Justia U.S. 3rd Circuit Court of Appeals Opinion Summaries

Plaintiffs installed shingles manufactured by Owens Corning (debtor). They discovered leaks in 2009; shingles had cracked. Each sent warranty claims, which were rejected. They filed a class action alleging fraud, negligence, strict liability, and breach of warranty. In 2000, the debtors had filed Chapter 11 bankruptcy petitions; the Bankruptcy Court set a claims bar date in 2002 and approved a notice that appeared in multiple publications. Notices of the confirmation hearing for the Plan, in 2006, included generic notice to unknown claimants. At the time they filed the class action plaintiffs did not hold “claims” under 11 U.S.C. 1101. The Third Circuit subsequently established a rule that a claim arises when an individual is exposed pre-petition to a product or other conduct giving rise to an injury, which underlies a right to payment under the Bankruptcy Code. Based on that holding, the district court held that plaintiffs’ claims were discharged. The Third Circuit affirmed in part and remanded, agreeing that plaintiffs had “claims.” Both were “exposed” to the product before confirmation of the plan. Plaintiffs were not afforded due process by published notice, however, because they could not have known they had claims at the time of confirmation. View "Wright v. Owens Corning" on Justia Law

Debtors began development of a subdivision and entered into a construction loan agreement with Bank Lenders, who retained a lien on substantially all of Debtors' assets. Debtors subsequently borrowed from Cornerstone, which similarly received liens and later agreed to subordinate the claims to that of Bank Lenders. After selling approximately a quarter of the planned units, Debtors filed petitions for relief under Chapter 11. The final plan of reorganization, confirmed by the court, specified that claims of Cornerstone would be secured to the extent determined by the court and included a budget that anticipated full payment of both Bank Lenders and Cornerstone; unsecured claimants would receive about 45 percent. The court valued Cornerstone's claims, using fair market value of the project on the plan confirmation date, rather than potential use and disposition value. Because the amount due Bank Lenders exceeded that value plus the value of other assets, no collateral remained to secure Cornerstone's claims; Cornerstone was treated as unsecured. The district court and Third Circuit affirmed. The Bankruptcy Court properly accepted the valuation because it overcame the presumed validity and amount of the Cornerstone’s secured claims. Cornerstone did not prove that secured claims were worth more than the valuation indicated. View "In re: Heritage Highgate Inc." on Justia Law

A Trustee was appointed in a Chapter 7 bankruptcy. The estate included 44 lots, subdivided and zoned for mobile homes. Lot 45 contained an assisted living facility. The lots shared infrastructure and were subject to restrictions, including one prohibiting transfer of lots for construction of residences and requiring that title remain in the developer. GCL purchased Lot 45. The township solicitor agreed and the Bankruptcy Court declared the sale free of the restriction. The Trustee discovered that some residents had affixed mobile homes to the land. To resolve the matter, the Trustee agreed to sell lots to the residents. The trustee and the township entered agreement, abrogating the restriction as to the lots. CGL, not a party to that agreement, alleged that the sales damaged its property interests in Lot 45 and that the agreement deprived CGL of its property rights without notice and without due process of law. The Bankruptcy Court concluded that the claims were not frivolous and could be filed in state court. The district court and Third Circuit affirmed. The Barton doctrine, which requires a party seeking to sue a court-appointed receiver, to obtain leave of the appointing court, continues to apply to bankruptcy trustees.View "In Re: VistaCare Group, L.L.C." on Justia Law

The company and its affiliates filed for Chapter 11 bankruptcy and sought to resolve asbestos-related liability through the creation of a personal-injury trust under 11 U.S.C. 524(g). As part of its reorganization plan, it sought to transfer rights under insurance liability policies to the trust. The Insurers had provided liability policies to the debtors prior to bankruptcy and objected that the transfer violated the policies' anti-assignment provisions. The bankruptcy and district courts held that 11 U.S.C. 1123(a)(5)(B) preempts those provisions. The Third Circuit affirmed. Section 524 trusts are the only national statutory scheme available to resolve asbestos litigation through a quasi-administrative process. The plain language of 11 U.S.C. 1123(a) evinces clear intent for a preemptive scope that includes transfer of property to a 524 trust; that preemption reaches private contracts enforced by state common law. View "In Re: Fed-Mogul Global, Inc." on Justia Law

Harold and his son William started a corporation, operated by William. Harold made loans to the corporation. When the corporation ceased operating William and his wife formed PCI-2 to take its place; despite an agreement, Harold's loans were not repaid and Harold made loans to PCI-2, lending about $300,000 to PCI-1 and PCI-2. William and his wife acquired other corporations and substantial real estate holdings. One business, WEL, issued one share of stock to Harold and nine shares to Harold as custodian for William's infant son, L.L. Harold was a director of WEL. William and his wife divorced. In 2004, Harold filed a loan repayment lawsuit against WEL and PCI-2; William did not defend, asserting there was no money. Harold obtained default judgments of $1,107,550 and $1,204,439, commenced execution proceedings against property that WEL owned, and obtained approximately $320,000 in proceeds. In the Bankruptcy Court, a custodian for shares owned by L.L. sought to recover $345,000 from Harold, claiming that Harold breached his fiduciary duties owed to L.L. The Bankruptcy Court and the district court rejected the claim. The Third Circuit reversed. Harold breached his duties as a WEL director and as a custodian for L.L.'s shares. View "In re: Lampe, Jr" on Justia Law

Nortel employed about 24,000 people worldwide when it filed Chapter 11 petitions. Its affiliates entered insolvency proceedings in Canada and the U.K. The Bankruptcy Court recognized the foreign proceedings as triggering the automatic stay of 11 U.S.C. 362(a). Nortel entities from several countries entered into an Interim Funding and Settlement Agreement, approved by the Bankruptcy Court, providing for cooperation in sales of business units and that proceeds of any sale will be held in escrow. Claims filed in the U.S. asserted that U.S. debtors might be required to provide financial support for U.K. pension obligations under the U.K. Pensions Act 2004. The claims were contingent and unliquidated, based on the outcome of the U.K. proceedings. U.S. debtors sought to enforce the stay, to prevent participation in U.K. proceedings concerning their liability. The court granted the motion, holding that the police power exception to the automatic stay did not apply because neither the Trustee nor the U.K. agency is a governmental unit under 11 U.S.C. 101(27) and that U.K. proceedings do not pass the public policy or pecuniary purpose tests because the focus is a benefit for a private party, the Trustee. Canadian courts reached the same conclusion. The district court affirmed the stay. In U.K. proceedings, the debtors were ordered to secure financial support for the plan. The Third Circuit affirmed the stay.View "In Re: Nortel Network" on Justia Law

The nonprofit corporation was founded as a home for elderly African-Americans in 1883. In the 1980s its financial condition began to deteriorate and, in 2004, the administrator recommended bankruptcy. The board opted to take a $1 million loan, after which there were two unusual patient deaths; the board and administration fell into disarray. When the board eventually filed Chapter 11 bankruptcy, a committee of unsecured creditors filed claims against directors and officers for breach of the fiduciary duties of care and loyalty and for deepening insolvency. The district court rejected the claims. The Third Circuit vacated, finding genuine disputes of material facts. The court noted evidence that the board and officers had reason to know that its administrators were not reliable and competent and did not act with reasonable diligence. There was evidence that breaches of fiduciary duties benefited defendants' individual interests and that defendants contributed to the deepening insolvency.

The United States Trustee, Region 3, appealed a district court’s reversal of sanctions originally imposed by the bankruptcy court on attorneys Mark Udren and Lorraine Doyle and HSBC for violating the Federal Rules of Bankruptcy Procedure. "This case [was] an unfortunate example of the ways in which overreliance on computerized processes in a high-volume practice, as well as a failure on the part of client and lawyers alike to take responsibility for accurate knowledge of a case, can lead to attorney misconduct before a court." At issue were two pleadings that HSBC’s attorneys filed in bankruptcy court. Both documents contained imperfect information and were filed with the court. The attorneys appealed the sanctions order arguing that the facts contained in the filed documents were "actually literally true." Upon review, the Third Circuit found that the statements therein were not wholly true, and faulted counsel for "rubber-stamping" the information taken from its computerized database without additional investigation as to their veracity: "[w]here a lawyer systematically fails to take any responsibility for seeking adequate information from her client, makes representations without any factual basis because they are included in a "form pleading" she has been trained to fill out, and ignores obvious indications that her information may be incorrect, she cannot be said to have made reasonable inquiry." The Court concluded the bankruptcy court did not abuse its discretion in imposing sanctions on Doyle or the Udren Firm itself. However, it found the lower court abused its discretion in imposing sanctions on Udren individually.

The company filed a Chapter 11 bankruptcy petition and continued to make payments to pension plans, as required by collective bargaining agreements. When the company was sold and it no longer employed individuals covered by the plans, the pension fund filed a claim for $5,890,128 (withdrawal liability) and requested that the claim be classified as an administrative expense. The bankruptcy court classified the claim as unsecured debt. The district court reversed and remanded, holding that the portion of withdrawal liability attributable to the post-petition period was entitled to priority. The Third Circuit affirmed. If entire withdrawal liability were automatically classified as a general unsecured claim, it would undercut the purpose of the Multiemployer Pension Plan Amendments Act, 29 U.S.C. 1381, amendment to the Employee Retirement Income Security Act: to secure the finances of pension funds and prevent an employer's withdrawal from negatively affecting the plan and its employee beneficiaries.

The district court denied insurance companies standing to challenge a Chapter 11 plan of reorganization for a debtor facing asbestos and silica-related injury claims and affirmed the plan. The Third Circuit vacated and remanded, holding that the companies have bankruptcy standing. The availability of hundreds of millions of dollars in insurance cover was a major assumption underlying the plan; insurance policies were assigned to specific trusts created for the injury claims, in contravention of anti-assignment clauses in the policies. The plan puts a "hand in the pocket" of the insurance companies, which, therefore, qualify as parties in interest under 11 U.S.C. 1109(b). Although the plan preserves coverage defenses, it increases the companies' pre-petition liability exposure more than 27 times over. Noting the likely increase in costs of administration and investigation, the court held that the interests are not speculative. The court stated that an allegation that the debtor "sold out" the insurers to gain approval of the plan by plaintiffs' attorneys was "not without record support."