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

Net Pay managed clients’ payrolls and handled their employment taxes pursuant to a “Payroll Services Agreement,” which required clients to provide their employee payroll information and gave clients the option of authorizing Net Pay to transfer funds from their bank accounts into Net Pay’s account and to remit those funds to the clients’ employees, the IRS, and other taxing authorities. The Agreement established an independent contractor relationship between Net Pay and its clients. About three months before it filed its Chapter 7 petition, Net Pay transferred $32,297 on behalf of Altus; $5,338 on behalf of HealthCare Systems; $1,143 on behalf of Project Services; $352.84 for an unknown client; and $281.13 for another unknown client. The next day, Net Pay informed its clients that it was ceasing operations. The trustee for Net Pay sought to recover the five payments, arguing that they were avoidable preferential transfers, 11 U.S.C. 547(b). The district court concluded that four of the transfers were not subject to recovery, being below the minimum amount established by law ($5,850), and that distinct transfers may be aggregated only if “‘transactionally related’ to the same debt.” Because the IRS applied the entire $32,297 toward Altus’s trust fund tax obligations, the court held that the payment was not avoidable. The Third Circuit affirmed. Net Pay lacked an equitable interest in the Altus funds by operation of 26 U.S.C. 7501(a). View "In Re: Net Pay Solutions Inc" on Justia Law

WI buys furniture wholesale. OEC provided WI with non-vessel-operating common carrier transportation services. WI signed an Application for Credit that granted a security interest in WI property in OEC’s possession, custody or control or en route. As required by federal law, OEC also publishes a tariff with the Federal Maritime Commission, which provides for a Carrier’s lien. WI filed voluntary Chapter 11 bankruptcy petitions. OEC sought relief from the automatic stay, arguing that it was a secured creditor with a possessory maritime lien. OEC documented debts of $458,251 for freight and related charges due on containers in OEC’s possession and $994,705 for freight and related charges on goods for which OEC had previously provided services. The estimated value of WIs’ goods in OEC’s possession was $1,926,363. WI filed an adversary proceeding, seeking release of the goods. The bankruptcy court ruled in favor of WI, citing 11 U.S.C. 542. The district court affirmed, holding that OEC did not possess a valid maritime lien on Pre-petition Goods. The Third Circuit reversed, noting the strong presumption that OEC did not waive its maritime liens on the Prepetition Goods, the clear documentation that the parties intended such liens to survive delivery, the familiar principle that a maritime lien may attach to property substituted for the original object of the lien, and the parties’ general freedom to modify or extend existing liens by contract. View "In re: World Imports LTD" on Justia Law

Wettach was a partner at theTitus law firm, which rented space from Trizec under a long-term lease. After the firm's 1999 dissolution, Trizec filed suit against Titus’s former partners for unpaid rent. The Pennsylvania court found the partners jointly and severally liable for more than $2,700,000. Before that court entered final judgment Wettach filed a voluntary Chapter 7 bankruptcy petition, listing $3,551,500 in assets, including $2,951,500 in personal property, retirement accounts, insurance, and a checking account held by the entireties with his wife. Wettach claimed all of this property as exempt, primarily relying on the exemption for property held by the entireties, 11 U.S.C. 522(b)(1), (3)(B). Wettach joined another law firm and earned wages that the firm directly deposited into the entireties account. The Trustee claimed that these deposits constituted recoverable fraudulent transfers. Before the bankruptcy court could rule, the case was reassigned. The parties consented to the court issuing findings without a new trial. The court ruled in favor of the Trustee, awarding $428,868.12, plus $37,139.01 in interest. The district court and Third Circuit affirmed, rejecting challenges to allocation of the burdens of persuasion and production on the fraudulent transfer claims; evidentiary findings; and a legal determination that the deposit of wages into an account held by the entireties constituted “transfer” of an “asset” under Pennsylvania state law. View "In re: Wettach" on Justia Law

The Debtors own the Atlantic City Trump Taj Mahal casino. The union represents 1,136 employees. The 2011 collective bargaining agreement was to remain in effect through September 14, 2014 and continue in full force and effect from year to year thereafter, unless either party served 60 days written notice of its intention to terminate, modify, or amend. In March 2014, the Debtors gave notice of their “intention to terminate, modify or amend” and sought to begin negotiations. The Union initially declined. On August 20 the parties met. The Debtors emphasized their critical financial situation. No agreement was reached. The Debtors filed for Chapter 11 bankruptcy. On September 11, the Debtors asked the Union to extend the term of the CBA. The Union refused. The CBA expired. On September 17, the Debtors sent the Union a proposal with supporting documentation. After meetings, the Debtors successfully moved, under section 1113, to reject the CBA and implement the terms of the Debtors’ last proposal, asserting that rejection of the CBA was necessary to the reorganization.While 11 U.S.C. 1103 allows a debtor to terminate a CBA under certain circumstances, the National Labor Relations Act prohibits an employer from unilaterally changing CBA terms even after its expiration; key terms of an expired CBA continue to govern until the parties reach a new agreement or bargain to impasse. The Third Circuit affirmed, finding section 1113 does not distinguish between the terms of an unexpired CBA and terms that continue to govern after the CBA expires. View "In re: Trump Entm't Resorts" on Justia Law

Day’s company, Forever Green, sells artificial turf playing fields. It sued its competitor, ProGreen, for $5 million for diversion of corporate assets (Bucks County Action). Dawson, an owner of ProGreen and a former Forever Green sales representative, would be liable if damages are awarded. Dawson sued Forever Green for unpaid commissions and wages (Louisiana Action). Years later, the Louisiana court entered a consent judgment ( about $300,000) in favor of Dawson, which was not paid. Meanwhile, the Bucks County parties agreed to arbitrate. Weeks after the consent judgment entered, ProGreen moved to terminate arbitration, arguing that Forever Green was insolvent and that Day lacked “ability or desire to pay the Arbitrator’s fees and expenses.” Dawson obtained a writ of execution against the arbitrator. Recognizing that he was adverse to Dawson, the arbitrator suspended the arbitration until the fee issue was resolved. Forever Green sued to reinstate the arbitration. Dawson and a law firm that was owed $206,000 from Forever Green, filed an involuntary Chapter 7 bankruptcy petition against Forever Green, which satisfied the statutory criteria, 11 U.S.C. 303(b). The Bankruptcy Court dismissed the filing as being in bad faith. The Third Circuit affirmed, finding that bad faith provides a basis for dismissal independent of the statutory criteria for filing. View "Forever Green Athletic Fields, Inc. v. Dawson" on Justia Law

Revel opened an Atlantic City resort-casino, costing $2.4 billion. Revel entered into a 10-year lease with IDEA to run two nightclubs and a beach club. IDEA contributed $16 million of the projected cost of construction in addition to monthly rental payments. The Casino did not turn a profit. Revel filed a “Chapter 22” bankruptcy, seeking permission to sell its assets free of all liens and interests (including leases). The Bankruptcy Court approved and set an auction date. IDEA, concerned that the proposed sale would eliminate the value of its lease notwithstanding its $16 million investment, filed objections. No qualified buyer appeared. The court postponed the auction. A month later, Revel closed the Casino’s doors and barred tenants, IDEA gave notice that it intended to continue operating its beach club and nightclub and expected Revel to honor its obligations to provide uninterrupted utility service. In the meantime Polo agreed to buy the Casino for $90 million. Days before the sale hearing, Revel replied to IDEA’s objections. IDEA appealed an unfavorable order and sought a stay pending appeal, noting that, if the decision were not stayed, its appeal would be moot under 11 U.S.C. 363(m) once the sale closed. The district court denied the motion. The Third Circuit reversed, staying that part of the order that allowed Revel to sell the Casino free of IDEA’s lease. View "In re: Revel AC Inc" on Justia Law

LifeCare operated 27 long-term acute care hospitals with about 4,500 employees.Hurricane Katrina destroyed three of its facilities. It had $484 million debt; approximately $355 million was secured. Secured lenders wanted to purchase the company outright and offered to credit $320 million of the debt as LifeCare’s only alternative to liquidation under Chapter 7. The secured lender group, LLC2, put funds in escrow to pay legal and accounting fees. LifeCare filed for bankruptcy one day later, obtained permission to sell assets under 11 U.S.C. 363(b)(1), abd marketed its assets to more than 106 potential parties. LLC2 was selected as the successful bidder. The Committee of Unsecured Creditors and U.S. government—neither of which would recover anything through the sale— objected to the transfer as a “veiled foreclosure.” In exchange for the Committee dropping its objections, LLC2 deposited $3.5 million in trust for general unsecured creditors. The Bankruptcy Court approved the sale. Deeming the administrative fee monies escrowed by LLC2 not to be estate property, the court held that the government had no claim to it. The Third Circuit affirmed. Payments by an 11 U.S.C. 363 purchaser (LLC2) need not be distributed according to the Code’s creditor-payment hierarchy where no cash changed hands other than that deposited in escrow for professional fees and paid directly to the unsecured creditors. The payments neither went into nor came out of the bankruptcy estate. View "In re: ICL Holding Co., Inc." on Justia Law

Zell orchestrated a leveraged buy-out (LBO) of the Tribune Company, which published the Chicago Tribune and the Los Angeles Times. In an LBO, a purchaser acquires an entity using debt secured by assets of the acquired entity. The transaction saddled the company with an additional $8 billion of debt. Tribune subsidiaries guaranteed the LBO debt. The holders of pre-LBO debt had recourse only against Tribune, not against the subsidiaries. Tribune sought Chapter 11 bankruptcy protection in 2008. Aurelius, a hedge fund specializing in distressed debt, bought $2 billion of the pre-LBO debt and participated in the bankruptcy. The Committee of Unsecured Creditors obtained permission to pursue claims of breach of fiduciary duty and fraudulent conveyance against the LBO lenders, directors and officers of old Tribune, and Zell. The Bankruptcy Court discussed possible plans at length, concluding that it was uncertain that litigation would result in full avoidance of the LBO, the only result that could result in greater recovery than settlement. A plan was confirmed over Aurelius’s objection. A requested stay was conditioned on Aurelius posting a $1.5 billion bond. Aurelius was unsuccessful in obtaining expedited review. The plan was consummated. Appeals were dismissed as equitably moot. The Third Circuit agreed that Aurelius’s appeal, which sought to undo the crucial component of the consummated plan, was moot, but reversed with respect to trustees representing pre-LBO debt, who sought disgorgement from other creditors of $30 million; their requested relief would neither jeopardize the $7.5 billion plan of reorganization nor harm third parties who have justifiably relied on plan confirmation. View "In re: Tribune Media Co." on Justia Law

In 1996, Bocchino, a stockbroker, learned from a superior that Traderz “might go public” and that the endeavor was supported by “some commitment” from a popular fashion model. Based solely on that, and without any independent investigation into the quality of the entity, Bocchino immediately sought investment from clients. Bocchino received over $40,000 in commissions from Traderz sales. The second involved Fargo. The source of Bocchino’s information regarding Fargo is unclear. Bocchino only obtained cursory documentation about the entity before soliciting sales. He did not conduct any independent investigation, despite awareness that Fargo’s principal’s “full-time ‘job’ was law student.” Bocchino received $14,000 in commissions for his clients’ stock purchases in Fargo. Traderz and Fargo turned out to be fraudulent ventures. The principals of each entity were criminally convicted, and the anticipated value of the investments vanished. The Securities and Exchange Commission brought civil law enforcement actions against those who sold investments in the entities. The bankruptcy court held that those civil judgments against Bocchino were nondischargeable, 11 U.S.C. 523(a)(2)(A). The district court and Third Circuit affirmed, finding that collapse of the private placements was neither abnormal nor extraordinary given Bocchino’s lack of due diligence. View "In Re: Bocchino" on Justia Law

Debtor, a billing services technology company, is a limited liability business and its sole member is Joli, Inc. Heverly owns 75 percent of Joli. A printing company holds the single largest claim against Debtor and the Debtor’s CEO, Heverly’s husband, for $9,359,630.91, arising from a judgment. Debtor filed a voluntary Chapter 11 petition. Debtor’s unsecured claims, not including the printing claim, total less than $1.3 million. Debtor filed a Fourth Amended Plan of Reorganization, under which a third-party, One2One (Plan Sponsor) would acquire a membership interest in Debtor. A Plan Support Agreement provided the Plan Sponsor with the exclusive right to purchase 100% of Debtor’s equity for $200,000. Neither the Plan Sponsor nor any third-party was to contribute any additional capital. The Plan incorporated the terms of the Committee Agreement concerning distributions and the waiver of preference actions against unsecured creditors. Over the objection of the printing company, the bankruptcy judge entered a Confirmation Order. The district court affirmed. The Third Circuit declined to overrule its 1996 adoption of the doctrine of equitable mootness, but concluded that the district court abused its discretion under that precedent and remanded for consideration of the merits of the printing company appeal. View "In re: One2One Communications" on Justia Law