.S. Debtors and were thus known creditors entitled to actual notice of the Bar Date. Since the U.S. Debtors did not provide actual notice of the Bar Date to the Canadian Employees, the Canadian Employees argue that they should not be bound by the Bar Date based on principles of due process. In short, to the extent the Canadian Employees are creditors of the U.S. Debtors at all, a point which is far from undisputed, the Court is not convinced that they were creditors whose identities were reasonably ascertainable by the U.S. Debtors at the time the Court entered the Bar Date Order. The Canadian Employees represent approximately one-half of a group of 300 former employees of the Canadian Debtors who received Termination Letters pre-petition. There are approximately 20,000 former employees of the Canadian Debtors participating in the Canadian Proceedings. The Canadian Employees’ only tie to the United States, which is tenuous at best, is that the Termination Letters were sent from the centralized human resources office for all Nortel Entities, based in the U.S. An even weaker and more illusory connection to the United States is that some of the Canadian Employees had U.S.-based supervisors. Identifying a tiny subset of former employees of a foreign, non-debtor affiliate who received a certain form termination letter to which the U.S. Debtors were not a signatory goes well beyond the purview of a reasonably diligent search. Accordingly, the Court finds that the Canadian Employees were not known creditors and were not entitled to actual notice of the Bar Date. There is no evidence that the U.S. Debtors knew about the self-serving language in the Termination Letters which includes reference to “its subsidiaries and affiliates.” Exhibit 21, supra. More persuasive that the Canadian Employees were not known creditors entitled to actual notice is the fact that the Canadian Employees themselves did not “know” or consider themselves to be creditors of the U.S. Debtors.

The Canadian Employees further argue that even if they were not known creditors entitled to actual notice of the Bar Date, the U.S. Debtors nevertheless failed to provide them with proper constructive notice of the Bar Date as unknown creditors. It is well settled that constructive notice of the claims bar date by publication, while less direct than actual notice, generally satisfies the requirements of due process for unknown creditors. Chemetron I, 72 F.3d at 348 ; New Century, 465 B.R. at 48 . The published notice must be “reasonably calculated, under the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” Chemetron I, 72 F.3d at 348 (citing Mullane, 339 U.S. at 314 ). “The proper inquiry in evaluating notice is whether a party acted reasonably in selecting means likely to inform persons affected, not whether each person actually received notice.” New Century, 465 B.R. at 48-49 .

The Canadian Employees’ argument that the Published Notice was insufficient for purposes of constructive notice is based not on the means the U.S. Debtors selected to convey the Published Notice, but on their assertion that the wording of the Published Notice itself was confusing or misleading to those creditors holding claims against both the U.S. Debtors and Canadian Debtors. According to the Canadian Employees, when creditors holding claims against both the U.S. Debtors and Canadian Debtors read the phrase “[i]f you believe you have claims against [the Canadian Debtors], any such claims shall be filed in, and only in, the Canadian proceedings . . .” they were either confused as to whether to file a claim in the U.S. Proceedings or misled into believing that they were only allowed to file a claim in the Canadian Proceedings despite holding a claim against the U.S. Debtors as well. The Canadian Employees argue that such confusion was reasonable given the complexity of the Published Notice and the Nortel insolvency proceedings generally. The Court rejects this argument for a number of reasons.

First, the Court is not convinced that a reasonable, objective reader would find the Published Notice to be confusing or misleading. The portion of the Published Notice cited by the Canadian Employees specifically references claims against the Canadian Debtors and states that “such claims” should be filed only in the Canadian Proceedings. That particular passage makes no reference to claims against the U.S. Debtors. In fact, the portions of the Published Notice not cited by the Canadian Employees speak at length about how to proceed with claims against the U.S. Debtors. Further, the Published Notice was vetted by the Court and ultimately approved by the Court as part of the Bar Date Order and thereafter given recognition by the Canadian Court. The Court is not persuaded that it is necessary to revisit the sufficiency of the Published Notice years later based on the subjective views of a relatively small number of potential claimants. Finally, it appears from the evidence presented at the Hearing, and discussed above, that many, if not most, of the Canadian Employees had actual knowledge of the Bar Date, which would suggest that the constructive notice procedures set forth in the Bar Date Order worked as intended. It is also highly significant that the Koskie Minsky firm represented the Canadian Employees and advised them of the U.S. Proceedings and Bar Date.

The Canadian Employees were unknown creditors. The Court is satisfied now, as it was when it entered the Bar Date Order more than five years ago, that the Published Notice satisfies the requirements of due process with respect to unknown creditors. The Canadian Employees had all the necessary information at their fingertips, i.e. the Termination Letters, to determine if they held claims against the U.S. Debtors well prior to the Bar Date. The Canadian Employees also had thorough and regular discussions among themselves, including discussions about filing claims in the U.S. Proceedings. To the extent the Canadian Employees do in fact hold claims against the U.S. Debtors, they either did not realize they held such claims prior to the Bar Date for the same reason they were unknown creditors, or simply chose not to pursue those claims prior to the Bar Date. Accordingly, the Court rejects the Canadian Employees’ notice-related arguments.

B. Excusable Neglect

“Bankruptcy Rule 9006(b)(1) empowers a bankruptcy court to permit a creditor to file a late claim if the movant’s failure to comply with an earlier deadline `was the result of excusable neglect.'” Chemetron I, 72 F.3d at 349 . “The determination whether a party’s neglect of a bar date is `excusable’ is essentially an equitable one, in which courts are to take into account all relevant circumstances surrounding a party’s failure to file.” Id. (citing Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P’ship, 507 U.S. 380, 395 (1993) ). Relevant circumstances, emphasized by the Supreme Court in Pioneer, include: “[1] the danger of prejudice to the debtor, [2] the length of the delay and its potential impact on judicial proceedings, [3] the reason for the delay, including whether it was within the reasonable control of the movant, and [4] whether the movant acted in good faith.” Pioneer, 507 U.S. at 395 . “The burden of proving excusable neglect lies with the late-claimant.” Jones v. Chemetron Corp., 212 F.3d 199, 205 (3d Cir. 2000) (“Chemetron II”) .

With respect to prejudice to the U.S. Debtors, the Canadian Employees correctly point out that the plan confirmation process has essentially yet to commence in the U.S. Proceedings and the total potential, aggregate amount of their claims, $18 million, is small relative to the $7.3 billion Sale Proceeds. But courts consider a number of factors in connection with the Pioneer prejudice analysis including, as is relevant here, “whether allowing the claim would open the floodgates to other similar claims.” Manus Corp. v. NRG Energy, Inc. (In re O’Brien Envtl. Energy, Inc.), 188 F.3d 116, 126 (3d Cir. 1999) ; New Century, 465 B.R. at 51 ; In re U.S. Airways, Inc., No. 04-13819, 2005 WL 3676186, at *7-8 (Bankr. E.D. Va. Nov. 21, 2005) .

The reasons the Canadian Employees offer for failing to timely file proofs of claim in the U.S. Proceedings are essentially that: (1) they were confused by the multi-jurisdictional nature of the Nortel insolvency proceedings; (2) the Published Notice was confusing or misleading, as discussed above; and (3) Koskie Minsky advised them repeatedly to wait for an employee-specific claims process. Further, the basis for the Canadian Employees’ underlying alleged claims is the broad definition of the word “Corporation” in the Termination Letters, to which the U.S. Debtors were not signatories. Some or all of these circumstances could apply to a great number of other potential claimants, including many of the other 20,000 former employees of the Canadian Debtors. The Court is persuaded that the risk of opening the floodgates to similar claims is very real in this instance. Accordingly, the Court finds that the danger of significant prejudice to the U.S. Debtors weighs against granting the Motion.

As for the length of the delay and its potential impact on the U.S. Proceedings, the Canadian Employees assert that they only learned of their potential claims against the U.S. Debtors in mid-2012 and thereafter proceeded diligently first to attempt to reach a consensual resolution with the U.S. Debtors and then to retain U.S. counsel to file the Motion. The Canadian Employees filed the Motion nearly three and one-half years after the Bar Date. Further, by their own admission, the Canadian Employees waited approximately six months to file the Motion after “discovering” their potential claims against the U.S. Debtors. The six month delay in and of itself constitutes inexcusable neglect.

It is true that allowing the Canadian Employees to file untimely proofs of claim will not disrupt the U.S. Debtors’ plan confirmation process, which has yet to begin. But, outside of the plan confirmation process, the U.S. Proceedings have advanced far in the years since the Bar Date. To effectively re-open the claims process in the U.S. Proceedings to any potential claimant who would state that they felt confused or misled by the Published Notice would do great violence to the U.S. Debtors’ ability to efficiently bring the U.S. Proceedings to their end. Moreover, “although it is proper to consider the delay’s effect on the judicial proceedings, Pioneer teaches that we should consider the length of the delay in absolute terms. . . .” O’Brien, 188 F.3d at 130 . Therefore, the Court finds that the length of the delay weighs heavily against granting the Motion.

Regarding the Canadian Employees’ asserted reasons for the delay, set forth above, first, the Court is not convinced that under the circumstances presented here, a reasonable, objective actor would fail to grasp that there is a separate U.S. insolvency proceeding and that there was a separate claims bar date applicable only to that proceeding. Further, while it appears to the Court that Koskie Minsky’s instructions with respect to a separate employee-specific claims process were applicable only to the Canadian Proceedings, to the extent Koskie Minsky acted negligently, that negligence is imputed on the Canadian Employees for purposes of the excusable neglect analysis. See Pioneer, 507 U.S. at 397 (“[T]he proper focus is upon whether the neglect of respondents and their counsel was excusable.” (emphasis in original)).

The Canadian Employees had all the necessary information to discover any potential claims they had against the U.S. Debtors well before the Bar Date. They failed to act prior to the Bar Date. Simple “[i]gnorance of one’s own claim does not constitute excusable neglect.” Chemetron II, 212 F.3d at 205 . The Court is not persuaded that any of the other justifications offered by the Canadian Employees for their untimely action support a finding of excusable neglect. In 2009, the Canadian Employees and their lawyers had all of the facts needed to decide whether to file a claim in the U.S. Proceedings. The filing of the Motion was a change of mind, not circumstances. This is amply demonstrated by Koskie Minsky’s answer in 2009 prior to the expiration of the Bar Date to the following question in a document disseminated to the Canadian Employees:

Q. Do I need to submit separate claims for my pension and retiree benefits (medical, LT care, life insurance, etc.)? Also do I need to submit both in Canadian and US Courts?

A. It is likely that you will only have to submit one claim for the loss of all benefits earned as a result of employment in Canada. You will need to urgently file a separate claim with the US Court for the loss of any benefits earned as a result of employment in the USA.

Exhibit 18 at page 16 (No. 102).

The analysis with respect to the first three Pioneer factors is sufficient alone to support the Court’s denial of the Motion, thus making a full analysis of the Canadian Employees’ good faith unnecessary. The U.S. Debtors argue that the Canadian Employees and their U.S. counsel are merely pawns and that certain Canadian creditor constituencies engineered the filing of the Motion as a way to advance their arguments with respect to the Allocation Dispute. In support of their argument, the U.S. Debtors cite both the timing of the filing of the Motion, just days after the final failed Allocation Dispute mediation, and the failure of Koskie Minsky to cooperate with discovery or attend the Hearing. Koskie Minsky’s failure to cooperate with discovery or participate in this matter in any meaningful way was certainly conspicuous. But without evidence the Court cannot make any findings. In any event, based on the first three Pioneer factors, the Court rejects the Canadian Employees’ excusable neglect argument.

C. Evidentiary Matters

At the close of the Hearing, the U.S. Debtors sought to introduce deposition designations for party-witnesses who testified live at the Hearing (the “Deposition Designations”) into the evidentiary record. The admissibility of the Deposition Designations was a matter of some dispute both at the Hearing and in letter briefs filed by the U.S. Debtors and Canadian Employees on the day after the Hearing. The Court has determined to permit the designations pursuant to Fed. R. Civ. P. 32(a)(3). See, e.g., Fenstermacher v. Phila. Nat’l Bank, 493 F.2d 333, 338 (3rd Cir. 1974); Fey v. Walston & Co., 493 F.2d. 1036, 1046 (7th Cir. 1974) .

The U.S. Debtors also requested that the Court draw an adverse inference against the Canadian Employees due to Koskie Minsky’s refusal to cooperate with discovery in connection with the Motion or attend the Hearing. The Court has already commented that Koskie Minsky’s actions in connection with the Motion were troublesome because Koskie Minsky could have shed light on the issues. But since an adverse inference is not necessary to the U.S. Debtors’ success in this matter, the Court declines to formally make such a finding.


For the reasons set forth above, the Court finds that the Published Notice met the requirements of due process with respect to the Canadian Employees and their failure to timely file proofs of claim in the U.S. Proceedings was not the result of excusable neglect. Accordingly, the Court will deny the Motion. The Court will enter a separate order.

[1] See Motion of the Ad Hoc Committee of Canadian Employees terminated Pre-Petition for Entry of an Order Allowing Late Filed Claims, dated February 1, 2013, D.I. 9362 (the “Motion”).

[2] 11 U.S.C. § 101 et seq.

[3] As is relevant here, the Monitor acts as a fiduciary to the Canadian estate in a role analogous to that of a trustee appointed pursuant to the Bankruptcy Code. Among other duties, the Monitor is responsible for communicating with creditors regarding the claims process. The Monitor maintains a website for purposes of information dissemination.

[4] For reasons not relevant here, the Court entered a separate bar date order with respect to U.S. Debtor entity Nortel Networks (CALA), Inc. establishing a claims bar date of January 25, 2010 (the “NN CALA Bar Date”). [D.I. 2059]. The U.S. Debtors served and published notice of the NN CALA Bar Date in compliance with the Court’s order. The fact that the NN CALA Bar Date was approximately four months later than the Bar Date is immaterial and any reference to the “Bar Date” in this memorandum shall encompass both the Bar Date and the NN CALA Bar Date.

[5] The U.S. Debtors stated in argument that the Canadian Employees number 156 while counsel to the Canadian Employees indicated that their number is 170. The difference is immaterial to the issue at hand.

[6] Nortel Networks Corporation is a Canadian corporation and the ultimate corporate parent of Nortel entities spread across the globe, including the U.S. Debtors.

[7] The U.S. Debtors allege that as many as eight of the Canadian Employees received actual notice of the Bar Date. For the reasons set forth below, whether or not the Canadian Employees received actual notice of the Bar Date is irrelevant. Accordingly, for purposes of this memorandum, the Court presumes that none of the Canadian Employees received actual notice of the Bar Date.

[8] The former employees of the Canadian Debtors were exempt from the general claims bar date applicable to the Canadian Proceedings.

[9] Certain of the U.S. Debtors’ creditor constituencies joined the U.S. Debtors’ objection and subsequent supplemental brief. The creditors’ arguments are essentially duplicative of the U.S. Debtors’ arguments and so are not separately addressed below.

[10] Koskie Minsky, a Canadian law firm, is beyond the Court’s jurisdiction for purposes of issuing a subpoena or compelling production in response to the U.S. Debtors’ discovery requests.

[11] Blais Dep. 32:10-14; Buchanan Dep. 27:21-28:4; Law Dep. 18:7-9; Klein Dep. 136:24-25; Longchamps Dep. 23:16-18; Roddick Dep. 30:13-22; Trowbridge Dep. 17:8-11

[12] Klein Dep. 136:24-25; Law Dep. 99:13-15; Roddick Dep. 31:10-11; Ruprecht Dep. 31:2-5

[13] Blais Dep. 33:23-25; Buchanan Dep. 26:19-23; Campbell Dep. 30:13-31:3; Longchamps Dep. 32:23-33:13

[14] Buchanan Dep. 35:22-36:6; Leung Dep. 66:3-7; Longchamps Dep. 111:9-21; Piggott Dep. 51:11-52:7; Ruprecht Dep. 43:2-11; Trowbridge Dep. 37:5-11

[15] Blais Dep. 24:23-25, 101:17-20; Buchanan Dep. 128:10-14; Campbell Dep. 31-25-32:4; Law Dep. 113:22-114:5; Longchamps Dep. 91:4-6; Piggott Dep. 35:11-14; 108:15-18; Roddick Dep. 70:15-22; Ruprecht Dep. 144:6-9; Trowbridge Dep. 78:21-79:3

[16] Blais, Dep. 36:2-6

[17] Trowbridge Dep., 97:14-25

[18] Klein Dep. 132:16-21, Exhibits 43, 44 & 45

[19] Hearing Tr.; (Klein) 82:5-10, 85:7-11, 114:114-115:24; (Longchamps) 171:12-19; (Campbell) 233:1-15, 234:14-235:7.

[20] Hearing Tr., (Klein) 126:13-24; (Longchamps) 197:14-24; (Campbell) 221:8-20. See also Trial Ex. 14.

[21] Hearing Tr., (Klein) 114:14-115:24.

[22] Hearing Tr., (Klein) 116:10-118:24; (Longchamps) 181:22-182:6.

[23] Hearing Tr., (Klein) 132:9-133:18; (Longchamps) 141:1-10; (Campbell) 225:6-226:8.

[24] Hearing Tr., (Klein) 112:1-20, 126:23-127:6; (Longchamps) 178:13-179:4; (Campbell) 241:3-10; Trial Exs. 5-13, 17, 22.

[25] Hearing Tr., (Klein) 133:14-20; 137:18-21; (Longchamps) 195:18-23.

[26] Hearing Tr., (Klein) 135:1-24; (Longchamps) Exhibit 13.

[27] Hearing Tr., (Campbell) 260:21-261:6.

[28] In Chapter 11, only creditors holding claims which are not properly listed in the debtor’s schedule of liabilities or which are scheduled as disputed, contingent, or unliquidated must file a proofs of claim prior to the claims bar date in order to preserve their claims. FED. R. BANKR. P. 3003(b)(1).

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New Bankruptcy Opinion: IN RE MOTORS LIQUIDATION COMPANY – Dist. Court, SD New York, 2015

IN RE: MOTORS LIQUIDATION COMPANY, f/k/a General Motors Corporation, Debtors.

Nos. 15-CV-772 (JMF), 15-CV-776 (JMF)

United States District Court, S.D. New York.

May 18, 2015.


JESSE M. FURMAN, District Judge.

In each of these cases, Plaintiffs in ignition-switch-defect-related lawsuits against General Motors LLC (“New GM”) move for leave to appeal, pursuant to Title 28, United States Code, Section 158(a)(3), from interlocutory orders of the United States Bankruptcy Court for the Southern District of New York — specifically, from orders staying their cases pending adjudication of New GM’s motion to enforce a Sale Order and Injunction entered July 5, 2009. Upon review of the parties’ submissions (15-CV-772 Docket Nos. 3 & 4; 15-CV-776 Docket Nos. 2 & 3), the motions are denied, substantially for the reasons set forth in New GM’s consolidated objection to the motions. (15-CV-772 Docket No. 4; 15-CV-776 Docket No. 3).

Indeed, if anything, the case for granting leave to appeal is considerably weaker today than it was when New GM filed its consolidated objections, for two reasons. First, on April 15, 2015, the Bankruptcy Court (Gerber, B.J.) ruled on New GM’s motion to enforce. (09-BR-50026 (Bankr. S.D.N.Y.) Docket No. 13109 (“Motion To Enforce Decision”)). Final judgment should be entered shortly, and Lead Counsel in the multi-district litigation (“MDL”) relating to the ignition-switch defects have indicated their intention to appeal. (See 14-MD-2543 Docket No. 909). Second, on April 24, 2015, this Court — which is presiding over the ignition-switch MDL — entered an Order indicating that, with one limited exception not relevant here, “any individual economic loss action” that is not otherwise dismissed (a group that includes the actions of Plaintiffs in these appeals) “shall be stayed” in light of the Consolidated Class Action Complaints that have been filed in the MDL and the anticipated amended Consolidated Class Action Complaints to be filed shortly. (Order No. 50 (14-MD-2543 Docket No. 875) ¶ 11). [1]

In light of those developments, allowing Plaintiffs to appeal would not serve to “avoid protracted and expensive litigation.” Enron Corp. v. Avenue Special Situations Fund II, L.P. (In re Enron Corp.), No. 05-CV-1105 (SAS), 2006 WL 2548592, at *3 (S.D.N.Y. Sept. 5, 2006) (internal quotation marks omitted). Instead, it would serve only to undermine orderly adjudication of the many cases in the MDL and final resolution of the issues addressed in the Bankruptcy Court’s April 15, 2015 ruling. The bottom line is that Plaintiffs will have ample opportunity to argue (in whatever forum is appropriate) that their claims are not subject to New GM’s motion to enforce and, if they are correct, to pursue their claims in the MDL; there is no reason to allow them to pursue those arguments separately from the other plaintiffs in actions before the Bankruptcy Court or in the MDL. Accordingly, Plaintiffs cannot come close to demonstrating “the existence of exceptional circumstances to overcome the general aversion to piecemeal litigation and to justify a departure from the basic policy of postponing appellate review until after the entry of final judgment.” In re Enron Corp., 2006 WL 2548592, at *3 (footnotes and internal quotation marks omitted).

For the reasons stated above, Plaintiffs’ motions for leave to appeal are DENIED. The Clerk of Court is directed to terminate 15-CV-772 Docket No. 3 and 15-CV-776 Docket No. 2 and to close both cases.


[1] The Court entered the Order in response to a motion filed by counsel to Plaintiffs in these appeals and after giving him an opportunity to be heard about the contents of the Order. (See 14-MD-2543 Docket No. 809; see also 14-MD-2543 Docket No. 686, at 62-67). Notably, counsel did not object to the Order — and, in fact, joined in submitting a proposed order prior to the Order’s entry that included the same provision staying Plaintiffs’ actions. (14-MD-2543 Docket No. 809, Ex. A at 5-6).

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New Bankruptcy Opinion: IN RE JEVIC HOLDING CORP. – Court of Appeals, 3rd Circuit, 2015

In re: JEVIC HOLDING CORP., et al., Debtors.

OFFICIAL COMMITTEE OF UNSECURED CREDITORS on behalf of the bankruptcy estates of Jevic Holding Corp., et al.,



No. 14-1465.

United States Court of Appeals, Third Circuit.

Argued January 14, 2015.
Filed: May 21, 2015.

Jack A. Raisner, Esq. (Argued), Rene S. Roupinian, Esq., Outten & Golden, 3 Park Avenue, 29th Floor, New York, NY 10016, Christopher D. Loizides, Esq., Loizides, P.A., 1225 King Street, Suite 800, Wilmington, DE 19801, Attorneys for Appellants.

Domenic E. Pacitti, Esq., Linda Richenderfer, Esq., Klehr Harrison Harvey Branzburg, 919 Market Street, Suite 1000, Wilmington, DE 19801, Attorneys for Appellee Debtors.

Robert J. Feinstein, Esq., Pachulski Stang Ziehl & Jones, 780 Third Avenue, 36th Floor, New York, NY 10017, James E. O’Neill III, Esq., Pachulski Stang Ziehl & Jones, 919 North Market Street, P.O. Box 8705, 17th Floor, Wilmington, DE 19801, Attorneys for Appellee Official Committee of, Unsecured Creditors,

Christopher Landau, Esq. (Argued), James P. Gillespie, Esq., Jason R. Parish, Esq., Kirkland & Ellis, 655 15th Street, N.W., Suite 1200, Washington, DC 20005, Danielle R. Sassoon, Esq., Kirkland & Ellis, 601 Lexington Avenue, New York, NY 10022, Curtis S. Miller, Esq., Morris, Nichols, Arsht & Tunnell, 1201 North Market Street, P.O. Box 1347, Wilmington, DE 19899, Attorneys for Appellee Sun Capital Partners IV, LP, Sun Capital Partners, Inc., Sun Capital Partners, Management IV, LLC.

Tyler P. Brown, Esq., Shannon E. Daily, Esq., Hunton & Williams, 951 East Byrd Street, 13th Floor, East Tower, Riverfront Plaza, Richmond, VA 23219. Richard P. Norton, Esq., Hunton & Williams, 200 Park Avenue, 52nd Floor, New York, NY 10166, Attorneys for Appellee CIT Group Business Credit Inc.

Ramona D. Elliott, Esq., P. Matthew Sutko, Esq., Wendy L. Cox, Esq. (Argued), United States Department of Justice, 441 G Street, N.W., Suite 6150, Washington, DC 20530, Attorneys for Amicus Curiae.

Before: HARDIMAN, SCIRICA and BARRY, Circuit Judges.


HARDIMAN, Circuit Judge.

This appeal raises a novel question of bankruptcy law: may a case arising under Chapter 11 ever be resolved in a “structured dismissal” that deviates from the Bankruptcy Code’s priority system? We hold that, in a rare case, it may.



Jevic Transportation, Inc. was a trucking company headquartered in New Jersey. In 2006, after Jevic’s business began to decline, a subsidiary of the private equity firm Sun Capital Partners acquired the company in a leveraged buyout financed by a group of lenders led by CIT Group. The buyout entailed the extension of an $85 million revolving credit facility by CIT to Jevic, which Jevic could access as long as it maintained at least $5 million in assets and collateral. The company continued to struggle in the two years that followed, however, and had to reach a forbearance agreement with CIT—which included a $2 million guarantee by Sun—to prevent CIT from foreclosing on the assets securing the loans. By May 2008, with the company’s performance stagnant and the expiration of the forbearance agreement looming, Jevic’s board of directors authorized a bankruptcy filing. The company ceased substantially all of its operations, and its employees received notice of their impending terminations on May 19, 2008.

The next day, Jevic filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the District of Delaware. At that point, Jevic owed about $53 million to its first-priority senior secured creditors (CIT and Sun) and over $20 million to its tax and general unsecured creditors. In June 2008, an Official Committee of Unsecured Creditors (Committee) was appointed to represent the unsecured creditors.

This appeal stems from two lawsuits that were filed in the Bankruptcy Court during those proceedings. First, a group of Jevic’s terminated truck drivers (Drivers) filed a class action against Jevic and Sun alleging violations of federal and state Worker Adjustment and Retraining Notification (WARN) Acts, under which Jevic was required to provide 60 days’ written notice to its employees before laying them off. See 29 U.S.C. § 2102; N.J. Stat. Ann. § 34:21-2. Meanwhile, the Committee brought a fraudulent conveyance action against CIT and Sun on the estate’s behalf, alleging that Sun, with CIT’s assistance, “acquired Jevic with virtually none of its own money based on baseless projections of almost immediate growth and increasing profitability.” App. 770 (Second Am. Compl. ¶ 1). The Committee claimed that the ill-advised leveraged buyout had hastened Jevic’s bankruptcy by saddling it with debts that it couldn’t service and described Jevic’s demise as “the foreseeable end of a reckless course of action in which Sun and CIT bore no risk but all other constituents did.” App. 794 (Second Am. Compl. ¶ 128).

Almost three years after the Committee sued CIT and Sun for fraudulent conveyance, the Bankruptcy Court granted in part and denied in part CIT’s motion to dismiss the case. The Court held that the Committee had adequately pleaded claims of fraudulent transfer and preferential transfer under 11 U.S.C. §§ 548 and 547. Noting the “great potential for abuse” in leveraged buyouts, the Court concluded that the Committee had sufficiently alleged that CIT had played a critical role in facilitating a series of transactions that recklessly reduced Jevic’s equity, increased its debt, and shifted the risk of loss to its other creditors. In re Jevic Holding Corp., 2011 WL 4345204, at *10 (Bankr. D. Del. Sept. 15, 2011) (quoting Moody v. Sec. Pac. Bus. Credit, Inc., 971 F.2d 1056, 1073 (3d Cir. 1992) ). The Court dismissed without prejudice the Committee’s claims for fraudulent transfer under 11 U.S.C. § 544, for equitable subordination of CIT’s claims against the estate, and for aiding and abetting Jevic’s officers and directors in breaching their fiduciary duties, because the Committee’s allegations in support of these claims were too sparse and vague.

In March 2012, representatives of all the major players—the Committee, CIT, Sun, the Drivers, and what was left of Jevic—convened to negotiate a settlement of the Committee’s fraudulent conveyance suit. By that time, Jevic’s only remaining assets were $1.7 million in cash (which was subject to Sun’s lien) and the action against CIT and Sun. All of Jevic’s tangible assets had been liquidated to repay the lender group led by CIT. According to testimony in the Bankruptcy Court, the Committee determined that a settlement ensuring “a modest distribution to unsecured creditors” was desirable in light of “the risk and the [re]wards of litigation, including the prospect of waiting for perhaps many years before a litigation against Sun and CIT could be resolved” and the lack of estate funds sufficient to finance that litigation. App. 1275.

In the end, the Committee, Jevic, CIT, and Sun reached a settlement agreement that accomplished four things. First, those parties would exchange releases of their claims against each other and the fraudulent conveyance action would be dismissed with prejudice. Second, CIT would pay $2 million into an account earmarked to pay Jevic’s and the Committee’s legal fees and other administrative expenses. Third, Sun would assign its lien on Jevic’s remaining $1.7 million to a trust, which would pay tax and administrative creditors first and then the general unsecured creditors on a pro rata basis. [1] Lastly, Jevic’s Chapter 11 case would be dismissed. The parties’ settlement thus contemplated a structured dismissal, a disposition that winds up the bankruptcy with certain conditions attached instead of simply dismissing the case and restoring the status quo ante. See In re Strategic Labor, Inc., 467 B.R. 11, 17 n.10 (Bankr. D. Mass. 2012) (“Unlike the old-fashioned one sentence dismissal orders—’this case is hereby dismissed’—structured dismissal orders often include some or all of the following additional provisions: `releases (some more limited than others), protocols for reconciling and paying claims, “gifting” of funds to unsecured creditors[, etc.]'” (citation omitted)).

There was just one problem with the settlement: it left out the Drivers, even though they had an uncontested WARN Act claim against Jevic. [2] The Drivers never got the chance to present a damages case in the Bankruptcy Court, but they estimate their claim to have been worth $12,400,000, of which $8,300,000 was a priority wage claim under 11 U.S.C. § 507(a)(4). See Drivers’ Br. 6 & n.3; In re Powermate Holding Corp., 394 B.R. 765, 773 (Bankr. D. Del. 2008) (“Courts have consistently held that WARN Act damages are within `the nature of wages’ for which § 507(a)(4) provides.”). The record is not explicit as to why the settlement did not provide for any payment to the Drivers even though they held claims of higher priority than the tax and trade creditors’ claims. [3] It seems that the Drivers and the other parties were unable to agree on a settlement of the WARN Act claim, and Sun was unwilling to pay the Drivers as long as the WARN Act lawsuit continued because Sun was a defendant in those proceedings and did not want to fund litigation against itself. [4] The settling parties also accept the Drivers’ contention that it was “the paramount interest of the Committee to negotiate a deal under which the [Drivers] were excluded” because a settlement that paid the Drivers’ priority claim would have left the Committee’s constituents with nothing. Appellees’ Br. 26 (quoting Drivers’ Br. 28).


The Drivers and the United States Trustee objected to the proposed settlement and dismissal mainly because it distributed property of the estate to creditors of lower priority than the Drivers under § 507 of the Bankruptcy Code. The Trustee also objected on the ground that the Code does not permit structured dismissals, while the Drivers further argued that the Committee breached its fiduciary duty to the estate by “agreeing to a settlement that, effectively, freezes out the [Drivers].” App. 30-31 (Bankr. Op. 8-9). The Bankruptcy Court rejected these objections in an oral opinion approving the proposed settlement and dismissal.

The Bankruptcy Court began by recognizing the absence of any “provision in the code for distribution and dismissal contemplated by the settlement motion,” but it noted that similar relief has been granted by other courts. App. 31 (Bankr. Op. 9). Summarizing its assessment, the Court found that “the dire circumstances that are present in this case warrant the relief requested here by the Debtor, the Committee and the secured lenders.” Id. The Court went on to make findings establishing those dire circumstances. It found that there was “no realistic prospect” of a meaningful distribution to anyone but the secured creditors unless the settlement were approved because the traditional routes out of Chapter 11 bankruptcy were impracticable. App. 32 (Bankr. Op. 10). First, there was “no prospect” of a confirmable Chapter 11 plan of reorganization or liquidation being filed. Id. Second, conversion to liquidation under Chapter 7 of the Bankruptcy Code would have been unavailing for any party because a Chapter 7 trustee would not have had sufficient funds “to operate, investigate or litigate” (since all the cash left in the estate was encumbered) and the secured creditors had “stated unequivocally and credibly that they would not do this deal in a Chapter 7.” Id.

The Bankruptcy Court then rejected the objectors’ argument that the settlement could not be approved because it distributed estate assets in violation of the Code’s “absolute priority rule.” After noting that Chapter 11 plans must comply with the Code’s priority scheme, the Court held that settlements need not do so. The Court also disagreed with the Drivers’ fiduciary duty argument, dismissing the notion that the Committee’s fiduciary duty to the estate gave each creditor veto power over any proposed settlement. The Drivers were never barred from participating in the settlement negotiations, the Court observed, and their omission from the settlement distribution would not prejudice them because their claims against the Jevic estate were “effectively worthless” since the estate lacked any unencumbered funds. App. 36 (Bankr. Op. 14).

Finally, the Bankruptcy Court applied the multifactor test of In re Martin, 91 F.3d 389 (3d Cir. 1996), for evaluating settlements under Federal Rule of Bankruptcy Procedure 9019. It found that the Committee’s likelihood of success in the fraudulent conveyance action was “uncertain at best,” given the legal hurdles to recovery, the substantial resources of CIT and Sun, and the scarcity of funds in the estate to finance further litigation. App. 34-35 (Bankr. Op. 12-13). The Court highlighted the complexity of the litigation and expressed its skepticism that new counsel or a Chapter 7 trustee could be retained to continue the fraudulent conveyance suit on a contingent fee basis. App. 35-36 (Bankr. Op. 13-14) (“[O]n these facts I think any lawyer or firm that signed up for that role should have his head examined.”). Faced with, in its view, either “a meaningful return or zero,” the Court decided that “[t]he paramount interest of the creditors mandates approval of the settlement” and nothing in the Bankruptcy Code dictated otherwise. App. 36 (Bankr. Op. 14). The Bankruptcy Court therefore approved the settlement and dismissed Jevic’s Chapter 11 case.


The Drivers appealed to the United States District Court for the District of Delaware and filed a motion in the Bankruptcy Court to stay its order pending appeal. The Bankruptcy Court denied the stay request, and the Drivers did not renew their request for a stay before the District Court. The parties began implementing the settlement months later, distributing over one thousand checks to priority tax creditors and general unsecured creditors.

The District Court subsequently affirmed the Bankruptcy Court’s approval of the settlement and dismissal of the case. The Court began by noting that the Drivers “largely do not contest the bankruptcy court’s factual findings.” Jevic Holding Corp., 2014 WL 268613, at *2 (D. Del. Jan. 24, 2014). In analyzing those factual findings, the District Court held, the Bankruptcy Court had correctly applied the Martin factors and determined that the proposed settlement was “fair and equitable.” Id. at *2-3. The Court also rejected the Drivers’ fiduciary duty and absolute priority rule arguments for the same reasons explained by the bankruptcy judge. Id. at *3. And even if the Bankruptcy Court had erred by approving the settlement and dismissing the case, the District Court held in the alternative that the appeal was equitably moot because the settlement had been “substantially consummated as all the funds have been distributed.” Id. at *4. The Drivers filed this timely appeal, with the United States Trustee supporting them as amicus curiae.


The Bankruptcy Court had jurisdiction under 28 U.S.C. § 157(b), and the District Court had jurisdiction under 28 U.S.C. §§ 158(a) and 1334. We have jurisdiction under 28 U.S.C. §§ 158(d) and 1291.

“Because the District Court sat below as an appellate court, this Court conducts the same review of the Bankruptcy Court’s order as did the District Court.” In re Telegroup, Inc., 281 F.3d 133, 136 (3d Cir. 2002) . We review questions of law de novo, findings of fact for clear error, and exercises of discretion for abuse thereof. In re Goody’s Family Clothing Inc., 610 F.3d 812, 816 (3d Cir. 2010) .


To the extent that the Bankruptcy Court had discretion to approve the structured dismissal at issue, the Drivers tacitly concede that the Court did not abuse that discretion in approving a settlement of the Committee’s action against CIT and Sun and dismissing Jevic’s Chapter 11 case.

First, Federal Rule of Bankruptcy Procedure 9019 expressly authorizes settlements as long as they are “fair and equitable.” Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson (TMT Trailer Ferry), 390 U.S. 414, 424 (1968) . In Martin, we gleaned from TMT Trailer Ferry four factors to guide bankruptcy courts in this regard: “(1) the probability of success in litigation; (2) the likely difficulties in collection; (3) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and (4) the paramount interest of the creditors.” 91 F.3d at 393 . None of the objectors contends that the Bankruptcy Court erred in concluding that the balance of these factors favors settlement, and we agree. Although the Committee’s fraudulent conveyance suit survived a motion to dismiss, it was far from compelling, especially in view of CIT’s and Sun’s substantial resources and the Committee’s lack thereof. App. 35 (Bankr. Op. 13); see App. 1273 (summarizing expert testimony CIT planned to offer that Jevic’s failure was caused by systemic economic and industrial problems, not the leveraged buyout); In re World Health Alts., Inc., 344 B.R. 291, 302 (Bankr. D. Del. 2006) (“[S]uccessful challenges to a pre-petition first lien creditor’s position are unusual, if not rare.”). The litigation promised to be complex and lengthy, whereas the settlement offered most of Jevic’s creditors actual distributions.

Nor do the Drivers dispute that the Bankruptcy Court generally followed the law with respect to dismissal. A bankruptcy court may dismiss a Chapter 11 case “for cause,” and one form of cause contemplated by the Bankruptcy Code is “substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation[.]” 11 U.S.C. § 1112(b)(1), (b)(4)(A). By the time the settling parties requested dismissal, the estate was almost entirely depleted and there was no chance of a plan of reorganization being confirmed. But for $1.7 million in encumbered cash and the fraudulent conveyance action, Jevic had nothing.

Instead of challenging the Bankruptcy Court’s discretionary judgments as to the propriety of a settlement and dismissal, the Drivers and the United States Trustee argue that the Bankruptcy Court did not have the discretion it purported to exercise. Specifically, they claim bankruptcy courts have no legal authority to approve structured dismissals, at least to the extent they deviate from the priority system of the Bankruptcy Code in distributing estate assets. We disagree and hold that bankruptcy courts may, in rare instances like this one, approve structured dismissals that do not strictly adhere to the Bankruptcy Code’s priority scheme.


We begin by considering whether structured dismissals are ever permissible under the Bankruptcy Code. The Drivers submit that “Chapter 11 provides debtors only three exits from bankruptcy”: confirmation of a plan of reorganization, conversion to Chapter 7 liquidation, or plain dismissal with no strings attached. Drivers’ Br. 18. They argue that there is no statutory authority for structured dismissals and that “[t]he Bankruptcy Court admitted as much.” Id. at 44. They cite a provision of the Code and accompanying legislative history indicating that Congress understood the ordinary effect of dismissal to be reversion to the status quo ante. Id. at 45 (citing 11 U.S.C. § 349(b)(3); H.R. Rep. No. 595, 95th Cong., 1st Sess. 338 (1977)).

The Drivers are correct that, as the Bankruptcy Court acknowledged, the Code does not expressly authorize structured dismissals. See App. 31 (Bankr. Op. 9). And as structured dismissals have occurred with increased frequency, [5] even commentators who seem to favor this trend have expressed uncertainty about whether the Code permits them. [6] As we understand them, however, structured dismissals are simply dismissals that are preceded by other orders of the bankruptcy court (e.g., orders approving settlements, granting releases, and so forth) that remain in effect after dismissal. And though § 349 of the Code contemplates that dismissal will typically reinstate the pre-petition state of affairs by revesting property in the debtor and vacating orders and judgments of the bankruptcy court, it also explicitly authorizes the bankruptcy court to alter the effect of dismissal “for cause”—in other words, the Code does not strictly require dismissal of a Chapter 11 case to be a hard reset. 11 U.S.C. § 349(b); H.R. Rep. No. 595 at 338 (“The court is permitted to order a different result for cause.”); see also Matter of Sadler, 935 F.2d 918, 921 (7th Cir. 1991) (“`Cause’ under § 349(b) means an acceptable reason.”).

Quoting Justice Scalia’s oft-repeated quip “Congress . . . does not, one might say, hide elephants in mouseholes,” Whitman v. Am. Trucking Ass’ns, 531 U.S. 457, 468 (2001), the Drivers forcefully argue that Congress would have spoken more clearly if it had intended to leave open an end run around the procedures that govern plan confirmation and conversion to Chapter 7, Drivers’ Br. 22. According to the Drivers, the position of the District Court, the Bankruptcy Court, and Appellees overestimates the breadth of bankruptcy courts’ settlement-approval power under Rule 9019, “render[ing] plan confirmation superfluous” and paving the way for illegitimate sub rosa plans engineered by creditors with overwhelming bargaining power. Id.; see also id. at 24-25. Neither “dire circumstances” nor the bankruptcy courts’ general power to carry out the provisions of the Code under 11 U.S.C. § 105(a), the Drivers say, authorizes a court to evade the Code’s requirements. Id. at 32-35, 40-41.

But even if we accept all that as true, the Drivers have proved only that the Code forbids structured dismissals when they are used to circumvent the plan confirmation process or conversion to Chapter 7. Here, the Drivers mount no real challenge to the Bankruptcy Court’s findings that there was no prospect of a confirmable plan in this case and that conversion to Chapter 7 was a bridge to nowhere. So this appeal does not require us to decide whether structured dismissals are permissible when a confirmable plan is in the offing or conversion to Chapter 7 might be worthwhile. For present purposes, it suffices to say that absent a showing that a structured dismissal has been contrived to evade the procedural protections and safeguards of the plan confirmation or conversion processes, a bankruptcy court has discretion to order such a disposition.


Having determined that bankruptcy courts have the power, in appropriate circumstances, to approve structured dismissals, we now consider whether settlements in that context may ever skip a class of objecting creditors in favor of more junior creditors. See In re Buffet Partners, L.P., 2014 WL 3735804, at *4 (Bankr. N.D. Tex. July 28, 2014) (approving a structured dismissal while “emphasiz[ing] that not one party with an economic stake in the case has objected to the dismissal in this manner”). The Drivers’ primary argument in this regard is that even if structured dismissals are permissible, they cannot be approved if they distribute estate assets in derogation of the priority scheme of § 507 of the Code. They contend that § 507 applies to all distributions of estate property under Chapter 11, meaning the Bankruptcy Court was powerless to approve a settlement that skipped priority employee creditors in favor of tax and general unsecured creditors. Drivers’ Br. 21, 35-36; see 11 U.S.C. § 103(a) (“[C]hapters 1, 3, and 5 of this title apply in a case under chapter 7, 11, 12, or 13[.]”); Law v. Siegel, 134 S. Ct. 1188, 1194 (2014) (“`[W]hatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of’ the Bankruptcy Code.” (citation omitted)).

The Drivers’ argument is not without force. Although we are skeptical that § 103(a) requires settlements in Chapter 11 cases to strictly comply with the § 507 priorities, [7] there is some tacit support in the caselaw for the Drivers’ position. For example, in TMT Trailer Ferry, the Supreme Court held that the “requirement[] . . . that plans of reorganization be both `fair and equitable,’ appl[ies] to compromises just as to other aspects of reorganizations.” 390 U.S. at 424 . The Court also noted that “a bankruptcy court is not to approve or confirm a plan of reorganization unless it is found to be `fair and equitable.’ This standard incorporates the absolute priority doctrine under which creditors and stockholders may participate only in accordance with their respective priorities[.]” Id. at 441; see also 11 U.S.C. § 1129(b)(2)(B)(ii) (codifying the absolute priority rule by requiring that a plan of reorganization pay senior creditors before junior creditors in order to be “fair and equitable” and confirmable). This latter statement comports with a line of cases describing “fair and equitable” as “`words of art’ which mean that senior interests are entitled to full priority over junior ones[.]” SEC v. Am. Trailer Rentals Co., 379 U.S. 594, 611 (1965) ; accord Otis & Co. v. SEC, 323 U.S. 624, 634 (1945) ; Case v. L.A. Lumber Prods. Co., 308 U.S. 106, 115-16 (1939) .

Although these cases provide some support to the Drivers, they are not dispositive because each of them spoke in the context of plans of reorganization, not settlements. See, e.g., TMT Trailer Ferry, 424 U.S. at 441; Am. Trailer Rentals, 379 U.S. at 611 ; see also In re Armstrong World Indus., Inc., 432 F.3d 507 (3d Cir. 2005) (applying the absolute priority rule to deny confirmation of a proposed plan). When Congress codified the absolute priority rule discussed in the line of Supreme Court decisions cited above, it did so in the specific context of plan confirmation, see § 1129(b)(2)(B)(ii), and neither Congress nor the Supreme Court has ever said that the rule applies to settlements in bankruptcy. Indeed, the Drivers themselves admit that the absolute priority rule “plainly does not apply here,” even as they insist that the legal principle embodied by the rule dictates a result in their favor. Drivers’ Br. 37.

Two of our sister courts have grappled with whether the priority scheme of § 507 must be followed when settlement proceeds are distributed in Chapter 11 cases. In Matter of AWECO, Inc., the Court of Appeals for the Fifth Circuit rejected a settlement of a lawsuit against a Chapter 11 debtor that would have transferred $5.3 million in estate assets to an unsecured creditor despite the existence of outstanding senior claims. 725 F.2d 293, 295-96 (1984). The Court held that the “fair and equitable” standard applies to settlements, and “fair and equitable” means compliant with the priority system. Id. at 298.

Criticizing the Fifth Circuit’s rule in AWECO, the Second Circuit adopted a more flexible approach in In re Iridium Operating LLC, 478 F.3d 452 (2007) . There, the unsecured creditors’ committee sought to settle a suit it had brought on the estate’s behalf against a group of secured lenders; the proposed settlement split the estate’s cash between the lenders and a litigation trust set up to fund a different debtor action against Motorola, a priority administrative creditor. Id. at 456, 459-60. Motorola objected to the settlement on the ground that the distribution violated the Code’s priority system by skipping Motorola and distributing funds to lower-priority creditors. Id. at 456. Rejecting the approach taken by the Fifth Circuit in AWECO as “too rigid,” the Second Circuit held that the absolute priority rule “is not necessarily implicated” when “a settlement is presented for court approval apart from a reorganization plan[.]” Id. at 463-64. The Court held that “whether a particular settlement’s distribution scheme complies with the Code’s priority scheme must be the most important factor for the bankruptcy court to consider when determining whether a settlement is `fair and equitable’ under Rule 9019,” but a noncompliant settlement could be approved when “the remaining factors weigh heavily in favor of approving a settlement[.]” Id. at 464.

Applying its holding to the facts of the case, the Second Circuit noted that the settlement at issue deviated from the Code priorities in two respects: first, by skipping Motorola in distributing estate assets to the litigation fund created to finance the unsecured creditors committee’s suit against Motorola; and second, by skipping Motorola again in providing that any money remaining in the fund after the litigation concluded would go straight to the unsecured creditors. 478 F.3d at 459, 465-66 . The Court indicated that the first deviation was acceptable even though it skipped Motorola:

It is clear from the record why the Settlement distributes money from the Estate to the [litigation vehicle]. The alternative to settling with the Lenders—pursuing the challenge to the Lenders’ liens—presented too much risk for the Estate, including the administrative creditors. If the Estate lost against the Lenders (after years of litigation and paying legal fees), the Estate would be devastated, all its cash and remaining assets liquidated, and the Lenders would still possess a lien over the Motorola Estate Action. Similarly, administrative creditors would not be paid if the Estate was unsuccessful against the Lenders. Further, as noted at the Settlement hearing, having a well-funded litigation trust was preferable to attempting to procure contingent fee-based representation.

Id. at 465-66. But because the record did not adequately explain the second deviation, the Court remanded the case to allow the bankruptcy court to consider that issue. Id. at 466 (“[N]o reason has been offered to explain why any balance left in the litigation trust could not or should not be distributed pursuant to the rule of priorities.”).

We agree with the Second Circuit’s approach in Iridium—which, we note, the Drivers and the United States Trustee cite throughout their briefs and never quarrel with. See Drivers’ Br. 27, 36; Reply Br. 11-13; Trustee Br. 21. As in other areas of the law, settlements are favored in bankruptcy. In re Nutraquest, 434 F.3d 639, 644 (3d Cir. 2006) . “Indeed, it is an unusual case in which there is not some litigation that is settled between the representative of the estate and an adverse party.” Martin, 91 F.3d at 393 . Given the “dynamic status of some pre-plan bankruptcy settlements,” Iridium, 478 F.3d at 464, it would make sense for the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure to leave bankruptcy courts more flexibility in approving settlements than in confirming plans of reorganization. For instance, if a settlement is proposed during the early stages of a Chapter 11 bankruptcy, the “nature and extent of the [e]state and the claims against it” may be unresolved. Id. at 464. The inquiry outlined in Iridium better accounts for these concerns, we think, than does the per se rule of AWECO.

At the same time, we agree with the Second Circuit’s statement that compliance with the Code priorities will usually be dispositive of whether a proposed settlement is fair and equitable. Id. at 455. Settlements that skip objecting creditors in distributing estate assets raise justifiable concerns about collusion among debtors, creditors, and their attorneys and other professionals. See id. at 464. Although Appellees have persuaded us to hold that the Code and the Rules do not extend the absolute priority rule to settlements in bankruptcy, we think that the policy underlying that rule—ensuring the evenhanded and predictable treatment of creditors—applies in the settlement context. As the Drivers note, nothing in the Code or the Rules obliges a creditor to cut a deal in order to receive a distribution of estate assets to which he is entitled. Drivers’ Br. 42-43. If the “fair and equitable” standard is to have any teeth, it must mean that bankruptcy courts cannot approve settlements and structured dismissals devised by certain creditors in order to increase their shares of the estate at the expense of other creditors. We therefore hold that bankruptcy courts may approve settlements that deviate from the priority scheme of § 507 of the Bankruptcy Code only if they have “specific and credible grounds to justify [the] deviation.” Iridium, 478 F.3d at 466 .


We admit that it is a close call, but in view of the foregoing, we conclude that the Bankruptcy Court had sufficient reason to approve the settlement and structured dismissal of Jevic’s Chapter 11 case. This disposition, unsatisfying as it was, remained the least bad alternative since there was “no prospect” of a plan being confirmed and conversion to Chapter 7 would have resulted in the secured creditors taking all that remained of the estate in “short order.” App. 32 (Bankr. Op. 10).

Our dissenting colleague’s contrary view rests on the counterfactual premise that the parties could have reached an agreeable settlement that conformed to the Code priorities. He would have us make a finding of fact to that effect and order the Bankruptcy Court to redesign the settlement to comply with § 507. We decline to do so because, even if it were appropriate for us to review findings of fact de novo and equitably reform settlements on appeal, there is no evidence calling into question the Bankruptcy Court’s conclusion that there was “no realistic prospect” of a meaningful distribution to Jevic’s unsecured creditors apart from the settlement under review. App. 32 (Bankr. Op. 10). If courts required settlements to be perfect, they would seldom be approved; though it’s regrettable that the Drivers were left out of this one, the question—as Judge Scirica recognizes—is whether the settlement serves the interests of the estate, not one particular group of creditors. There is no support in the record for the proposition that a viable alternative existed that would have better served the estate and the creditors as a whole.

The distribution of Jevic’s remaining $1.7 million to all creditors but the Drivers was permissible for essentially the same reasons that the initial distribution of estate assets to the litigation fund was allowed by the Second Circuit in Iridium. [8] As in that case, here the Bankruptcy Court had to choose between approving a settlement that deviated from the priority scheme of § 507 or rejecting it so a lawsuit could proceed to deplete the estate. Although we are troubled by the fact that the exclusion of the Drivers certainly lends an element of unfairness to the first option, the second option would have served the interests of neither the creditors nor the estate. The Bankruptcy Court, in Solomonic fashion, reluctantly approved the only course that resulted in some payment to creditors other than CIT and Sun.

* * *

Counsel for the United States Trustee told the Bankruptcy Court that it is immaterial whether there is a viable alternative to a structured dismissal that does not comply with the Bankruptcy Code’s priority scheme. “[W]e have to accept the fact that we are sometimes going to get a really ugly result, an economically ugly result, but it’s an economically ugly result that is dictated by the provisions of the code,” he said. App. 1327. We doubt that our national bankruptcy policy is quite so nihilistic and distrustful of bankruptcy judges. Rather, we believe the Code permits a structured dismissal, even one that deviates from the § 507 priorities, when a bankruptcy judge makes sound findings of fact that the traditional routes out of Chapter 11 are unavailable and the settlement is the best feasible way of serving the interests of the estate and its creditors. Although this result is likely to be justified only rarely, in this case the Bankruptcy Court provided sufficient reasons to support its approval of the settlement under Rule 9019. For that reason, we will affirm the order of the District Court.

SCIRICA, Circuit Judge.

I concur in parts of the Court’s analysis in this difficult case, but I respectfully dissent from the decision to affirm. Rejection of the settlement was called for under the Bankruptcy Code and, by approving the settlement, the bankruptcy court’s order undermined the Code’s essential priority scheme. Accordingly, I would vacate the bankruptcy court’s order and remand for further proceedings, described below.

At the outset, I should state that this is not a case where equitable mootness applies. We recently made clear in In re Semcrude, L.P., 728 F.3d 314 (3d Cir. 2013), that this doctrine applies only where there is a confirmed plan of reorganization. I would also adopt the Second Circuit’s standard from In re Iridium Operating LLC, 478 F.3d 452 (2d Cir. 2007), and hold that settlements presented outside of plan confirmations must, absent extraordinary circumstances, comply with the Code’s priority scheme.

Where I depart from the majority opinion, however, is in holding this appeal presents an extraordinary case where departure from the general rule is warranted. The bankruptcy court believed that because no confirmable Chapter 11 plan was possible, and because the only alternative to the settlement was a Chapter 7 liquidation in which the WARN Plaintiffs would have received no recovery, compliance with the Code’s priority scheme was not required. For two reasons, however, I respectfully dissent.

First, it is not clear to me that the only alternative to the settlement was a Chapter 7 liquidation. An alternative settlement might have been reached in Chapter 11, and might have included the WARN Plaintiffs. The reason that such a settlement was not reached was that one of the defendants being released (Sun) did not want to fund the WARN Plaintiffs in their ongoing litigation against it. As Sun’s counsel explained at the settlement hearing, “if the money goes to the WARN plaintiffs, then you’re funding someone who is suing you who otherwise doesn’t have funds and is doing it on a contingent fee basis.” Sun therefore insisted that, as a condition to participating in the fraudulent conveyance action settlement, the WARN Plaintiffs would have to drop their WARN claims. Accordingly, to the extent that the only alternative to the settlement was a Chapter 7 liquidation, that reality was, at least in part, a product of appellees’ own making.

More fundamentally, I find the settlement at odds with the goals of the Bankruptcy Code. One of the Code’s core goals is to maximize the value of the bankruptcy estate, see Toibb v. Radloff, 501 U.S. 157, 163 (1991), and it is the duty of a bankruptcy trustee or debtor-in-possession to work toward that goal, including by prosecuting estate causes of action, [1] see Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343, 352 (1985) ; Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548, 573 (3d Cir. 2003) . The reason creditors’ committees may bring fraudulent conveyance actions on behalf of the estate is that such committees are likely to maximize estate value; “[t]he possibility of a derivative suit by a creditors’ committee provides a critical safeguard against lax pursuit of avoidance actions [by a debtor-in-possession].” Cybergenics, 330 F.3d at 573 . The settlement of estate causes of action can, and often does, play a crucial role in maximizing estate value, as settlements may save the estate the time, expense, and uncertainties associated with litigation. See Protective Comm. for Ind. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968) (“In administering reorganization proceedings in an economical and practical manner it will often be wise to arrange the settlement of claims as to which there are substantial and reasonable doubts.”); In re A&C Props., 784 F.2d 1377, 1380-81 (9th Cir. 1986) (“The purpose of a compromise agreement is to allow the trustee and the creditors to avoid the expenses and burdens associated with litigating sharply contested and dubious claims.”). Thus, to the extent that a settlement’s departure from the Code’s priority scheme was necessary to maximize the estate’s overall value, I would not object.

But here, it is difficult to see how the settlement is directed at estate-value maximization. Rather, the settlement deviates from the Code’s priority scheme so as to maximize the recovery that certain creditors receive, some of whom (the unsecured creditors) would not have been entitled to recover anything in advance of the WARN Plaintiffs had the estate property been liquidated and distributed in Chapter 7 proceedings or under a Chapter 11 “cramdown.” There is, of course, a substantial difference between the estate itself and specific estate constituents. The estate is a distinct legal entity, and, in general, its assets may not be distributed to creditors except in accordance with the strictures of the Bankruptcy Code. [2]

In this sense, then, the settlement and structured dismissal raise the same concern as transactions invalidated under the sub rosa plan doctrine. In In re Braniff Airways, Inc., 700 F.2d 935 (5th Cir. 1983), the Court of Appeals for the Fifth Circuit rejected an asset sale that “had the practical effect of dictating some of the terms of any future reorganization plan.” Id. at 940. The sale was impermissible because the transaction “short circuit[ed] the requirements of Chapter 11 for confirmation of a reorganization plan by establishing the terms of the plan sub rosa in connection with a sale of assets.” Id. “When a proposed transaction specifies terms for adopting a reorganization plan, `the parties and the district court must scale the hurdles erected in Chapter 11.'” In re Cont’l Air Lines, Inc., 780 F.2d 1223, 1226 (5th Cir. 1986) (quoting Braniff, 700 F.2d at 940 ). Although the combination of the settlement and structured dismissal here does not, strictly speaking, constitute a sub rosa plan — the hallmark of such a plan is that it dictates the terms of a reorganization plan, and the settlement here does not do so — the broader concerns underlying the sub rosa doctrine are at play. The settlement reallocated assets of the estate in a way that would not have been possible without the authority conferred upon the creditors’ committee by Chapter 11 and effectively terminated the Chapter 11 case, but it failed to observe Chapter 11’s “safeguards of disclosure, voting, acceptance, and confirmation.” In re Lionel Corp., 722 F.2d 1063, 1071 (2d Cir. 1982) ; see also In re Biolitec Inc., No. 13-11157, 2014 WL 7205395, at *8 (Bankr. D.N.J. Dec. 17, 2014) (rejecting settlement and structured dismissal that assigned rights and interests but did not allow parties to vote on settlement’s provisions in part because it “resemble[d] an impermissible sub rosa plan”). This settlement then appears to constitute an impermissible end-run around the carefully designed routes by which a debtor may emerge from Chapter 11 proceedings.

Critical to this analysis is the fact that the money paid by the secured creditors in the settlement was property of the estate. A cause of action held by the debtor is property of the estate, see Bd. of Trs. of Teamsters Local 863 v. Foodtown, Inc., 296 F.3d 164, 169 (3d Cir. 2002), and “proceeds . . . of or from property of the estate” are considered estate property as well, 11 U.S.C. § 541(a)(6). Here, the administrative and unsecured creditors received the $3.7 million as consideration for the releases from the fraudulent conveyance action, so this payment qualifies as “proceeds” from the estate’s cause of action. [3] See Black’s Law Dictionary 1325 (9th ed. 2009) (defining proceeds as “[s]omething received upon selling, exchanging, collecting, or otherwise disposing of collateral”); see also Strauss v. Morn, Nos. 97-16481 & 97-16483, 1998 WL 546957, at *3 (9th Cir. 1998) (“§ 541(a)(6) mandates the broad interpretation of the term `proceeds’ to encompass all proceeds of property of the estate”); In re Rossmiller, No. 95-1249, 1996 WL 175369, at *2 (10th Cir. 1996) (similar). This case is thus distinguishable from the so-called “gifting” cases such as In re World Health Alternatives, 344 B.R. 291 (Bankr. D. Del. 2006), and In re SPM Manufacturing Corp., 984 F.2d 1305 (1st Cir. 1993) . In fact, those courts explicitly distinguished estate from non-estate property, and approved the class-skipping arrangements only because the proceeds being distributed were not estate property. See World Health, 344 B.R. at 299-300 ; SPM, 984 F.3d at 1313. The arrangement here is closer to a § 363 asset sale where the proceeds from the debtor’s assets are distributed directly to certain creditors, rather than the bankruptcy estate. Cf. In re Chrysler LLC, 576 F.3d 108, 118 (2d Cir. 2009) (noting, in upholding a § 363 sale, that the bankruptcy court demonstrated “proper solicitude for the priority between creditors and deemed it essential that the [s]ale in no way upset that priority”), vacated as moot, 592 F.3d 370 . It is doubtful that such an arrangement would be permissible.

The majority likens the deviation in this case to the first deviation in Iridium, in which the settlement would initially distribute funds to the litigation trust instead of the Motorola administrative creditors. For two reasons, however, I find this analogy unavailing. First, it is not clear to me that the Second Circuit saw the settlement’s initial distribution of funds to the litigation trust as a deviation from the Code’s priority scheme at all. As the Second Circuit explained, if the litigation was successful, the majority of the proceeds from that litigation would actually flow back to the estate, then to be distributed in accordance with the Code’s priority scheme. 459 F.3d at 462. [4] Second, the critical (and, in my view, determinative) characteristic of the settlement in this case is that it skips over an entire class of creditors. That is precisely what the second “deviation” in Iridium did, and the Second Circuit remanded to the bankruptcy court for further consideration of that aspect of the settlement.

In fact, the second “deviation” in Iridium deviated from the priority scheme in a more minor way than the settlement at issue here. In Iridium, the settlement would have deviated from the priority scheme only in the event that Motorola, an administrative creditor and a defendant in various litigation matters brought by the creditors’ committee, had prevailed in the litigation or if its administrative claims had exceeded its liability in the litigation. Iridium, 478 F.3d at 465 . The Second Circuit thus characterized this aspect of the settlement as a mere “possible deviation” in “one regard,” but nevertheless remanded for the bankruptcy court to assess the “possible” deviation’s justification. Id. at 466. Here, of course, it is clear that the settlement deviates from the priority scheme, as it provides no compensation for an entire class of priority creditors, while providing $1.7 million to the general unsecured creditors.

Finally, I do not question the factual findings made by the bankruptcy court. That court found that there was “no realistic prospect” of a meaningful distribution to Jevic’s unsecured creditors apart from the settlement under review. But whether there was a realistic prospect of distribution to the unsecured creditors in the absence of this settlement is not relevant to my concerns. What matters is whether the settlement’s deviation from the priority scheme was necessary to maximize the value of the estate. There is a difference between the estate and certain creditors of the estate, and there has been no suggestion that the deviation maximized the value of the estate itself.

The able bankruptcy court here was faced with an unpalatable set of alternatives. But I do not believe the situation it faced was entirely sui generis. It is not unusual for a debtor to enter bankruptcy with liens on all of its assets, nor is it unusual for a debtor to enter Chapter 11 proceedings — the flexibility of which enabled appellees to craft this settlement in the first place — with the goal of liquidating, rather than rehabilitating, the debtor. [5] It is also not difficult to imagine another secured creditor who wants to avoid providing funds to priority unsecured creditors, particularly where the secured creditor is also the debtor’s ultimate parent and may have obligations to the debtor’s employees. Accordingly, approval of the bankruptcy court’s ruling in this case would appear to undermine the general prohibition on settlements that deviate from the Code’s priority scheme.

I recognize that if the settlement were unwound, this case would likely be converted to a Chapter 7 liquidation in which the secured creditors would be the only creditors to recover. Accordingly, I would not unwind the settlement entirely. Instead, I would permit the secured creditors to retain the releases for which they bargained and would not disturb any of the proceeds received by the administrative creditors either. But I would also require the bankruptcy court to determine the WARN Plaintiffs’ damages under the New Jersey WARN Act, as well as the proportion of those damages that qualifies for the wage priority. [6] I would then have the court order any proceeds that were distributed to creditors with a priority lower than that of the WARN Plaintiffs disgorged, and apply those proceeds to the WARN Plaintiffs’ wage priority claim. To the extent that funds are left over, I would have the court redistribute them to the remaining creditors in accordance with the Code’s priority scheme.

[1] This component of the agreement originally would have paid all $1.7 million to the general unsecured creditors, but the United States Trustee, certain priority tax creditors, and the Drivers objected. The general unsecured creditors ultimately received almost four percent of their claims under the settlement.

[2] Although Sun was eventually granted summary judgment in the WARN Act litigation because it did not qualify as an employer of the Drivers, In re Jevic Holding Corp., 492 B.R. 416, 425 (Bankr. D. Del. 2013), the Bankruptcy Court entered summary judgment against Jevic because it had “undisputed[ly]” violated the state WARN Act, In re Jevic Holding Corp., 496 B.R. 151, 165 (Bankr. D. Del. 2013) .

[3] For example, Jevic’s chief restructuring officer opaquely testified in the Bankruptcy Court: “There was no decision not to pay the WARN claimants. There was a decision to settle certain proceedings amongst parties. The WARN claimants were part of that group of people that decided to create a settlement. So there was no decision not to pay the WARN claimants.” App. 1258.

[4] Sun’s counsel acknowledged as much in the Bankruptcy Court, stating:

[I]t doesn’t take testimony for Your Honor . . . to figure out, Sun probably does care where the money goes because you can take judicial notice that there’s a pending WARN action against Sun by the WARN plaintiffs. And if the money goes to the WARN plaintiffs, then you’re funding somebody who is suing you who otherwise doesn’t have funds and is doing it on a contingent fee basis.

App. 1363; accord Appellees’ Br. 26. This is the only reason that appears in the record for why the settlement did not provide for either direct payment to the Drivers or the assignment of Sun’s lien on Jevic’s remaining cash to the estate rather than to a liquidating trust earmarked for everybody but the Drivers.

[5] See Norman L. Pernick & G. David Dean, Structured Chapter 11 Dismissals: A Viable and Growing Alternative After Asset Sales, Am. Bankr. Inst. J., June 2010, at 1; see, e.g., In re Kainos Partners Holding Co., 2012 WL 6028927 (D. Del. Nov. 30, 2012); World Health Alts., 344 B.R. at 293-95 . But cf. In re Biolitec, Inc., 2014 WL 7205395 (Bankr. D.N.J. Dec. 16, 2014) (rejecting a proposed structured dismissal as invalid under the Code).

[6] See, e.g., Brent Weisenberg, Expediting Chapter Liquidating Debtor’s Distribution to Creditors, Am. Bankr. Inst. J., April 2012, at 36 (“[T]he time is ripe to make crystal clear that these procedures are in fact authorized by the Code.”). But cf. Nan Roberts Eitel et al., Structured Dismissals, or Cases Dismissed Outside of Code’s Structure?, Am. Bankr. Inst. J., March 2011, at 20 (article by United States Trustee staff arguing that structured dismissals are improper under the Code).

[7] There is nothing in the Code indicating that Congress legislated with settlements in mind—in fact, the bankruptcy courts’ power to approve settlements comes from a Federal Rule of Bankruptcy Procedure promulgated by the Supreme Court, not Congress. See Rules Enabling Act, 28 U.S.C. § 2075. If § 103(a) meant that all distributions in Chapter 11 cases must comply with the priorities of § 507, there would have been no need for Congress to codify the absolute priority rule specifically in the plan confirmation context. See 11 U.S.C. § 1129(b)(2)(B)(ii).

[8] Judge Scirica reads Iridium as involving a settlement that deviated from the § 507 priority scheme in just one respect, and a minor one at that. As we have explained, however, the Iridium settlement involved two deviations: (1) the initial distribution of estate funds to the litigation fund created to sue Motorola; and (2) the contingent provision that money left in the fund after the litigation concluded would go directly to the unsecured creditors. See supra Section III-B. The Second Circuit held that, while the second deviation needed to be explained on remand, the first was acceptable despite the fact that it impaired Motorola because it clearly served the interests of the estate. See Iridium, 478 F.3d at 465-66 .

[1] Of course, it was the creditors’ committee, rather than a bankruptcy trustee or debtor-in-possession, who was responsible for prosecuting the fraudulent conveyance action here.

[2] This point is reinforced with an analogy to trust law. Where there are two or more beneficiaries of a trust, the trustee is under a duty to deal with them impartially, and cannot take an action that rewards certain beneficiaries while harming others. Restatement (Second) of Trusts § 183 (1959); see also Varity Corp. v. Howe, 516 U.S. 489, 514 (1996) (“The common law of trusts recognizes the need to preserve assets to satisfy future, as well as present, claims and requires a trustee to take impartial account of the interests of all beneficiaries.”). Yet that is what the Committee did here. This duty persists even where the trustee is a beneficiary of the trust himself, like the creditors’ committee was here. See Restatement (Third) of Trusts § 32 (2003) (“A natural person, including a settlor or beneficiary, has capacity . . . to administer trust property and act as trustee. . . .”)

[3] On June 30, 2006, Sun acquired Jevic in a leveraged buyout, which included an $85 million revolving credit facility from a bank group led by CIT. The fraudulent conveyance action complaint sets forth that Jevic and Sun allegedly knew that Jevic would default on the CIT financing agreement by September 11 of that year. The fraudulent conveyance action sought over $100 million in damages, and the unsecured creditors’ committee alleged that “[w]ith CIT’s active assistance . . . Sun orchestrated a[n] . . . LBO whereby Debtors’ assets were leveraged to enable a Sun affiliate to pay $77.4 million . . . with no money down.”

[4] Here, by contrast, none of the settlement proceeds flowed to the estate.

[5] See Ralph Brubaker, The Post-RadLAX Ghosts of Pacific Lumber and Philly News (Part II): Limiting Credit Bidding, Bankr. L. Letter, July 2014, at 4 (describing the “ascendancy of secured credit in Chapter 11 debtors’ capital structures, such that it is now common that a dominant secured lender has blanket liens on substantially all of the debtor’s assets securing debts vastly exceeding the value of the debtor’s business and assets”); Kenneth M. Ayotte & Edward R. Morrison, Creditor Control & Conflict in Chapter 11, 1 J.L. Analysis 511, 519 (2009) (finding that secured claims exceeded the value of the company in twenty-two percent of the bankruptcies surveyed); Stephen J. Lubben, Business Liquidation, 81 Am. Bankr. L.J. 65 (2007) (noting that although “chapter 7 is the prevailing method of business liquidation, . . . a sizable number of firms first attempt either a reorganization or liquidation under chapter 11″); 11 U.S.C. § 1123(b)(4) (providing that a chapter 11 plan may “provide for the sale of all or substantially all of the property of the estate, and the distribution of the proceeds of such sale among holders of claims or interests”).

[6] At this point, the WARN litigation has largely concluded, with the WARN Plaintiffs having established liability on their New Jersey WARN claims against Jevic but having lost on all other claims. On May 10, 2013, the bankruptcy court dismissed the WARN Plaintiffs’ claims against Sun (but not Jevic) on the grounds that Sun was not a “single employer” for purposes of the WARN Acts. The district court affirmed that decision on September 29, 2014. In re Jevic Holding Corp., No. 13-1127-SLR, 2014 WL 4949474 (D. Del. Sept. 29, 2014). In a separate opinion on May 10, 2013, the bankruptcy court dismissed the federal WARN Act claims against Jevic, but granted summary judgment in favor of the WARN Plaintiffs against Jevic on their New Jersey WARN Act claims. No appeal was taken of that ruling; in fact, Jevic did not contest liability on the New Jersey WARN Act claims.

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New Bankruptcy Opinion: IN RE GENCO SHIPPING & TRADING LIMITED – Bankr. Court, SD New York, 2015

In re: GENCO SHIPPING & TRADING LIMITED, et al., Chapter 11, Reorganized Debtors.

Case No. 14-11108 (SHL).

United States Bankruptcy Court, S.D. New York.

May 21, 2015.

KRAMER LEVIN NAFTALIS & FRANKEL LLP, By: Adam C. Rogoff, Esq., Natan Hamerman, Esq., Anupama Yerramalli, Esq., New York, NY, Counsel for the Reorganized Debtors.

PAUL HASTINGS LLP, Harvey A. Strickon, Esq., New York, NY, Counsel for Fisher Brothers Management Co. LLC and Fisher-Park Lane Owner LLC.


SEAN H. LANE, Bankruptcy Judge.

Before the Court is the objection [ECF No. 462] of the above-captioned reorganized debtors (collectively, the “Debtors”) to claim numbers 69 and 70 (together, the “Claims”). For the reasons set forth below, the Court grants the Debtors’ objection to the Claims.


All the facts relevant to this matter are undisputed. Genco Shipping & Trading Limited (“Genco”), one of the Debtors, was a tenant of landlord Fisher-Park Lane Owner LLC (the “Owner”) pursuant to a lease dated September 22, 2005 (the “Master Lease”) for a portion of the 20th floor of the building located at 299 Park Avenue in Manhattan (the “Leased Premises”). By its terms, the Master Lease was not set to expire until July 31, 2021. Objection ¶ 17. Genco decided to move its corporate offices from the Leased Premises to a new location on the 12th Floor of the same building. For its 20th floor Leased Premises, Genco entered into a sublease with Fisher Brothers Management Co. LLC (“Fisher Management”) on November 1, 2013 (the “Sublease”). The Sublease provided for an annual sub-rent that was approximately 60% below the annual rent provided in the Master Lease and payable by Genco to the Owner. [1]

In connection with the Sublease, Genco also entered into a Subordination, Nondisturbance and Attornment Agreement (the “SNDA”) and a letter agreement (the “Consent”) with the Owner and Fisher Management, both of which are dated the same day as the Sublease. The SNDA and the Consent essentially provide two guarantees that notwithstanding any termination of the Master Lease: (a) Fisher Management would always be assured that its tenancy would not be disturbed, and (b) the Owner would always be assured of collecting the full rent reserved under the Master Lease.

From the effective date of the Sublease to the filing of the Chapter 11 petition, Genco paid to the Owner the full rent due under the Master Lease totaling $312,987.64, but it collected only $182,722.58 in rent due under the Sublease from Fisher Management. On the Petition Date, the Debtors filed a motion to reject the Master Lease, the Sublease, the SNDA and the Consent. That motion was granted by order in May 2015.

During the Chapter 11 case, the landlord Owner and the subtenant Fisher Management filed two claims in these Chapter 11 Cases. The first claim (Claim Number 70) was filed by the Owner seeking an unspecified amount of damages from rejection of the Master Lease— essentially the rent they contracted for under the Master Lease, subject to the statutory cap under Section 502(b)(6) of the Bankruptcy Code. The second claim (Claim Number 69) was filed by the subtenant Fisher Management seeking an amount representing the increased rent that it is obligated to pay given Genco’s termination of the Master Lease and Sublease—that is, the difference between the 60% it had been paying and the 100% it now must pay.


Section 502(a) of the Bankruptcy Code provides that a filed proof of claim is “deemed allowed, unless a party in interest . . . objects.” 11 U.S.C. § 502(a). If the claim is properly filed, it is prima facie evidence that the claim is valid. See FED. R. BANKR. P. 3001(f). A party in interest may object to a proof of claim, and once an objection is made, the court must determine whether the objection is well founded. See 4 COLLIER ON BANKRUPTCY ¶ 502.02[2] (16th ed. rev. 2013).

Although Rule 3001(f) establishes the initial evidentiary effect of a filed claim, the burden of proof rests on different parties at different times. In re Allegheny Int’l, Inc., 954 F.2d 167, 173 (3d Cir. 1992) . Claims objections have a shifting burden of proof. Correctly filed proofs of claim “constitute prima facie evidence of the validity of the claim. . . . To overcome this prima facie evidence, an objecting party must come forth with evidence which, if believed, would refute at least one of the allegations essential to the claim.” Sherman v. Novak (In re Reilly), 245 B.R. 768, 773 (B.A.P. 2d Cir. 2000) . By producing “evidence equal in force to the prima facie case,” an objector can negate a claim’s presumptive legal validity, thereby shifting the burden back to the claimant to “prove by a preponderance of the evidence that under applicable law the claim should be allowed.” Creamer v. Motors Liquidation Co. GUC Trust (In re Motors Liquidation Co.), 2013 WL 5549643, at *3 (S.D.N.Y. Sept. 26, 2013) (internal quotation marks omitted); see In re MF Global Holdings Ltd., 2012 WL 5499847, at *3 (Bankr. S.D.N.Y. Nov. 13, 2012) (“A proof of claim is prima facie evidence of the validity and amount of a claim, and the objector bears the initial burden of persuasion. The burden then shifts to the claimant if the objector produces evidence equal in force to the prima facie case . . . which, if believed, would refute at least one of the allegations that is essential to the claim’s legal sufficiency.”) (citing In re Oneida Ltd., 400 B.R. 384, 389 (Bankr. S.D.N.Y. 2009) ). If the objector does not “introduce[] evidence as to the invalidity of the claim or the excessiveness of its amount, the claimant need offer no further proof of the merits of the claim.” 4 COLLIER ON BANKRUPTCY ¶ 502.02 (16th ed. rev. 2013); see also In re Residential Capital, LLC, 507 B.R. 477, 490 (Bankr. S.D.N.Y. 2014) .

Federal pleading standards apply when assessing the validity of a proof of claim. See, e.g., In re Residential Capital, LLC, 518 B.R. 720, 731 (Bankr. S.D.N.Y. 2014) ; In re DJK Residential LLC, 416 B.R. 100, 106 (Bankr. S.D.N.Y. 2009) (“In determining whether a party has met their burden in connection with a proof of claim, bankruptcy courts have looked to the pleading requirements set forth in the Federal Rules of Civil Procedure.”) (citations omitted). Accordingly, a claimant must allege “enough facts to state a claim for relief that is plausible on its face.” Vaughn v. Air Line Pilots Ass’n, Int’l, 604 F.3d 703, 709 (2d Cir. 2010) (citing Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) ).

Section 502(b)(1) of the Bankruptcy Code provides that claims may be disallowed if “unenforceable against the debtor and property of the debtor, under any agreement or applicable law. . . .” To determine whether a claim is allowable by law, bankruptcy courts look to “applicable nonbankruptcy law.” In re W.R. Grace & Co., 346 B.R. 672, 674 (Bankr. D. Del. 2006) .

In their objection, the Debtors argue that the two Claims should be expunged because neither the landlord nor the subtenant is entitled under the relevant agreements to any additional compensation from Genco. All parties agree that there is a threshold legal issue that the Court can determine based on the undisputed facts here: namely, whether the Owner or Fisher Management has a claim under the applicable documents, including the Master Lease, the Sublease and the SNDA.

As a practical matter, the claimants’ counsel conceded at the hearing held on April 28, 2015 that the subtenant Fisher Management has been paying the full rent due under the Master Lease, rather than the 60% that was being paid before Genco rejected these agreements. See Hr’g Tr. 8: 2-4, April 28, 2015; see also Claimants’ Response ¶ 7 [ECF No. 467]. Thus, the question becomes whether the increase in the rent paid by the subtenant Fischer Management from 60% to the full amount creates a claim—that is an entitlement to payment from Genco for this difference in the rent.

In addressing this question, there are two provisions of the agreements that are of particular relevance. Both of these provisions compel the conclusion that Genco is not obligated to pay any amounts sought in the two Claims.

First, Section 2 of the SNDA specifically addresses the exact circumstance now before the Court. It makes clear that, where the Master Lease is terminated, but the subtenant Fischer Management stays in the premises, the subtenant must pay the full amount of the rent. Section 2 provides as follows:

In the event the [Master Lease] terminates for any reason other than (i) the occurrence of a casualty or condemnation that results in the exercise by [the Owner] of a termination right under the [Master Lease] or (ii) a default by [Fisher Management] or breach of [Fisher Management’s] obligations under the Sublease, then so long as [Fisher Management] is not then in default in the performance of any of its obligations under the Sublease (after any required notice and beyond the applicable period of grace set forth in the Sublease) and the Consent . . .

. . .

(b) [Fisher Management’s ] subleasehold estate in the Subleased Premises under the Sublease shall not be terminated or disturbed and the Sublease shall continue in full force and effect with respect to the Subleased Premises as a direct lease between [Fisher Management] and [the Owner] upon all of the same terms, covenants, conditions and obligations of the Sublease (subject, however, to the other provisions of this Agreement) relative to the Subleased Premises only, for the balance of the term thereof with the same force as if the Sublease were a direct lease between [the Owner] and [Fisher Management]; provided, however, that, commencing on the [date on which Fisher Management attorns to the Owner and the Owner recognizes the tenancy of Fisher Management], [Fisher Management] shall pay the greater of (x) the fixed annual rent and additional rent as provided in the Sublease, or (y) the fixed annual rent and additional rent as provided in the [Master Lease]. . . .

SNDA, Section 2(b) (emphasis added).

It is noteworthy that this SNDA was signed by all the parties, including Genco, the landlord Owner and the subtenant Park Management. It clearly sets forth each of the parties’ respective obligations under the agreements. As the Debtors correctly observe, all three parties thus planned what would occur if Genco’s prime tenancy ended early; notably, the parties agreed that Fisher Management would have a right to continued and undisturbed occupancy, albeit at a higher rental rate. But as part of this bargain, Genco gave up something: it agreed to sublet the Leased Premises at a loss by accepting a sublease rent below the amount it was required to pay on its prime lease. Thus, Fisher Management has no claim for damages from having to now pay the full prime lease rent because that is precisely what it agreed to in the SNDA to obtain the benefit of its undisturbed occupancy, rather than face potential eviction from the Leased Premises.

This result also is consistent with Section 5.1 of the Sublease, which explicitly absolves Genco of any liability under the Sublease in the event that the Master Lease ends early. Section 5.1 provides, in relevant part:

[i]f the [Master Lease] shall terminate for any reason this Sublease shall also terminate as of the date of termination of the [Master Lease], unless [the Owner] otherwise agrees, and in no event shall [Genco] be liable therefor.

Sublease, Section 5.1 (emphasis added). Thus, both the SNDA and the Sublease support the conclusion that Genco has no obligation to pay the additional rent sought by the claimants under these circumstances.

The consistency of the result under these two agreements—executed at the same time and related to the same sublease by Fisher Management—supports Genco’s position here. Indeed, the claimants conceded at the hearing that the result they urge would appear to place the provisions in the SNDA and Sublease in conflict, which is problematic. See Hr’g Tr. 22:23-24:3, April 28, 2015; see also Production Resource Group, L.L.C. v. Martin Professional, A/S, 907 F. Supp. 2d 401, 413 (S.D.N.Y. 2012) (“When interpreting contracts, it is accepted that separate agreements executed contemporaneously and that are part of a single transaction are to be read together.”) (citing This Is Me, Inc. v. Taylor, 157 F.3d 139, 143 (2d Cir. 1998) (applying New York law); Kelso Enters. Ltd. v. A.P. Moller-Maersk A/S, 375 Fed. App’x. 48, 49 (2d Cir. 2010) (summary order) (“[W]hen interpreting a contract or multiple contracts in a transaction, we strive to give effect to all of the terms of the relevant documents, reading them together.”); Gordon v. Vincent Youmans, Inc., 358 F.2d 261, 263 (2d Cir. 1965) (“[I]t is both good sense and good law that these closely integrated and nearly contemporaneous documents be construed together.”) (internal quotations omitted); Nau v. Vulcan Rail & Constr. Co., 286 N.Y. 188, 197 (N.Y. 1941) (agreements at issue “were executed at substantially the same time, related to the same subject-matter, were contemporaneous writings and must be read together as one.”); Neal v. Hardee’s Food Sys., Inc., 918 F.2d 34, 37 (5th Cir. 1990) (“Under general principles of contract law, separate agreements executed contemporaneously by the same parties, for the same purposes, and as part of the same transaction, are to be construed together.”)).

In their opposition, the claimants make several arguments but none of them is persuasive. For example, the claimants argue that the agreements are silent as to whether Genco must compensate Fisher Management for the increased rent and thus the Court should default to the normal rule that a breaching party is liable for damages. But the agreements are not silent. Rather, Section 2(b) of the SNDA and Section 5.1 of the Sublease make clear what each party’s obligations are under these circumstances. As such, the Court agrees with Genco that this case is similar to the result reached in Health Insurance Plan of Greater New York v. Photobition New York, Inc., 884 N.Y.S.2d 713 (N.Y. App. Div. 1st Dep’t 2009), where the court recognized that a subtenant suffers no damages from breach of contract by paying an increased rent when the subtentant previously consented to such an increase in order to be able to remain in possession of the premises if the prime tenant’s tenancy ended early.

The claimants also argue that Section 5.1 of the Sublease does not apply here because it only relates to the subordination of the Sublease to any leases, mortgages and other rights or encumbrances to which the Master Lease itself was subject and subordinate. They state that “if the [Master Lease] was for any reason terminated as a result of the exercise of rights and remedies granted to any superior interest holders, such as superior lessees, mortgagees or encumbrancers to which the [Master Lease] was made subordinate, which by operation of law resulted in the termination of the Sublease, Genco would have had no liability to Fisher Management.” Claimants’ Response ¶ 12. But the language of Section 5.1 contains no such limitation. Indeed, it explicitly states that “if the [Master Lease] shall terminate for any reason” then the Sublease terminates and “in no event shall [Genco] be liable therefor.” Sublease, Section 5.1 (emphasis added).

The Court also rejects the claimants’ reliance on Section 55.1 of Corbin on Contracts, which claimants cite for the unremarkable proposition that a breaching party owes damages to a counterparty. But a party is not entitled to contract damages where, as here, a contingency was contemplated and addressed by an agreement negotiated by the parties. See, e.g. Levine v. Yokell, 665 N.Y.S.2d 962, 962 (N.Y. App. Div. 1st Dep’t 1997) ; Duane Reade v. I.G. Second Generation Partners, L.P., 721 N.Y.S.2d 42, 44 (N.Y. App. Div. 1st Dep’t 2001) .

The claimants also cite Rasch’s Landlord and Tenant, Section 28:76 about the damages due to an unlawfully evicted tenant. Fischer Management was not evicted, however, but rather stayed in the premises consistent with the rights it had bargained for in the SDNA, an agreement that provides that it must pay the full amount of the rent under these circumstances.

Finally, the claimants cite the case of Henry v. Lewis, 478 N.Y.S.2d 263, 268 (N.Y. App. Div. 1st Dept. 1984) for the proposition that a contractual waiver must be strictly construed. While that statement of law is correct, that proposition does not apply here. In reaching the result here, the Court is simply applying the terms of the relevant agreements, not relying on waiver. [2]


For the reasons set forth above, the Court grants Genco’s objection to the Claims. Genco should submit an order on three days’ notice. The proposed order must be submitted by filing a notice of the proposed order on the Case Management/Electronic Case Filing docket, with a copy of the proposed order attached as an exhibit to the notice. A copy of the notice and proposed order shall also be served upon opposing counsel.

[1] The parties represent that the annual rent payable to Genco by Fisher Management under the Sublease was approximately $178,000 less than the annual rent payable by Genco to the Owner under the Master Lease, although the exact amount of the difference is not relevant for purposes of ruling on this objection.

[2] Given the Court’s ruling, the Court does not need to address the question of whether the subtenant’s damages might be capped pursuant to Section 502(b)(6) of the Bankruptcy Code and whether the discount rate applied to Claim No. 69 is appropriate.

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New Bankruptcy Opinion: IN RE 256-260 LIMITED PARTNERSHIP – Bankr. Court, WD New York, 2015

In re 256-260 Limited Partnership, Debtor.

No. 14-11582 K.

United States Bankruptcy Court, W.D. New York.

May 20, 2015.


MICHAEL J. KAPLAN, Bankruptcy Judge.

Two questions are presented by a creditor’s Objection to Confirmation of a proposed Chapter 11 Plan, and by that creditor’s Motion to Lift Stay to permit a foreclosure sale of one of the Debtor’s three parcels of real estate.

(1) May a downstream owner of mortgaged land use Chapter 11 to “cure” the defaults of prior owners (who were insiders), and to “modify” a fully-matured mortgage debt by stretching it out for 10 more years at a Till rate of interest? (And does it matter that the creditor is a downstream owner of the mortgage lender’s rights?)

(2) If it may do so, what is “fair and equitable treatment” of such a creditor? [1]


There is a difference between a “lender” and someone who purchases a lender’s right to collect the subject debt either in personnam or in rem. There is “privity of contract” between a lender and a borrower whether genuine negotiations actually occur or not. Black’s Law Dictionary (10th Ed.) defines “privity of contract” as “The relationship between parties to a contract, allowing them to sue each other but preventing a third party from doing so.” When the debt is secured by a mortgage lien, and the mortgagee sells its rights, there typically will be an assignment of such rights to the buyer. In New York, the mortgagor/borrower can sell the real estate subject to the rights of the mortgagee, but remains liable on the debt unless the lender agrees otherwise. In two prior opinions in this District (one in this Court and the other in the District Court) it was held that where one has acquired the mortgaged real estate from the original borrower (or from an intermediate downstream owner) an attempt to utilize Chapter 11 or 13 seeking to “cure” the previous owner’s default by spreading missed payments over time, or otherwise by “modifying” the mortgage note over the objection of the original lender, must fail. [2] Not because of lack of “privity,” but because notions of “cure” and “reinstatement” bespeak statutory privileges accorded to a borrower who defaulted, not privileges available to someone who acquires the property after the default. (See In re Parks 227 B.R. 20 (Bankr. W.D.N.Y. 1998) and in re Pescrillo 2015 WL 417659 (W.D.N.Y. 2015), wherein the objecting creditors were the original lenders.).

In this Chapter 11 case we have neither the lender nor the borrower. The mortgage loan originated in 1995. The lender sold its rights years ago, and then those rights changed hands several times until the secured creditor here, Extraco, acquired them in October of 2011. The mortgage was in foreclosure at that time; no mortgage payments had been made since 2006, according to Extraco’s counsel. The mortgage borrower, Mr. DiGiulio, deeded the property in 1996 to a company he controlled, “Eagle,” and then in 2003, he caused Eagle to convey the property to “Zotar” (an affiliate of both DiGiulio and this Debtor). Finally, on December 30, 2010, Zotar conveyed the property to the Debtor, a Limited Partnership from another state, of which DiGiulio is a principal. The mortgage instrument did not forbid conveyances of the land without permission of the holder of the mortgage lien, but even if it did, in New York that fact might not impair the validity of the transfers. Extraco argues that the title transfers were “improper, . . . in contravention of the Note and Mortgage,” but it does not challenge the Debtor’s title. [3]

As noted above, the debt fully matured back in 2010 and according to Extraco’s counsel, no payments have been made on the loan since 2006, and Extraco objects to this Plan (and seeks lift of stay to continue foreclosure), arguing (1) that it cannot be “forced” to become a “lender” on this fully-matured obligation because (A) it and this Debtor are not in “privity of contract,” and (B) the Debtor acquired title in violation of the mortgage; or, alternatively, (2) the plan is not “fair and equitable” toward Extraco (11 U.S.C. § 1129(b)).

For its part, the Debtor argues that Extraco “bought-in” on a defaulted mortgage debt after title to the real estate had been transferred, of record, to this Debtor. Extraco should not benefit from its lack of due diligence (the Debtor argues). (Extraco’s counsel informed the record (at oral argument on February 18, 2015) that this mortgage debt was purchased by Extraco in a large portfolio of mortgage debt, and that if this Debtor were the original borrower, Extraco “would not be here” relying on the “privity” argument.) [4]

Consequently, the question before the Court is well-framed, with one exception. The question ought not turn upon whether a secured creditor and a debtor “are” in privity of contract; rather the issue arises if they “were not” in privity on the petition date. That is because the Court may eliminate concerns about ongoing privity (and the right to sue upon a Plan default in any appropriate court) by requiring guarantees from the original borrower (DiGiulio), and from “Eagle” and “Zotar” if necessary, as pre-conditions to confirmation. And all elements of the mortgage note and instrument would have to be reaffirmed and assumed by the reorganized Debtor. And future conveyances without permission of the Court would be declared invalid as a matter of law, etc. Consequently, the issue should be re-framed as follows: “Does the fact that the current mortgagee bought a defaulted mortgage upon land that was no longer owned by the original borrower (a matter of public record) permit the new obligee to block the Debtor (the current owner of the real estate) from its effort to `modify’ the terms of the secured debt under 11 U.S.C. § 1123(b)(5) because the current mortgagee and the Debtor were not in privity of contract on the petition date?”


Because this Debtor owned the subject property, of record, ten months before Extraco bought the loan that was already in foreclosure, Extraco may not now cry “foul” for lack of privity. It is income property, not a homestead. [5] The lack of due diligence that has exemplified such transactions since before the financial meltdown of 2007 and 2008 does not give Extraco greater rights against this downstream owner than the original lender would have against the original borrower. During that economic chaos, “turn-about” in the form of transfers ahead of foreclosure might have been “fair play.”

However, after consideration of all of the submissions and arguments, the Court finds that the Plan, currently is, not “fair and equitable” as to Extraco, under 11 U.S.C. § 1129(b). (The Debtor will be given an opportunity to propose a modification.)


First, it is this writer’s view that one who buys large portfolios of mortgage debt without diligence as to each debt cannot be heard to complain of lack of privity as to any debtor that seeks relief under the Bankruptcy Code. The creditor might have many valid objections, but lack of privity is not one of them. Lenders have the right and opportunity to meet with a borrower and negotiate terms, whether they actually assert that right and opportunity or not. But those who buy “large” mortgage debt portfolios pay a discounted price which reflects the risk that some loans like this loan might be in the batch. (Parks and Pescrillo are distinguished on that basis. In each of those cases the objecting creditor was the lender/mortgagee, but relief before this Court was sought by a downstream owner, not the borrower.)

The argument that Extraco “cannot” sue the Debtor (because the Debtor is not on the note) and has recourse only to the property is a non sequitur. Besides the fact that that seems to be in the nature of Extraco’s business, the Court assures Extraco that if the Court does confirm such a Plan, Extraco will be able to sue the Debtor for a breach of the Plan, as explained above. (Privity in the future would be provided by an Order of this Court, as will be the certainty that future transfers of the property will not end up in future bankruptcy or foreclosure proceedings.)

Second, there may be states in which a mortgagor’s conveyance of the land in violation of a mortgage instrument is invalid. (Perhaps the “deed of trust” states do not use “mortgages” for that reason.) New York is not one of them. When a mortgagor conveys title to a third party without permission of the mortgagee, the third party takes valid title subject, however to the mortgage lien. The mortgagor would remain liable on the debt, and the breach (usually) is an “act of default” triggering acceleration of the full balance. (The “due on sale clause.”) As to a new owner who is a “bona-fide purchaser without knowledge” of a prohibition, the impact might depend upon whether what was filed with the appropriate County Clerk was the “Mortgage” instrument only, or a “Note and Mortgage” or “Bond and Mortgage” instrument. If the Mortgage instrument was the only instrument filed, the degree (if any) of incorporation of “due-on-sale” or other acceleration clauses in that instrument might be critical to the determination of the rights of the new owner of the realty as against the mortgagee or its assignees. Extraco, however, has not disputed the Debtor’s title even though the Debtor, as an “affiliate” of DiGiulio, is chargeable with knowledge of everything that DiGiulio ever knew about this debt. And so the court assumes that Extraco accepts that there is no cloud on the Debtor’s title. [6]

Does the fact that title seemingly has been passed among insiders in a game of “Keep-Away” matter? In this particular case, it does not. The fact that this Debtor owned the property before Extraco bought the mortgage debt was not hidden from the world. It was duly recorded ten months before Extraco’s purchase of the loan. If DiGiulio and his affiliates were playing “Keep-Away,” Extraco was not the target; Extraco had not appeared on the scene before the Debtor held title.

Based on the submissions to the Court, Extraco seems to be arguing that it enjoys something in the nature of a right to claim “the victimhood” which one or more of its assignor(s) might have claimed at various points in time. After the lessons learned by the secondary and derivative mortgage markets during the years 2007-2010, there can be no doubt that when Extraco bought the portfolio in 2011, it got what it decided was an appropriate discount from the face value of a “large” portfolio of mortgage loans. That discount fixed the price of a portfolio that included non-performing loans, whether because of less-than-creditworthy borrowers, or properties that were intentionally over-valued by commissioned loan representatives and appraisers, or real estate investors who found a niche here and there by “dodging” the lenders and those who bought debt from lenders.

Extraco seems to invite the Court to invent something like a “D’Oench-Duhme Doctrine” for Extraco’s business. Of course, the D’Oench-Duhme Doctrine assures that certain assets bought by certain purchasers of large portfolios of debt owned by failing banks, and bought through the auspices of certain Federal agencies (such as the FDIC), are “cleansed” of defenses that would be “good” as against the original lender if those defenses are “secret” in the sense that they are not stated in the portfolio.

The Court declines that invitation, and moves on to the cited case authorities. Only one of Extraco’s citations of authority as to the text of the Bankruptcy Code is worthy of attention — In re Clay, 204 B.R. 786 (Bankr. N.D. Alabama, 1996) . That decision would have rejected this Debtor’s effort. It sensibly reasoned (though not persuasively, in this writer’s view) that when Congress made it clear — in 1994 — that a Chapter 13 debtor may stretch-out a post-petition balloon payment over the life of the plan (and it became a judicial “gloss” that that also applied to defaulted pre-petition balloons), Congress did not add the same provision to Chapter 11 even though it did make other amendments to Chapter 11 to make it more similar to Chapter 13 when a debtor in Chapter 11 is a natural person.

The fact that Congress made the path clear for residential homeowners to resurrect and extend the chance to hold-on to their homes by use of Chapter 13 does not mean that that path did not already exist in Chapter 13. The decisions were split. Statutory clarifications for Chapter 13 cases do not stand for the proposition that what the Debtor here seeks to accomplish was not permissible under Chapter 11 before or since the 1994 statutory amendments to both Chapters. [7] Chapter 11 secured creditors have more power than Chapter 13 secured creditors have, such as the power to vote.

This Court chooses to consider Chapter 11 case authorities first, not Chapter 13 cases. Extraco argues that In re Clay was correctly decided. A “cure” must “reinstate” the debt, and reinstatement of a fully-matured debt gets a debtor nowhere because the term has expired.

The Debtor, however, correctly notes that Re New Midland Plaza Assoc., 247 B.R. 877 (Bankr. S.D. Fla 2000); Re Patrician St. Joseph Partners, 169 B.R. 669 (D Ariz. 1994); Re Naugles, 37 B.R. 574 (Bankr. S.D. Fla 1984); Re Lennington, 288 B.R. 802 (Bankr. C.D. Ill. 2003), and Re Arden, 248 B.R. 164 (Bankr. D. Ariz. 2000), [8] seem to permit what the Debtor attempts here. This Court is not prepared to reject that effort as a matter of law. [9]

And so the Court turns to the question of whether the Plan is “fair and equitable” toward Extraco. Under different circumstances, full payment of the secured claim over ten years with a 4% rate of interest would seem fair enough given that any bad conduct by the Debtor or its affiliates could not have been directed at Extraco. The last title transfer was accomplished and recorded well before Extraco appeared on the scene. The Court discerns no animus toward Extraco by the Debtor. The Chapter 11 filing by this Debtor came in the face of a foreclosure sale, and there is nothing unusual about that. It seems that the Debtor discussed a Chapter 11 filing with Extraco before it filed, hoping for a workout that did not happen. Apparently the Debtor did not “slink around the corner” to “ambush” Extraco.

However, the background here is a game of “Keep-Away,” as noted above. A Plan that would be “fair and equitable” as to Extraco ought to reflect the facts (1) that this was initially a $65,000, 15-year loan that presumably was fully-secured at its inception in 1995; (2) that 20 years have gone by so far, and nearly ten years have gone by without any payment; (3) yet $112,500 remains due and owing, only $69,000 of which is secured; (4) the Plan proposes yet another 10 years; (5) the contract rate of interest was 12.99%, and the judgment rate of interest has been 9% since entry of judgment of foreclosure and sale on or about May 14, 2013, but the Plan proposes only a 4% Till rate, and (6) the Plan proposes to pay only 13% of the unsecured deficiency claim. It does not seem “fair and equitable,” but, more importantly for now, it does not propose to pay Extraco in a manner that would pass the “absolute priority rule,” codified in 11 U.S.C. § 1129(b)(2)(B)(ii).

To begin this part of the analysis, the Court notes that this is a two-party case. Although the Debtor has other creditors and other properties, has tenants, owes taxes, etc., it states in its Disclosure Statement that this case was filed solely to restructure the Extraco debt. The Disclosure Statement and the Schedules misleadingly state that all of the mortgage debt on all of the Debtor’s properties are “non-recourse against the Debtor.” That seems to be a contrivance intended to create the impression that the Debtor is being very “fair and equitable” toward Extraco by granting it an unsecured deficiency claim upon which 13% will be paid over time, even though Extraco’s claim is “non-recourse.”

“Non-recourse” is a term of art used in connection with some secured loan transactions. It means that the lender has agreed to look only to the collateral for enforcement of the loan, and that the lender will not assert any in personam liability with regard to the borrower. In fact, the mortgage interest held by Extraco does not arise out of a “non-recourse loan.” Rather, what the Debtor really is saying is the opposite side of its own “privity” argument. The Debtor vigorously opposes Extraco’s argument that there is no privity, the Debtor arguing that the note and mortgage recognized that there might be downstream owners of the real estate, on the one hand, and of the note and mortgage on the other hand. But the Debtor denies that Extraco has any “recourse” against the Debtor, and so Extraco must look only to the real estate. So the offer of 13 cents on the dollar as to the deficiency is by the Debtor’s grace. Such a stance is inconsistent and disingenuous. The Court finds that the Plan must be viewed as giving Extraco an unsecured deficiency claim as a matter of right, not of grace.

The result is this. Extraco now controls the vote of the general unsecured class because the Debtor cannot win two-thirds in amount of that class of claims without Extraco’s consent, yet the Debtor proposes to retain ownership of the property. That is unconfirmable under the absolute priority rule. (11 U.S.C. § 1129(b)(2))

How the Court might rule in a case that is similar, but in which the objector would not control the unsecured class, will be left to another day. For now, the Court will only express a view (not a holding) that the path of least resistance toward confirmation of a Chapter 11 Plan proposed by a Debtor who owns mortgaged land that has been transferred among insiders in a game of “Keep Away” from various successive buyers of the portfolio that includes a loan such as that in question, would be to offer to assume the debt in full, to provide guaranties upon the debt from intervening insiders, to propose contract rate of interest (or judgment rate where, as here, there is a judgment of foreclosure and sale) on the secured portion of the debt, and to provide negotiated satisfaction of the unsecured deficiency claim in a reasonable time frame. That would be the “path of least resistance,” but not necessarily the only path to confirmation. Much that is presented in the facts and nuances of this case might evolve in this or other cases.

Extraco’s Objection to the Debtor’s Plan is sustained without prejudice to the Debtor filing an Amended Plan within 21 days. Extraco’s Motion to Lift Stay is continued to July 1, 2015 at 10:00 a.m. in order to consider any Amended Plan that the Debtor might file.


[1] The property at issue is a two-unit residential dwelling that can earn $600/unit/month. Its assessed value is $68,687 as against a debt of about $112,500. The creditor is Extraco. After $6670 of property tax liens that prime Extraco’s mortgage, Extraco’s secured claim of about $66,000 is proposed to be paid in full at 4% over the course of 10 years. Its unsecured deficiency claim will be paid at 13 cents on the dollar beginning on the 50th month. The mortgage term was 15 years beginning in 1995. Other details are provided below.

[2] “Cure” is § 1123(a)(5)(G). “Modification” is § 1123(b)(5).

[3] In other words, Extraco complains that the transfers violated the mortgage instrument, but not the conveyancing law of this State. (Even the former is not supported by the document itself, as the Debtor has pointed out with emphasis.)

[4] That concession is the “flip side” of the Parks and Pescrillo cases cited above. In those cases the objecting creditors were original lenders opposing efforts by subsequent owners of the land to “cure” the defaults of the original borrowers, and those lenders’ objections were sustained. Extraco here agrees that if the Debtor here were DiGiulio (the original borrower), “lack of privity” would not protect Extraco.

[5] It appears from the record that DiGiulio lives there, but he may not claim a “homestead” because he does not own the property.

[6] See footnote 3, supra, and note that the mortgage did not prohibit unapproved sales of the mortgage property.

[7] Consider a different example. 11 U.S.C. § 523(a)(9) excepting certain debts arising from drunk driving from discharge was enacted in 1984. That did not mean that such debts were discharged before that. Rather, the amendment laid conflicting decisions to rest. At the time of that amendment the application of § 523 to Chapter 11 or 13 cases was in flux. The fact that it was made clear in 1984 that such debts were non-dischargeable in Chapter 7 does not mean that such debts were ipso facto dischargeable in other Chapters.

[8] The Court in Arden, however, also pointed out that the Plan before it had an “absolute priority rule” problem. So does the Plan here, as addressed below.

[9] It is true that 11 U.S.C. § 1124, in setting-forth what “impairment” means, speaks of reinstating the “original” maturity date, but § 1124 is relevant only to the question of whether a class is “impaired.” No reference to § 1124 is necessary in finding that Extraco’s secured and unsecured claims are “impaired.”

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New Bankruptcy Opinion: IN RE 11 EAST 36th LLC – Bankr. Court, SD New York, 2015

In re: 11 EAST 36TH LLC, et al., Chapter 11, Debtors.

11 EAST 36TH LLC, Plaintiff,



Case No. 13-11506 (JLG) Jointly Administered, Adversary No. 14-01819 (JLG).

United States Bankruptcy Court, S.D. New York.

May 20, 2015.

Jonathan S. Pasternak, Esq., Steven R. Schoenfeld, Esq., DELBELLO DONNELLAN WEINGARTEN WISE & WIEDERKEHR LLP, White Plains, New York, Attorneys for Plaintiff 11 East 36th LLC.

Mark A. Frankel, Esq., BACKENROTH FRANKEL & KRINSKY LLP, New York, New York, Attorneys for Defendants 11 East 36th Note Buyer LLC and Griffon V LLC

William F. Savino, Esq., Bernard Schenkler, Esq., WOODS OVIATT GILMAN LLP, Buffalo, New York, Attorneys for Defendants 11 East 36th Note Buyer LLC and Griffon V LLC.



JAMES L. GARRITY, Jr., Bankruptcy Judge.


Before the Court is the motion of Defendants 11 East 36th Note Buyer LLC (“Note Buyer”) and Griffon V LLC (“Griffon”) to dismiss portions of the amended complaint in the above-captioned adversary proceeding (the “Adversary Proceeding”) and the Plaintiff’s cross-motion for leave to file the amended complaint naming Griffon as a defendant nunc pro tunc. Note Buyer and Griffon argue that the amended complaint improperly revives a cause of action against Note Buyer that was previously dismissed, amends the original complaint beyond the scope permitted by the Court’s prior order granting leave to amend, and fails to state a claim upon which relief can be granted as to two newly-pled causes of action. The Plaintiff contends that it has adequately pled the new causes of action, denies that the amended complaint runs afoul of prior orders of the Court, and argues that, to the extent its amended complaint exceeds scope of the Court’s prior order granting leave to amend, the Court should grant retroactive relief to permit the filing of the amended complaint.

For the reasons set forth below, the motion to dismiss is GRANTED IN PART and DENIED IN PART. The Plaintiff’s cross-motion for leave to file the amended complaint against Griffon nunc pro tunc is GRANTED.


I. The Claim Objections and Adversary Proceeding

On May 8, 2013, 11 East 36th LLC and Morgan Lofts LLC (collectively, the “Debtors”) filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code in this Court. Together, the Debtors are the owners and developers of the Morgan Lofts condominium project located on East 36th Street in New York City. The project includes 20 residential units, two ground-floor commercial units, and one cellar unit. Each of the units was previously encumbered by a $10,000,000 note (the “Note”) and blanket mortgage (the “Mortgage”) dated March 20, 2008. The Note and Mortgage were previously held by Note Buyer as the assignee of First Central Savings Bank (“FCSB”), the original lender. The units were also encumbered by an approximately $2,900,000 judgment (the “Judgment”) previously held by Griffon as assignee of Chinatrust Bank.

On September 12, 2013, Note Buyer and Griffon each filed proofs of claim in this case (Claim Nos. 5 and 6, respectively) for amounts allegedly due and owing under the Note and Judgment. As amended, Note Buyer’s claim totaled $14,400,167, while Griffon’s totaled $2,970,610. On October 17, 2013, the Debtors filed objections to those claims. The Debtors sought to reduce Note Buyer’s claim by the sum of approximately $3,000,000 on account of allegedly excessive legal and management fees, charges for disputed protective advances and overstated interest charges, including charges for default interest. (See Motion Objecting to Claim 5 (the “Note Buyer Claim Objection”) [ECF 43 [1] ].) The Debtors also challenged approximately $250,000 of Griffon’s claim on account of disputed protective advances, interest on those advances and excessive legal fees. (See Motion Objecting to Claim 6 (the “Griffon Claim Objection” [ECF 44], collectively with the Note Buyer Claim Objection, the “Claim Objections”).) On December 31, 2013, Note Buyer and Griffon filed a joint opposition to the Claim Objections.

On February 7, 2014, while the Claim Objections were pending, Debtor 11 East 36th LLC (the “Plaintiff”) filed a complaint against FCSB, Note Buyer, and Mission Capital Advisors LLC (“Mission Capital”) initiating this Adversary Proceeding. (See Complaint (the “Complaint”) [AP ECF 1].) In substance, the Plaintiff contended that FCSB breached the Note and Mortgage by unjustifiably withholding consent to the Plaintiff’s proposed sale of the two ground-floor condominium units in October 2011.

According to the Complaint, at the same time the Plaintiff was seeking approval of the sale of the ground-floor units to a third party, FCSB was under pressure from its regulators to improve its capital base. As a result, FCSB had been attempting to sell off a pool of its loans, including the Note. If FCSB had allowed the Plaintiff’s proposed sale to go through, the Plaintiff would have been able to pay down approximately 45% of the outstanding balance of the Note, hurting FCSB’s marketing efforts. Accordingly, the Plaintiff alleges that FCSB “manufactured, arranged, and declared an artificial default” as an excuse to refuse the sale. (Compl. ¶ 41.) FCSB alleged that the Plaintiff had failed to pay real estate taxes, although it did not declare the Note in default and refused to inform the Plaintiff of the amount of the alleged default. FCSB deliberately kept the Plaintiff “in the dark” about the claimed default in order to prevent the Plaintiff from curing it. (Id. ¶ 28.) As a result, any purchaser of the loan portfolio from FCSB could immediately declare the Note in default — based on the circumstances created by FCSB — and begin collecting interest at the 24% default rate.

As originally pled, the Complaint contains five causes of action:

• Count 1 (against FCSB): Breach of contract;

• Count 2 (against FCSB): Breach of the implied covenant of good faith and fair dealing;

• Count 3 (against FCSB and Mission Capital): Fraud;

• Count 4 (against all Defendants): Declaratory judgment that, “as an assignee, Note Buyer `stands in the shoes’ of the assignor, FCSB,” and “is also liable for the damages for the wrongful acts described [in the Complaint]”; and

• Count 5 (against all Defendants): Declaratory judgment that the Plaintiff remains the rightful owner of the two ground-floor commercial condominium units and that, to the extent those units had been sold, “the buyer’s ownership or possession . . . is subject to liability, and to all of the Plaintiff’s defenses, as a result of the wrongful acts described [in the Complaint].”

II. The First Motion to Dismiss the Complaint

On March 28, 2014, FCSB, Note Buyer, and Mission Capital each moved to dismiss the Complaint (collectively, the “First Motion”) [AP ECF 8-11]. The Defendants challenged the legal sufficiency of the pleadings under Rule 12(b)(6) of the Federal Rules of Civil Procedure (“FRCP”) and, in addition, contested the factual underpinnings of the Complaint. As relevant here, Note Buyer sought dismissal on the grounds that: (1) the Plaintiff had failed to satisfy the necessary conditions precedent to permit the sale of the two ground-floor condominium units in 2011, (2) the Plaintiff had, in fact, been in default of the Note at the time FCSB refused to consent to the sale; and (3) to the extent the Plaintiff sought to assert claims against Note Buyer in its capacity as assignee, those claims should fail to the same extent the claims fail against FCSB.

Prior to the hearing on the First Motion, the Plaintiff agreed to dismiss Counts 3 and 5 of the Complaint (fraud and one of the two declaratory judgment claims, respectively), including all claims against Mission Capital. After hearing argument, the Court (Grossman, J.) [2] denied the First Motion. (See Memorandum Decision (the “June 26 Decision”) [AP ECF 21]. [3] ) As to the Defendants’ arguments that the Plaintiff had not satisfied the conditions precedent to permit the sale and was actually in default of the Note, the Court held that the Plaintiff’s version of events as pled in the Complaint was “plausible” and stated that it would not “choose between the version of events as offered by the [Plaintiff] and the version as offered by the Defendants.” (Id. at 8.) Accordingly, the Court held that Counts 1 and 2 of the Complaint properly pled claims against FCSB for breach of contract and breach of the implied covenant of good faith and fair dealing, respectively. (Id. at 6-11.)

The Court next turned to Count 4 of the Complaint. Although Count 4 was denominated as a declaratory judgment action, in fact it sought “to hold Note Buyer liable on a contractual basis as purchaser and assignee of the Note and Mortgage.” (Id. at 12 (citation omitted).) The Court held that Count 4 stated a claim for relief against Note Buyer:

The Court has found . . . that the [Plaintiff] has adequately pled counts 1 and 2 asserting claims for breach of contract and breach of the implied covenant of good faith and fair dealing against FCSB. To the extent that Note Buyer stands in FCSB’s shoes as assignee of the Note and Mortgage Agreement, the [Plaintiff] has also adequately pled count 4 on a contractual theory only. Given that the requirement that the complaint need only plead a “plausible entitlement to relief” to survive a motion to dismiss, the [Plaintiff] need not re-plead count 4 as it adequately pleads a contractual claim against Note Buyer as assignee of the [N]ote and Mortgage. (Id.) In its order denying the First Motion, the Court stated, in pertinent part, that “the Motions are DENIED as to counts 1, 2 and 4 of the Complaint.” (Order Denying Defendants’ Motions to Dismiss (the “First Denial Order”) [AP ECF 22].)

III. The Refinancing Transaction

In mid-2014, after the Court denied the First Motion, the Debtors obtained a commitment from Madison Realty Capital (“Madison”) for Madison to provide postpetition, debtor-in-possession financing (the “DIP Financing”) that they could use to refinance the Note and Judgment. By motion dated June 25, 2014, the Debtors sought authorization to close on the DIP Financing. (See Debtor’s [sic] Motion for Order Authorizing Debtors to Obtain Postpetition Financing and Granting Senior Security Interests and Superpriority Administrative Expense Status Pursuant to 11 U.S.C. § 364(d) (the “Financing Motion”) [ECF 124].)

In connection with the request for DIP Financing, the Debtors initially sought to borrow only enough funds to pay off the undisputed portion of the Note and Judgment, with a provision for an additional $6,500,000 to be advanced by Madison “upon the settlement or disposition of” the disputed amounts “in an amount equal to whatever amount is required to be paid on account of” the dispute. (Loan Commitment Letter dated June 25, 2014 [ECF 124-1].) The proposal was later revised to permit the Debtors to borrow up to $18,300,000, which would permit the payment in full of the disputed and undisputed portions of the Note and Judgment. (See Loan Commitment Letter dated July 24, 2014 [ECF 144-2].) However, since the Claim Objections were still pending, the Debtors sought to estimate the allowed amounts of the Note and Judgment and to preserve the objections by requiring Note Buyer and Griffon to escrow sufficient funds from the payoff to cover the disputed portions of their claims to the extent the Claim Objections were ultimately successful. (See Debtor’s [sic] (1) Estimation of Amount 11 East 36th Note Buyer LLC and Griffon V LLC Should Be Entitled to Credit Bid . . . and (2) Request to Require Secured Creditors to Hold Disputed Amounts of Claim in Escrow Pending Further Determination by the Bankruptcy Court [ECF 141].) [4]

At a hearing on August 5, 2014, the Court estimated the allowed amount of Note Buyer and Griffon’s claims to be $15,189,167 — the full amount that had been claimed — and rejected the Debtors’ request to require Note Buyer and Griffon to escrow the disputed portion. However, the Court stressed that the estimation was “not dispositive of any of the issues raised in the [Adversary Proceeding] at all. Those claims survive, the [Plaintiff] can bring them [as Note Buyer] will still be here as a party in that lawsuit. . . .” (Aug. 5, 2014 Hr’g Tr. 25:8-11.) The Court also observed that the Note Buyer Claim Objection was predicated on the same set of facts as the Adversary Proceeding. [5]

By order dated August 6, 2014, the Court approved the Financing Motion. (See Final Order Authorizing Debtors to Obtain Postpetition Financing and Granting Senior Security Interests and Superpriority Administrative Expense Status Pursuant to 11 U.S.C. § 364(d) and Providing Related Relief (the “Financing Order”) [ECF 159].) As relevant here, the Financing Order directs that Note Buyer and Griffon be paid the sum of $15,189,167, “less credit for rents collected in July and August 2014 plus expenses, together with final legal/professional fees.” (Id. ¶ 26.) The order also directs Note Buyer and Griffon “to deliver at closing . . . satisfactions of mortgage and judgment in recordable form, as applicable, or assignment of same in recordable form.” (Id. ¶ 28.)

At the closing, the Debtors requested that Note Buyer and Griffon agree to assign the Note, Mortgage, and Judgment to Madison, rather than accepting satisfactions of their existing claims and liens. Note Buyer and Griffon agreed to do so, and each executed and delivered assignments to Madison’s nominee, 11 East 36th Street 1 LLC.

IV. The Second Motion to Dismiss the Complaint

On September 9, 2014, Note Buyer and Griffon jointly moved pursuant to FRCP 54(b) [6] to reconsider the First Denial Order and to dismiss the Adversary Proceeding against Note Buyer and the Claim Objections against both of them. (See Motion to Dismiss Adversary Proceeding and Objections to Claim (the “Second Motion”) [ECF 171] [AP ECF 29].) According to the Second Motion, the Complaint against Note Buyer did not allege any independent wrongdoing by Note Buyer. Instead, the Complaint sought to hold Note Buyer liable solely as the assignee of FCSB. Since Note Buyer’s position as assignee of FCSB was assigned to Madison’s nominee in connection with the refinancing transaction, Note Buyer argued that Madison — and not Note Buyer — should be held accountable for FCSB’s conduct. In addition, both Note Buyer and Griffon argued that the Debtors had no right to recover from them any amounts that Madison had paid to purchase their claims; to the extent their claims were overstated or otherwise unenforceable, this would simply reduce the Debtors’ liability to Madison as assignee. Based on this “new evidence” — to wit, the assignment of Note Buyer and Griffon’s claims to Madison — Note Buyer and Griffon asked the Court to reconsider the June 26 Decision and the First Denial Order and to dismiss both the Adversary Proceeding and the Claim Objections. (See Second Motion ¶ 37.)

At a hearing on December 9, 2014, the Court denied the Second Motion, declining to “revisit[ ]” the First Denial Order. (Dec. 9, 2014 Hr’g Tr. 28:16.) [7] However, the Court questioned the procedural status of the Note Buyer Claim Objection given that Note Buyer’s claim had been purchased by Madison and Note Buyer was no longer a creditor of the Debtors. (See id. at 35:4-5 (“[I]f [Note Buyer] doesn’t have a claim, can we get rid of the claims objection?”); 35:17-18 (“I don’t think [the Court] can have a claims objection where there’s no claim.”); 36:11 (“[The Court] can’t have a claims objection without a claim.”).) Accordingly, the Court granted the Plaintiff leave to amend the Complaint and directed the Debtors to “withdraw the claim objection and add that into the complaint.” [8] (Id. at 36:14-15.) In response to Note Buyer’s concern that Plaintiff might amend the Complaint to assert claims that did not arise from FCSB’s alleged misconduct, the Court reiterated that the amendment “is going to emanate from the . . . lender liability case [i.e., this Adversary Proceeding].” (Id. at 37:6-8.)

On December 22, 2014, the Court entered an order (the “December 22 Order”) denying the Second Motion and granting the Plaintiff leave to file an amended complaint. (See Order (1) Denying 11 East 36th Note Buyer LLC’s Motion to Dismiss Adversary Proceeding, (2) Deeming Debtors’ Objections to Claim of 11 East 36th Note Buyer Withdrawn, (3) Granting Leave to Plaintiff to Amend Complaint to Add Claims Asserted in Claim Objection, and (4) Providing for Related Relief (the “Second Denial Order”) [AP ECF 35].) Among other things, the Second Denial Order directs that the Note Buyer Claim Objection is deemed withdrawn “subject to the [Plaintiff]’s right to update and incorporate the Claims Objection into Plaintiff’s Adversary Proceeding Complaint.” (Id. at 2.) It also grants the Plaintiff “leave to amend the Adversary Proceeding Complaint for the sole purpose of updating and incorporating the Claims Objection into the Complaint.” (Id.) The order does not make any reference to the Griffon Claim Objection.

V. The Amended Complaint

On January 31, 2015, the Plaintiff filed its amended complaint in the Adversary Proceeding. (See Amended Complaint (the “Amended Complaint”) [AP ECF 36].) The Amended Complaint names Griffon as an additional defendant and the underlying allegations therein essentially track those set forth in the Complaint, except that the Plaintiff added allegations to support its contention that FCSB, Note Buyer, and/or Griffon collected excessive interest from the Plaintiff totaling $5,978,168.09, (Am. Compl. ¶¶ 30-35), and other fees and charges totaling $1,146,724.98, (id. ¶¶ 36-40). The Amended Complaint contains five causes of action:

• Amended Count 1 (against FCSB and Note Buyer): Breach of contract;

• Amended Count 2 (against FCSB and Note Buyer): Breach of the implied covenant of good faith and fair dealing;

• Amended Count 3 (against all Defendants): Declaratory judgment that, “as an assignee,” Note Buyer “`stands in the shoes’ of the assignor, FCSB,” and “is also liable for the damages for the wrongful acts described [in the Amended Complaint]”;

• Amended Count 4 (against Note Buyer and Griffon): Objection to claims; and

• Amended Count 5 (against Note Buyer and Griffon): Disgorgement and turnover of property of the estate.

VI. The Motion to Dismiss the Amended Complaint

On March 2, 2015, Note Buyer and Griffon moved to dismiss the Amended Complaint. (See Motion to Dismiss Amended Complaint (the “Third Motion”) [AP ECF 39].) The Third Motion makes essentially three arguments in favor of dismissal. First, Note Buyer contends that Amended Counts 2 and 3 purport to hold it liable under the theory of breach of the implied covenant of good faith and fair dealing, which was implicitly dismissed by the June 26 Decision. Note Buyer argues that its alleged liability for damages was limited by the June 26 Decision to a claim for breach of contract as assignee of FCSB. Accordingly, Note Buyer objects to the Plaintiff’s assertion of that claim against Note Buyer in Amended Count 2 and its attempt to hold Note Buyer liable for all of the wrongful acts of FCSB in Amended Count 3. Second, both Note Buyer and Griffon contend that Amended Counts 4 and 5 improperly assert a claim objection and affirmative causes of action for disgorgement and turnover that should have been asserted as damages resulting from the Plaintiff’s lender liability claim. Third and finally, Griffon contends that the Plaintiff improperly joined it as a defendant without leave and despite the fact that it is not a party to the lender liability causes of action.

VII. The Opposition to the Third Motion and Cross-Motion for Leave to File the Amended Complaint Against Griffon Nunc Pro Tunc

On April 8, 2015, the Plaintiff filed opposition to the Third Motion and a cross-motion for leave to file the Amended Complaint against Griffon nunc pro tunc. (See Plaintiff Debtor’s Memorandum of Law in Opposition to 11 East 36 [sic] Note Buyer LLC’s and Griffon V LLC’s Motion to Dismiss the Amended Complaint and in Support of the Cross-Motion for Leave to File the Amended Complaint Nunc Pro Tunc to the Extent Such Leave Was Not Already Granted, and Cross-Motion for Such Relief (the “Opposition”) [AP ECF 44].) As to Amended Counts 2 and 3, the Plaintiff argues that neither the June 26 Decision nor the First Denial Order limited the Plaintiff’s claims against Note Buyer for breach of the implied covenant of good faith and fair dealing. As to Amended Counts 4 and 5, the Plaintiff argues that the claims are properly pled and were asserted pursuant to the Court’s direction that the Claim Objections be incorporated into the Adversary Proceeding. Finally, to the extent leave was not previously granted to join Griffon as a defendant, the Plaintiff argues that this was the result of an oversight and requests leave to file the Amended Complaint against Griffon nunc pro tunc.

On April 10, 2015, Note Buyer and Griffon filed a reply to the Opposition. (See Reply in Further Support of Motion to Dismiss Amended Complaint (the “Reply”) [AP ECF 46].) The Reply reasserts Note Buyer and Griffon’s arguments that (1) the Plaintiff’s claim for breach of the implied covenant of good faith and fair dealing was dismissed by the June 26 Decision and is now barred by the law of the case doctrine, and (2) Amended Counts 4 and 5 fail to state a claim upon which relief can be granted. Griffon also argues that leave to join it as a defendant should be denied because it has been prejudiced by the Plaintiff’s delay.


I. The Plaintiff’s Claims Against Note Buyer in Amended Counts 2 and 3 Were Not Dismissed by the June 26 Decision

According to Note Buyer, the “law of the case” mandates dismissal of Amended Counts 2 and 3 against it. “Under the law of the case doctrine, a decision on an issue of law made at one stage of a case becomes binding precedent to be followed in subsequent stages of the same litigation.” Liona Corp., Inc. v. PCH Assocs. (In re PCH Assocs.), 949 F.2d 585, 592 (2d Cir. 1991) . Law of the case “applies both that that which is expressly decided as well as to everything decided by necessary implication.” U.S. v. Yonkers Bd. of Educ., 856 F.2d 7, 11 (2d Cir. 1988) (quoting Fogel v. Chestnutt, 668 F.2d 100, 108 (2d Cir. 1981) (alterations and internal quotation marks omitted)). The doctrine “is in effect a reflection of the general policy encouraging judicial economy and finality.” In re Northern Telecom Ltd. Securities Litig., 42 F. Supp. 2d 234, 239 (S.D.N.Y. 1998) . “[A]lthough the law of the case doctrine discourages the reconsideration of matters previously decided absent cogent or compelling reasons, the doctrine is discretionary and does not constitute a limitation on the court’s power.” Weitzman v. Stein, 908 F. Supp. 187, 193 (S.D.N.Y. 1995) (citations and internal quotation marks omitted). Stated succinctly, the doctrine posits that, “where litigants have once battled for the court’s decision, they should neither be required, nor without good reason permitted, to battle for it again.” Zdanok v. Glidden Co., 327 F.2d 944, 953 (2d Cir. 1964) .

As noted above, Note Buyer argues that the Court previously limited its potential liability to the alleged breach of contract. Thus, Note Buyer concedes that Amended Count 1 “is arguably permissible and follows [from the June 26 Decision].” (Third Motion ¶ 38.) However, Note Buyer argues that the Plaintiff’s claim for breach of the implied covenant of good faith and fair dealing in Amended Count 2 “contradicts” the June 26 Decision since “[a] claim for relief based on breach of [the] implied covenant of good faith and fair dealing was limited by the [June 26 Decision] to FCSB only.” (Id. at ¶ 39 (emphasis original).) In support of its argument, Note Buyer relies on language in the June 26 Decision that the Plaintiff had properly pled a claim against Note Buyer “on a contractual theory only.” (June 26 Decision 12.) Note Buyer argues that this language endorses the Plaintiff’s “contractual theory” (i.e., its breach of contract claim) while implicitly dismissing its breach of the implied covenant claim. Accordingly, Note Buyer requests dismissal of Amended Count 2 (including Paragraph B of the demand for judgment) because it impermissibly exceeds the scope of the June 26 Decision.

Similarly, Note Buyer requests dismissal of Amended Count 3, which seeks relief from Note Buyer as assignee of FCSB and alleges that Note Buyer “is also liable for the damages for the wrongful acts described [in the Amended Complaint].” (Am. Compl. ¶ 66.) Note Buyer complains that Amended Count 3 constitutes “a back-door to demand more relief than was allowed by [the June 26 Decision] — which limited any relief against Note Buyer to breach of contract.” (Third Motion ¶ 41.) Likewise, Note Buyer complains about Paragraph C of the Plaintiff’s demand for judgment, which seeks relief against FCSB and Note Buyer for “all damages caused by their fraudulent actions and omissions.” (Am. Compl. ¶ C.) According to Note Buyer, the demand exceeds not only the June 26 Decision, but also the Plaintiff’s agreement to voluntarily dismiss its fraud claim from the Complaint. [9]

The Court disagrees with Note Buyer that Amended Counts 2 or 3 were previously dismissed or are otherwise barred by the law of the case doctrine. Neither the June 26 Decision nor the First Denial Order expressly or implicitly dismissed the Plaintiff’s claim for breach of the implied covenant of good faith and fair dealing against Note Buyer. The June 26 Decision is not ambiguous. In addressing Note Buyer’s argument in support of dismissal, the Court stated that “[Note Buyer’s] argument fails.” (June 26 Decision 12.) The First Denial Order states simply that the First Motion is “DENIED as to counts 1, 2 and 4 of the Complaint.” (First Denial Order 2.) Nowhere did the Court parse out the breach of the implied covenant claim in order to dismiss it in part solely as against Note Buyer.

As noted, Note Buyer’s law of the case argument relies primarily on the language in the June 26 Decision that the Plaintiff had pled a cause of action against Note Buyer “on a contractual theory only.” (June 26 Decision 12.) According to Note Buyer, the “contractual theory” referred to must have been the Plaintiff’s breach of contract claim, not its breach of the implied covenant claim. But this is not so. In New York, a breach of the implied covenant claim is a contractual claim. See Smile Train, Inc. v. Ferris Consulting Corp., 986 N.Y.S.2d 473, 475 (1st Dep’t 2014) (“[B]reach of the implied covenant of good faith and fair dealing is not a tort; rather, it is a contract claim.”). Thus, the statement in the June 26 Decision that the Plaintiff had “adequately ple[d] a contractual claim against Note Buyer as assignee of the [N]ote and Mortgage,” (June 26 Decision 12), supports the Plaintiff’s argument that the June 26 Decision did not dismiss either the breach of contract or breach of the implied covenant claims. The Plaintiff’s clarification in the Amended Complaint by expressly naming Note Buyer as a defendant in Amended Counts 2 and 3 does not provide any basis for dismissal.

Note Buyer’s additional argument that Paragraph C of the Plaintiff’s demand for judgment impermissibly revives its previously dismissed fraud claim also fails. Paragraph C refers to FCSB and Note Buyer’s “fraudulent actions and omissions.” (See Am. Compl. ¶ C.) After reviewing the Amended Complaint, the Court is satisfied that this language merely constitutes the Plaintiff’s attempt to characterize conduct described in the Amended Complaint, and does not revive or constitute a separate fraud claim under New York law.

Accordingly, the Third Motion is denied in its entirety as to Amended Counts 2 and 3.

II. Amended Count 4 — Not Amended Count 5 — Properly Incorporates the Note Buyer Claim Objection into the Adversary Proceeding

A. Amended Count 4 Will Not Be Dismissed

In Amended Count 4 — which is asserted against both Note Buyer and Griffon and is captioned as an “objection to claims” — the Plaintiff “objects to the Note Buyer Claim and Griffon Claim and seeks to reduce them by the aggregate sum of no less than $7,260,892 with such reductions to be apportioned between each claim as appropriate by the Bankruptcy Court.” (Am. Compl. ¶ 69.) The Amended Complaint alleges:

Note Buyer and/or Griffon have improperly, excessively, unreasonably and/or unlawfully charged approximately $7,260,892.89 in unlawful and improper interest, legal fees, protective advances and other related charges which were either attributable to FCSB’s breach of contract and unfair dealing and/or sought by Note Buyer and Griffon without reasonableness, adequate explanation, accounting or supporting documentation or other evidence.

(Id. ¶ 68.)

Note Buyer and Griffon argue that Amended Count 4 must be dismissed because they are no longer “creditors” and do not hold “claims” since the assignment of their claims to Madison as part of the refinancing transaction. (See Third Motion ¶¶ 44-45.) They contend that the lender liability claims that initially formed the basis of the Complaint are common-law claims that, pursuant to Stern v. Marshall, 564 U.S. ___, 131 S. Ct. 2594 (2011), cannot be finally adjudicated in this Court. (Id. ¶¶ 48-51.) According to the Third Motion, the Plaintiff’s use of the phrase “objection to claims” not only “improperly attempts to implicate bankruptcy jurisdiction where there is none,” (Third Motion ¶ 51), but it also violates the law of the case by expanding the Plaintiff’s claims beyond common-law lender liability.

The Court finds no merit to those contentions. Labeling Amended Count 4 as an “objection to claims” signifies that the allegations in that count derive from the Claim Objections. It is irrelevant that Note Buyer and Griffon no longer hold claims against the estate. The Court is satisfied that, at least as to Note Buyer, Amended Count 4 represents the Plaintiff’s attempt to “wrap” the Claim Objections into the Adversary Proceeding as its claim for “damages,” as instructed by the Court at the December 9, 2014 hearing. (See Dec. 9, 2014 Hr’g Tr. 35:15-16.) Thus, to the extent of the Plaintiff’s claims against Note Buyer, the Court may construe Amended Count 4 as a claim for additional damages arising out of Amended Counts 1, 2, and 3. See ACR Sys., Inc. v. Woori Bank, No. 14 Civ. 2817 (JFK), 2015 WL 1332337, at *3 (S.D.N.Y. Mar. 25, 2015) (construing two “unidentified causes of action” as claims for damages arising out of another pled cause of action). The fact that the Court may not have the power to finally resolve the Plaintiff’s lender liability causes of action under Stern has no bearing on whether Amended Count 4 adequately pleads a cause of action for damages. See Wagner v. Pruett (In re Vaughan Co.), 477 B.R. 206, 225 (Bankr. D.N.M. 2012) (“[A]ny jurisdictional defect implicated by Stern v. Marshall cannot serve as grounds for dismissal . . . .”).

The additional argument in the Third Motion that the law of the case doctrine bars Amended Count 4 fails as well. The Court never dismissed the Claim Objections or barred the Plaintiff from asserting them in the Adversary Proceeding; in fact, the exact opposite is true. The Second Denial Order specifically authorized the Plaintiff to incorporate the Note Buyer Claim Objection into the Amended Complaint.

The Court likewise denies the motion as to Griffon — which is not a defendant in Amended Counts 1, 2, or 3. As set forth below, the Court finds that incorporating the Griffon Claim Objection into the Adversary Proceeding is appropriate, and will grant the Plaintiff leave to do so nunc pro tunc. As regards Amended Count 4, the Court is empowered to, inter alia, “declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.” 28 U.S.C. § 2201(a). [10] The facts alleged by the Plaintiff in Amended Count 4 with respect to both Note Buyer and Griffon “show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 (2007) (quoting Maryland Cas. Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273 (1941) ). Accordingly, independent of the fact that the Court can construe Amended Count 4 as to Note Buyer as an additional claim for damages arising out of Amended Counts 1, 2, and 3, the Court declines to dismiss the claim as against either Note Buyer or Griffon.

Finally, Note Buyer and Griffon complain that the Plaintiff has combined its separate damages claims against them into a single lump-sum claim for damages totaling $7,260,892. (See Am. Compl. ¶ 69 (“Plaintiff hereby objects to the Note Buyer Claim and the Griffon Claim and seeks to reduce them by the aggregate sum of no less than $7,260,892, with such reductions to be apportioned between each claim as appropriate by the Bankruptcy Code.”)) Note Buyer and Griffon argue that combining the Plaintiff’s objections to those claims is inappropriate. See Bd. of Educ. v. Sargent, Webster, Crenshaw & Folley, 71 N.Y.2d 21, 28 (1987) (“[A party to a contract is] entitled to expect at the time it contract[s] with [the counterparty] that is liability [will] be determined by its own contractual undertaking. [That party] should not [during litigation] be confronted with potential liability based on the promise made by [another party] in its separate contract . . . .”).

The Court disagrees. Rather than dismissal under FRCP 12(b)(6), what Note Buyer and Griffon are in fact seeking is a clarification — or a “more definite statement” under FRCP 12(e) [11] — as to the amount of each of the their claims the Plaintiff is objecting to. That information will be available to the Defendants in discovery and need not be provided at the pleading stage. See, e.g., In re European Rail Pass Antitrust Litig., 166 F. Supp. 2d 836, 844 (S.D.N.Y. 2001) (“[A]llegations that are unclear due to a lack of specificity are more appropriately clarified by discovery rather than by an order for a more definite statement.” (citation and internal quotation marks omitted)).

Accordingly, the Third Motion is denied in its entirety as to Amended Count 4.

B. Amended Count 5 Will Be Dismissed for Failure to State a Claim

Note Buyer and Griffon next attack Amended Count 5, which alleges that they “improperly and unlawfully received and/or were unjustly enriched” in connection with the refinancing and seeks as a remedy “disgorgement and turnover of property of the estate.” (Am. Compl. ¶¶ 70-72). According to the Third Motion, Amended Count 5 should be dismissed under FRCP 12(b)(6) [12] because the Plaintiff has failed to state claims for disgorgement, turnover, and unjust enrichment assuming the truth of the allegations in the Complaint. The Court agrees.

In order to survive a motion to dismiss under FRCP 12(b)(6), a complaint must allege sufficient facts “to state a claim that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007) . Facial plausibility exists when a plaintiff “pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) . In considering a motion under FRCP 12(b)(6), courts must “tak[e] the factual allegations of the complaint to be true and draw[ ] all reasonable inferences in the plaintiff’s favor.” Warren v. Colvin, 744 F.3d 841, 843 (2d Cir. 2014) .

As to the Plaintiff’s disgorgement theory, Amended Count 5 purports to state a claim “for the recovery of money received by Note Buyer and Griffon that they are not entitled to retain.” (Opp’n ¶ 65.) The claim is based on allegations that Note Buyer and Griffon have “been overpaid monies to which [they were] not entitled under law.” (Id. ¶ 66.) In New York, disgorgement is an equitable remedy that “aims to deter wrongdoing by preventing the wrongdoer from retaining ill-gotten gains from fraudulent conduct.” People v. Ernst & Young, LLP, 980 N.Y.S.2d 456, 457 (1st Dep’t 2014) . Assuming that the facts alleged by the Plaintiff are true, the allegations in Count 5 fail to properly set forth a cause of action for disgorgement. See Piccarreto v. Mura, 970 N.Y.S.2d 408, 426 (Sup. Ct. 2013) (“[D]isgorgement may not stand as an independent cause of action as disgorgement of payments is really a damage claim.” (citation omitted); see also Access Point Med., LLC v. Mandell, 963 N.Y.S.2d 44, 47 (1st Dep’t 2013) (“[P]laintiffs’ demand . . . is, essentially, a claim for money damages. The calculated use of the term `disgorgement’ . . . should not be permitted to distort the nature of the claim . . . .”). As the Plaintiff has already asserted a claim for money damages in Amended Count 4 based on the same set of facts, its claim for disgorgement is duplicative and should be dismissed. See Betz v. Blatt, 984 N.Y.S.2d 378, 382 (2d Dep’t 2014) (dismissing disgorgement claim as duplicative where the claim was “based on the same set of facts” as other causes of action for money damages and therefore “did not allege [a] distinct cause[ ] of action”).

As is the case with the Plaintiff’s disgorgement theory, the facts alleged in support of Amended Count 5 are also insufficient to allege a cause of action on a turnover theory pursuant to § 542 of the Bankruptcy Code. Section 542 states, in pertinent part:

(a) Except [in situations not relevant here], an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 . . . shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.

(b) Except [in situations not relevant here], an entity that owes a debt that is property of the estate and that is matured, payable on demand, or payable on order, shall pay such debt to, or on the order of, the trustee . . . .

11 U.S.C. § 542(a), (b). An element of either cause of action is the lack of any dispute of the estate’s interest in the property sought to be turned over. See Penthouse Media Grp. v. Guccione (In re Gen. Media, Inc.), 335 B.R. 66, 76 (Bankr. S.D.N.Y. 2005) (“Section 542(a) does not apply if title [to the property of which turnover is sought] is disputed.”); Hassett v. BancOhio Nat’l Bank (In re CIS Corp.), 172 B.R. 748, 760 (Bankr. S.D.N.Y. 1994) (an action should be regarded as a turnover proceeding under § 542(b) “only when there is no legitimate dispute over what is owed to the debtor”). Under either section, “[i]t is settled law that the debtor cannot use the turnover provisions to liquidate contract disputes or otherwise demand assets whose title is in dispute.” Hirsch v. London S.S. Owners Mut. Life Ins. Ass’n Ltd. (In re Seatrain Lines, Inc.), 198 B.R. 45, 50 n.7 (S.D.N.Y. 1996) .

On the face of the Amended Complaint, it is clear that the Plaintiff is attempting to use Amended Count 5 to liquidate a disputed debt. (See, e.g., Am. Compl. ¶¶ 30-46 (outlining disputes with Note Buyer and Griffon over various amounts allegedly due).) Even assuming that all of the Plaintiff’s allegations in the Amended Complaint are true, Amended Count 5 simply fails as a matter of law to state a claim for relief for turnover under § 542. See Weiner’s, Inc. v. T.G. & Y. Stores Co., 191 B.R. 30, 32 (S.D.N.Y. 1996) (“[A]n action to determine the amount of a claimed debt to the estate that is, as yet, wholly disputed and unliquidated cannot properly be styled an action to `turnover’ estate `property.'”); J.T. Moran Fin. Corp. v. Am. Consol. Fin. Corp. (In re J.T. Moran Fin. Corp.), 124 B.R. 931, 938 (Bankr. S.D.N.Y. 1991) (“Where . . . the court must resolve whether or not the debt claimed is due, the action to collect the disputed funds cannot be regarded as a turnover proceeding. . . .”).

Amended Count 5 fails to state a claim for relief under a turnover theory for the additional reason that, “[t]o the extent that a bona fide dispute exists with regard to the existence of an identifiable fund or res, a proceeding to recover that res is not a turnover . . . unless and until the existence, magnitude, and identity of the res are first established.” Acolyte Elec. Corp. v. City of New York, 69 B.R. 155, 171 (Bankr. E.D.N.Y. 1986) . The Amended Complaint fails to allege the existence, magnitude, and identity of the res of which the Plaintiff seeks turnover.

Finally, as to the Plaintiff’s unjust enrichment theory, Note Buyer and Griffon argue that the claim must be dismissed because the legal rights of Note Buyer and Griffon are governed by contracts, and “unjust enrichment is an obligation that the laws create in the absence of an agreement.” (Third Motion ¶ 59 (quoting Goldman v. Metropolitan Life Ins. Co., 5 N.Y.3d 561, 572 (2005) ). The Court agrees. Even taking all of the facts alleged in the Amended Complaint as true, the Plaintiff has failed to set forth a cause of action for unjust enrichment under New York law because it is undisputed that there were written agreements governing the claims of both Note Buyer and Griffon.

“[I]n New York, it is well-recognized that an action for unjust enrichment may only be brought in the absence of a written contract relating to the same subject matter.” Northeast Indus. Dev. Corp. v. Parkstone Capital Partners, LLC (In re Northeast Indus. Dev. Corp.), 513 B.R. 825, 842 (Bankr. S.D.N.Y. 2014) (citing Clark-Fitzpatrick, Inc. v. Long Is. R.R. Co., 70 N.Y.2d 382, 388 (1987) ); see also IDT Corp. v. Morgan Stanley Dean Witter & Co., 12 N.Y.3d 132, 142 (2009) (“Where parties executed a valid and enforceable written contract governing a particular subject matter, recovery on a theory of unjust enrichment for events arising out of that subject matter is ordinarily precluded.”). As stated by the New York Court of Appeals:

The basis of a claim for unjust enrichment is that the defendant has obtained a benefit which in equity and good conscience should be paid to the plaintiff. In a broad sense, this may be true in many cases, but unjust enrichment is not a catchall cause of action to be used when others fail. It is available only in unusual situations when, though the defendant has not breached a contract or committed a recognized tort, circumstances create an equitable obligation running from the defendant to the plaintiff. Typical cases are those in which the defendant, though guilty of no wrongdoing, has received money to which he or she is not entitled. An unjust enrichment claim is not available where it simply duplicates, or replaces, a conventional contract or tort claim.

Corsello v. Verizon New York, Inc., 18 N.Y.3d 777, 790 (2012) (emphasis added) (citations and internal quotation marks omitted). As it is undisputed that the rights of Note Buyer and Griffon are governed by their respective contracts, recovery against those parties under the theory of unjust enrichment is precluded as a matter of law. See id.

For these reasons, the Court agrees that the Plaintiff has failed to state a cause of action under any of the legal theories pled in Amended Count 5. That claim is dismissed.

III. The Plaintiff Will Be Granted Leave to File the Amended Complaint Nunc Pro Tunc to Join Griffon as a Defendant

Finally, Griffon moves to dismiss the Amended Complaint as against it in light of the fact that the Court did not grant the Plaintiff leave to join Griffon as a defendant. By cross-motion, the Plaintiff requests that the Court grant it leave, nunc pro tunc, to file the Amended Complaint adding Griffon as a defendant and incorporating the Griffon Claim Objection into the Adversary Proceeding. Griffon opposes the cross-motion.

FRCP 15 provides that, except in circumstances not relevant here, “a party may amend its pleading only with the opposing party’s written consent or the court’s leave. The court should freely give leave when justice so requires.” Fed. R. Civ. P. 15(a)(2). “[I]t is within the sound discretion of the district court to grant or deny leave to amend.” McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200 (2d Cir. 2007) . “A district court has discretion to deny leave for good reason, including futility, bad faith, undue delay, or undue prejudice to the opposing party.” Id. (citing Foman v. Davis, 371 U.S. 178, 182 (1962) ); see also Anthony v. City of New York, 339 F.3d 129, 138 n.5 (2d Cir. 2003) (“We have interpreted [FRCP 15] in favor of allowing . . . amendment absent a showing by the non-moving party of bad faith or undue prejudice.”).

Where a proposed amendment seeks to add or drop a party, FRCP 21 applies. See D’Attore v. New York City, No. 10 Civ. 6646 (WHP)(JCF), 2012 WL 2952853, at *3 (S.D.N.Y. July 19, 2012) (“Where . . . a proposed amendment adds new parties, the propriety of the amendment is governed by Rule 21 . . . .”). FRCP 21 states that, “[o]n motion or on its own, the court may at any time, on just terms, add or drop a party.” Fed. R. Civ. P. 21. “In analyzing a request to add a party under Rule 21, the court is guided by the same standard of liberality afforded to motions to amend pleadings under Rule 15.” Smith v. Manhattan Club Timeshare Ass’n, Inc., 944 F. Supp. 2d 244, 256 (S.D.N.Y. 2013) (citation and internal quotation marks omitted). Accordingly, “[w]here parties satisfy the requirements under Rule 15(a) for leave to amend, they will generally be permitted to add parties under Rule 21.” Commisso v. PricewaterhouseCoopers LLP, No. 11 Civ. 5713 (NRB), 2012 WL 3070217, at *2 n.6 (S.D.N.Y. July 27, 2012) .

The Plaintiff argues that the Griffon Claim Objection — like the Note Buyer Claim Objection — can no longer be maintained as a claim objection because Griffon is no longer the holder of a claim against the estate. (See, e.g., Dec. 9, 2014 Hr’g Tr. 36:11 (“[The Court] can’t have a claims objection without a claim.”)). Thus, the Plaintiff argues that it will further judicial efficiency to permit the Plaintiff to join Griffon as a defendant in this Adversary Proceeding given the issues of law and fact common to both Note Buyer and Griffon. The Plaintiff contends that Griffon will not be prejudiced by the amendment because the Adversary Proceeding is still in its early stages and Griffon has been on notice of the substance of the Griffon Claim Objection for more than a year.

Griffon disagrees and requests that the cross-motion be denied. Griffon argues that it would be prejudiced by the proposed amendment because (1) the Plaintiff unduly delayed in waiting since the refinancing to attempt to join Griffon as a defendant, and (2) Griffon already agreed to accept a payoff of $3,306,385.72 in connection with the refinancing, which was less than the actual amount due of $3,421,222.15. Griffon also contends that the Court has already limited the Plaintiff’s right to amend solely to claims “emanat[ing] . . . from the lender liability case.” (Id. at 37:6-8.)

The Court finds Griffon’s arguments unpersuasive. The Griffon Claim Objection has been pending since it was filed in October 2013. Griffon has been on notice of the arguments to reduce its claim since at least that time. Although the form of the Plaintiff’s requested relief has changed from the Claim Objections to the Adversary Proceeding, Griffon has not alleged that the Plaintiff is seeking different or additional relief than that set forth in the Griffon Claim Objection.

Moreover, the fact that the Court already limited the Plaintiff’s leave to claims arising out of the lender liability claims against FCSB and Note Buyer is not dispositive. At the hearing held on December 9, 2014, no party raised the issue of joining Griffon as a defendant in the Adversary Proceeding, so the Court had no occasion to consider whether it would be appropriate. The Plaintiff has admitted that this was an “oversight,” (Opp’n ¶ 53), and no credible suggestion has been made that the Plaintiff was acting in bad faith. Had the Court considered the fact that Griffon was in the same procedural position as Note Buyer, there is no doubt that the Court would have granted the Plaintiff leave to amend with respect to Griffon as well. See Shariff v. Amanda Realty, Inc., No. 11-CV-2547 (SLT)(CLP), 2013 WL 5522444, at *5 (E.D.N.Y. Sept. 30, 2013) (granting leave to amend and add a party, nunc pro tunc, where “it is clear that, had plaintiff sought permission from the Court to amend the Complaint, his request would have been granted”).


For the foregoing reasons, the Third Motion is DENIED as to Counts 2, 3, and 4 of the Amended Complaint and GRANTED as to Count 5 of the Amended Complaint. The Plaintiff’s cross-motion for leave to file the Amended Complaint nunc pro tunc is GRANTED. Counsel for the Plaintiff is directed to settle an order on notice to the Defendants.

[1] References to “ECF” refer to the electronic docket maintained in the Debtors’ above-captioned bankruptcy case, No. 13-11506 (JLG). References to “AP ECF” refer to the docket maintained in the above-captioned adversary proceeding, No. 14-01819 (JLG).

[2] When the Debtors’ bankruptcy case was filed in May 2013, it was assigned to the Honorable James M. Peck. After Judge Peck’s retirement effective January 31, 2014, the case was temporarily reassigned to the Honorable Robert E. Grossman, sitting by designation in the Southern District of New York pursuant to an order signed on January 6, 2014 by the Honorable Robert A. Katzmann, Chief Circuit Judge for the Second Circuit Court of Appeals. The Adversary Proceeding was assigned to Judge Grossman when it was filed on February 7, 2014, who presided over it until it was reassigned to the undersigned on February 18, 2015.

[3] 11 East 36th LLC v. First Central Savings Bank (In re 11 East 36th LLC), No. 14-01819 (RG), 2014 WL 2903660 (Bankr. S.D.N.Y. June 26, 2014).

[4] Note Buyer and Griffon had previously filed a motion to estimate their own claims. (See Motion to Estimate Claims for Plan Purposes [ECF 82].)

[5] In pertinent part, the Court stated:

[W]hat the [Debtors] ha[ve] is a claims objection. They have a claims objection and they have an adversary basically. [The] adversary is predicated on . . . lender liability causes of action. The claims objection is basically predicated on the same facts, that [the Debtors] object to the amount of the secured creditors’ claim because but for their conduct that claim would be less. Where I’m going to come out is that [Note Buyer and Griffon] are going to have an allowed claim . . . and [the Debtors will] have to pay off . . . [the full amount of the Note and Judgment]. That preserves [the Debtors’] right to sue them . . . .

(Aug. 5, 2014 Hr’g Tr. 14:6-21.)

[6] FRCP 54(b) provides, in pertinent part:

[A]ny order or other decision, however designated, that adjudicates fewer than all the claims or the rights and liabilities of fewer than all the parties does not end the action as to any of the claims or parties and may be revised at any time before the entry of a judgment adjudicating all the claims and all the parties’ rights and liabilities.

Fed. R. Civ. P. 54(b). Bankruptcy Rule 7054(a) makes FRCP 54(b) applicable in this Adversary Proceeding. See Fed. R. Bankr. P. 9054(a).

[7] In pertinent part, the Court stated:

Well I think that on a motion to dismiss there has to be no plausible case . . . . [The Plaintiff’s] argument is . . . that the conduct of the banks, lenders . . . rises to the level of a contractual breach of a duty that was owed to the borrower. Now I can tell you that, especially in the Second Circuit, finding the duty owed to a borrower is extraordinarily difficult and finding damages for a breach of that are equally extraordinarily difficult. But what’s in front of me is not a summary judgment motion. What’s in front of me is a motion to dismiss . . . . I think there’s a — there is a set of facts which is plausible . . . that the [Plaintiff] does have a case to say somebody did something to me . . . . So I’m going to deny the motion to dismiss . . . .

(Dec. 9, 2014 Hr’g Tr. 32:20-33:25.)

[8] Specifically, the Court directed the Debtors to “wrap [the Note Buyer Claim Objection] up in the complaint, either for disgorgement or damages or someplace.” (Dec. 9, 2014 Hr’g Tr. 35:15-16.) The Court noted that the Plaintiff’s claims arose from “improper legal fees . . ., accelerating [the debt] too soon, default [interest],” which could be “wrap[ped] into damages. So it should all be in a complaint [that Note Buyer] can respond to and we can try.” (Id. at 36:8-11.)

[9] The Plaintiff’s fraud claim, which was Count 3 of the Complaint, was dismissed by the First Denial Order. (See First Denial Order 2 (“Ordered that counts 3 and 5 of the Complaint are hereby dismissed on consent of the [Plaintiff].”))

[10] By citing to the Declaratory Judgment Act, the Court does not mean to imply that Amended Count 4 is limited to a claim declaring the rights of the parties. The Plaintiff is not required to properly plead all of the legal theories under which it may be entitled to relief. See, e.g., Newman v. Silver, 713 F.2d 14, 15 n.1 (2d Cir. 1983) (noting that federal pleading provides for “statement of claim, not . . . legal theories”).

[11] FRCP 12(e) states in pertinent part that “[a] party may move for a more definite statement of a pleading to which a responsive pleading is allowed but which is so vague or ambiguous that the party cannot reasonably prepare a response.” Fed. R. Civ. P. 12(e). Bankruptcy Rule 7012(b) makes FRCP 12(e) applicable in this Adversary Proceeding. See Fed. R. Bankr. P. 7012(b).

[12] FRCP 12(b)(6) permits a party to move for dismissal of a complaint for “failure to state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). Bankruptcy Rule 7012(b) makes FRCP 12(b)(6) applicable in this Adversary Proceeding. See Fed. R. Bankr. P. 7012(b).

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