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

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

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