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

Jevic , a trucking company, was acquired by Sun Capital in a leveraged buyout financed by lenders led by CIT. CIT extended $85 million in revolving credit, which Jevic could access while it maintained at least $5 million in assets. Jevic had to reach a forbearance agreement with CIT, with a $2 million guarantee by Sun, to prevent CIT from foreclosing. In 2008, Jevic’s board authorized a Chapter 11 bankruptcy filing. The company notified employees of their impending terminations. At that point, Jevic owed $53 million to senior secured creditors (CIT and Sun) and $20 million to tax and unsecured creditors. Jevic’s terminated truck drivers filed a class action alleging violations of federal and state Worker Adjustment and Retraining Notification (WARN) Acts. The Committee of Unsecured Creditors brought a fraudulent conveyance action, alleging that Sun, with CIT’s assistance, “acquired Jevic with virtually none of its own money based on baseless projections,” and hastened Jevic’s bankruptcy by saddling it with unmanageable debts. Jevic’s remaining assets were $1.7 million in cash (subject to Sun’s lien) and the action against CIT and Sun. All tangible assets had been liquidated to repay the CIT lenders. The Unsecured Creditors, Jevic, CIT, and Sun reached a settlement that left out the drivers, whose uncontested WARN claim was of higher priority than tax and trade creditors’ claims. The Third Circuit affirmed approval of the settlement, despite deviations from section 507 priorities, based on “sound findings” that traditional routes out of Chapter 11 are unavailable and the settlement was the best feasible way of serving the interests of the estate and creditors. View "Jevic Holding Corp. v.CIT Grp./Business Credit, Inc." on Justia Law

Prosser filed a Chapter 11 bankruptcy petition in 2006, which was converted to a Chapter 7 petition. Carroll was appointed as trustee. At a 2008 trial to adjudicate creditors’ objections to Prosser’s claim of exemptions, Stelzer, Prosser’s former “valet and personal assistant,” testified that Prosser asked him to destroy computer hard drives after Prosser filed for bankruptcy. The Bankruptcy Court denied the exemptions. Carroll and others initiated an adversary proceeding, seeking denial of discharge under 11 U.S.C. 727(a), Prosser deposed Stelzer in an effort to undermine his testimony; Prosser Counsel inquired into the payment of Stelzer’s legal fees by third parties and contacts Stelzer had with Carroll and Carroll’s counsel. Prosser Counsel later sought an evidentiary hearing into “a bribery scheme,” asserting that Stelzer gave unfavorable testimony during the Exemptions Trial in exchange for payment of his attorney fees in multiple litigations and that Carroll’s counsel had misrepresented Carroll’s contacts with Stelzer. Ultimately, Carroll obtained an award of legal fees and expenses against Prosser Counsel (28 U.S.C. 1927) contending that the Adversary Complaint, the Fee Objections, and the Conflicts Motion were patently meritless. The district court vacated, holding that the Adversary Complaint and Fee Objections could not have “multiplied” the adversary proceedings. The Third Circuit reversed, reinstating the sanctions. View "In re: Prosser" on Justia Law

The Lemington Home, established in 1883, was a non-profit nursing home caring for African-American seniors. Causey became its Administrator and CEO in 1997. Shealey became CFO in 2002. The Home had financial trouble for decades, but remained afloat with help from Pittsburgh, Allegheny County, and private foundations. In the early 2000s, the Home was repeatedly cited for deficiencies; two patients died under suspicious circumstances. In 2005, the Directors voted to close the Home and filed a Chapter 11 petition. Residency dropped to 37 patients. The Bankruptcy Court approved the closure. The Home had delayed filing Monthly Operating Reports that would have shown $1.4 million in Nursing Home Assessment Tax payments, which could have increased its chances of finding a buyer. The Committee of Unsecured Creditors filed an adversary proceeding, claiming breach of fiduciary duty, breach of the duty of loyalty, and deepening insolvency. In 2013 a jury awarded: compensatory damages of $2,250,000; punitive damage of $350,000, individually, against five Directors; and punitive damages of $1 million against Shealey and $750,000 against Causey. The Third Circuit affirmed the liability findings and the punitive damages awards against Shealey and Causey, but vacated the award of punitive damages against the Directors, which was not supported by evidence sufficient to establish that they acted with “malice, vindictiveness and a wholly wanton disregard of the rights of others.” View "In re: Lemington Home for the Aged" on Justia Law

In 2012 Schmidt, a former shareholder in Genaera, a biotechnology company that dissolved in 2009 and liquidated its assets, brought suit on behalf of himself and other former shareholders against the liquidating trustee (Argyce); the Genaera Liquidating Trust; Argyce’s CEO and Genaera’s former CFO; former major Genaera shareholders Xmark and BVF; former Genara directors and officers (D&O defendants); and the purchasers of certain Genaera assets. The complaint alleged that the liquidating trustee and the D&O defendants breached their fiduciary duties by disposing of promising drug technologies in tainted insider deals for far less than their true value and that Xmark and BVF aided and abetted this behavior so that companies they controlled could acquire Genaera’s assets at fire sale prices. Schmidt did not dispute the applicability of the two-year statute of limitations and that he filed suit more than two years after the assets were sold, but argued that the limitations period should be tolled under Pennsylvania’s discovery rule because he could not have been aware of the insider nature of the sales or that the assets were sold for below actual value until he learned the details of the sales, and subsequent market events suggested to him that the assets were quite valuable. The district court dismissed. The Third Circuit reversed in part, stating that it was premature to determine whether Schmidt exercised reasonable diligence. View "Schmidt v. Skolas" on Justia Law

Facing asbestos-related personal injury lawsuits filed in the 1980s, a group of producers of asbestos and asbestos-containing products formed the Center for Claims Resolution to administer such claims on behalf of its Members. About 20 Members negotiated and signed the Producer Agreement, which established and set forth the mechanics of the Center and the obligations of the Members. After G-I failed to pay its contractually-calculated share of personal injury settlements and Center expenses, U.S. Gypsum and Quigley were obligated to pay additional sums to cover G-I’s payment obligations. G-I filed for bankruptcy and the Center, U.S. Gypsum, and Quigley each filed a proof of claim, seeking to recover for G-I’s nonpayment under the Producer Agreement. The Center settled its claim with G-I. The Bankruptcy Court granted summary judgment in G-I’s favor. The district court affirmed. The Third Circuit vacated, holding that the Producer Agreement permits the Former Members to pursue a breach of contract action against G-I for its failure to pay contractually-obligated sums due to the Center, in light of their payment of G-I’s share. View "In re: G-I Holdings, Inc." on Justia Law

Makowka owns a home in a Pike County, Pennsylvania, planned community and, in 2005, fell behind on her homeowners’ association dues. In 2008, the Association obtained a default judgment of $2,436. As additional dues went unpaid, the Association sued again in 2010 and obtained another default judgment, worth $3,599.08. A writ of execution and attachment issued. A sheriff’s sale of Makowka’s property was scheduled for September 2011. Days before the sale, Makowka filed a Chapter 13 petition. In her proposed bankruptcy plan, Makowka moved to avoid the Association’s claims under 11 U.S.C. 522(f), which releases a debtor from obligations imposed by judicial liens and non-possessory, non-purchase money security interests. Although Makowka acknowledged that the Uniform Planned Community Act granted the Association a self-executing statutory lien on her residence for unpaid dues, she claimed that part of that lien had been extinguished because the Association failed to foreclose within the statutory period of three years. To the extent the claims represented fees due before September 2008, Makowka contended, it had obtained dischargeable money judgments. The Bankruptcy Court denied Makowka’s motion. The district court affirmed. The Third Circuit vacated, concluding that the district court relied on the wrong state precedent and that the Association did not enforce its statutory lien on Makowka’s residence when it pursued actions in debt.View "In re: Makowka" on Justia Law

In 1999 ATN fraudulently transferred $6 million to its former owners, including Allen, in a shareholder litigation settlement. ATN avoided the transfer and obtained a recovery order in its separate Florida bankruptcy proceedings. Allen transferred the money to a Cook Islands asset protection trust, filed for bankruptcy in New Jersey, and argued that the funds were never recovered and were property of his estate subject to an automatic stay. After a remand, the Florida Bankruptcy Court avoided the transfers to Allen; entered a $6 million judgment in favor of ATN on its fraudulent transfer claims; and ordered Allen to repatriate the money, provide an accounting, and freeze any other use or transfer of the money. Allen did not comply. ATN filed an adversary proceeding in Allen’s bankruptcy. The New Jersey Bankruptcy Court denied relief, finding that, because ATN had not recovered tangible possession of the funds, they were not property of ATN’s bankruptcy estate, but property of Allen’s estate and subject to the automatic stay and were not held by Allen in constructive trust for ATN. The district court affirmed. The Third Circuit reversed, holding that where a debtor avoids a fraudulent transfer and obtains a recovery order (11 U.S.C. 550) it has sufficiently “recovered” those funds such that they are part of that debtor’s estate. View "In re: Allen" on Justia Law

Before Paul filed for Chapter 7 bankruptcy, Paul and Candace were in divorce proceedings in New Jersey. No final judgment existed nor was there a division of marital assets. Based on an estimate of her expected share of marital assets, Candace filed a timely proof of claim for $577,935 against Paul’s bankruptcy estate, apparently premised on her stake in a partnership that was legally titled in Paul’s name and, therefore, passed to his bankruptcy estate. It would likely be distributed as shared marital property in a divorce decree. The trustee sought to expunge the claim, arguing that Candace’s interest in equitably dividing marital property in Paul’s bankruptcy estate was not a “claim” under 11 U.S.C. 101(5), because the state court had not entered a final divorce decree before Paul’s filing. The bankruptcy judge found that the claim for equitable distribution arose prepetition and must be allowed. On direct appeal, the Third Circuit affirmed. Although Candace did not have an equitable distribution decree in hand at the time Paul filed for bankruptcy, the focus should not be on when the claim accrues, but whether a claim exists. Given the Bankruptcy Code’s expansive definition of “claim,” a non-debtor spouse has an allowable pre-petition claim against the bankruptcy estate for equitable distribution of marital property when the parties are in divorce proceedings before the bankruptcy petition is filed. View "In re: Paul Ruitenberg, III" on Justia Law

Aaroma acquired certain assets and liabilities of Emoral, a manufacturer of diacetyl, a chemical used in the food flavoring industry. The parties were aware of potential claims arising from exposure to diacetyl. Their agreement stated that Aaroma was not assuming liabilities related to “Diacetyl Litigation,” and was not purchasing Emoral’s corresponding insurance coverage. Emoral filed for bankruptcy. The Trustee and Aaroma entered into an agreement, under which Aaroma paid $500,000 and the Trustee released Aaroma from any “causes of action . . . that are property of the Debtor’s Estate.” In response to objections by the Diacetyl Claimants, the parties added that their agreements would not “operate as a release of, or a bar to prosecution of any claims held by any person which do not constitute Estate’s Released Claims.” The Bankruptcy Court approved the settlement without resolving whether the Diacetyl claims constituted “Estate’s Released Claims.” The Diacetyl Claimants filed individual complaints, alleging that Aaroma was a “mere continuation” of Emoral. The Bankruptcy Court held that the Diacetyl claims were not property of the estate. The district court reversed, finding that the claim for successor liability was a “generalized” claim belonging to the estate because a finding that Aaroma was a “mere continuation” of Emoral would benefit Emoral’s creditors generally. The Third Circuit affirmed. Because the Diacetyl claim belongs to the bankruptcy estate, it falls within the “Estate’s Released Claims.” The Diacetyl Plaintiffs have no apparent recourse against Aaroma. View "In re: Emoral, Inc." on Justia Law

In the 90 days prior to filing for bankruptcy Debtor made payments for personnel to Roth Staffing totaling $81,997.57. After these preferential transfers, but before the petition was filed, Roth provided Debtor with services valued at $100,660.88 and was not paid. Debtor sought to pay its employees and independent contractors prepetition wages, compensation, and related benefits. The Bankruptcy Court granted the motion and after filing its bankruptcy petition, Debtor paid $72,412.71 to Roth for pre-petition staffing services. Debtor’s successor in interest later sought to avoid transfers made to Roth. Under the Bankruptcy Code, 11 U.S.C. 547(b), the trustee may avoid certain preferential transfers made by a debtor to a creditor during the 90 days before its bankruptcy petition was filed. A creditor who gives the debtor new value after a preference payment, however, may use the “new value” defense to offset an otherwise avoidable preference. That defense is not applicable to the extent that, thereafter, the debtor makes “an otherwise unavoidable transfer” to the creditor on account of the value received. The Bankruptcy Court, district court, and Third Circuit agreed that where “an otherwise unavoidable transfer” is made after the filing of a bankruptcy petition, it does not affect the new value defense.View "In Re: Friedman's Inc" on Justia Law