Adversary Proceedings - PowerPoint Presentation

Adversary Proceedings & Contested Matters in Bankruptcy Courts New Jersey State Bar Association

Panelists Hon. Rosemary Gambardella, U.S. Bankruptcy Judge for D.N.J. Judge Gambardella served as Chief Judge of the United States Bankruptcy Court for the District of New Jersey from August 12, 1998 to August 11, 2005. She is a member of the Lawyers Advisory Committee of the Bankruptcy Court for the District of New Jersey, a member and former President of the New Jersey Bankruptcy Inn of Court and a member of the Bankruptcy Committee of the Third Circuit Task Force on Equal Treatment in the Courts - Gender Commission. In addition, she is a member of the National Association of Women Judges, the National Conference of Bankruptcy Judges, the American Bankruptcy Institute , the Turnaround Management Association and former member of the Bankruptcy Judges Advisory Group for the Administrative Office of the United States Courts. Judge Gambardella was the Bankruptcy Judge representative to the Judicial Conference of the United States (2009-2011) and is a Fellow of the American College of Bankruptcy .

Panelists Stephen M. Packman, Partner at Archer Steve practices primarily in the areas of insolvency law and commercial litigation and has counseled many companies on all types of business issues over the past twenty eight years.   Steve chairs the Bankruptcy, Restructuring and Insolvency Litigation Group at Archer and is also co-Chair of the International Law Group. His experience includes representing diverse clients in insolvency proceedings, litigation and business matters. Recent engagements include representation of debtors (as lead and local counsel), creditor’s committees, trustees, foreign representatives and fiduciaries, as well as providing general counsel to many companies on a variety of litigation, business and corporate issues . Representative Experience: Special Counsel to the Debtor, Trump Entertainment , in connection with Delaware Bankruptcy proceedings. Counsel to foreign representatives in Hong Kong in Chapter 15 proceedings of Manley Toys Ltd . Counsel for creditors committees in bankruptcy proceedings of Fansteel and Wellman Dynamic and Mountain Crane

Panelists Douglas G. Leney, Partner at Archer Doug is a partner in Archer’s litigation department, concentrating his practice in matters involving bankruptcy and corporate restructuring, and debtor/creditor rights . His experience includes representing debtors , foreign representatives, creditors, and liquidating trustees in bankruptcy cases. Recent engagements include representation of debtors (as lead and local counsel), creditor’s committees, trustees, foreign representatives and fiduciaries, as well as providing general counsel to many companies on a variety of litigation, business, and corporate issues . Representative Experience: Counsel to foreign representatives in Hong Kong in Chapter 15 proceedings of Manley Toys Ltd . Counsel to purchaser-developer in  In re Kara Homes , defending against substantial post-confirmation claims brought by homeowners’ association Counsel to the Trustee in  In re Universal Marketing, Inc., et al.  bankruptcy case Counsel to Liquidating Plan Trustee in bankruptcy case of  In re DeCoro USA, Ltd.

Overview of Bankruptcy Topics Common Types of Adversary Proceedings Common Types of Contested Matters “Core” v. “Non-Core” Matters Procedural Issues Plan Contested Proceedings International Aspects

Contested Matter v. Adversary Proceeding What’s the difference? A contested matter involves a contested request for relief in the context of the main bankruptcy proceeding (pursuant to Rule 9014 of the Federal Rules of Bankruptcy Procedure ). An adversary proceeding involves the filing of a complaint, commencing a separate proceeding governed by the “7000” series of the Bankruptcy Rules. 

Common Types o f Adversary Proceedings Avoidance Actions Preferences (§ 547) Prima facie elements: A transfer of a debtor’s property; To or for the benefit of a creditor; On account of an antecedent debt owed before the transfer; Made while a debtor was insolvent; Made during preference period (90 days or 1 year for an insider); and Enabled creditor to receive more than it would have received in a hypothetical chapter 7 liquidation .

Common Types o f Adversary Proceedings Avoidance Actions Preferences (§ 547) All hope is not lost… statutory defenses! Ordinary course (disjunctive) New value (contemporaneous or subsequent) Monetary threshold (prima face vs. venue) Other common law defenses Earmarking Mere conduit No improvement in position

Common Types o f Adversary Proceedings Avoidance Actions Fraudulent transfers (§§ 544, 548) § 544 incorporates applicable state law fraudulent transfer law (UFTA ?) § 548 is creature of bankruptcy law § 544(a)(1)(A) deals with actual fraud § 544(a)(1)( B) addresses constructive fraud Need to look to intent, reasonably equivalent value, good-faith transferee defenses, among others Note differences between the two sections Longer look-back period under § 544 “Strong-arm” powers under § 544 Unauthorized post-petition transfers (§ 549) Understanding “avoidance” vs. “recovery” (§ 550)

Common Types of Adversary Proceedings Objections to Discharge/ Dischargeability § 523 vs. § 727 A discharge does not eliminate the debt. It means that a debtor is not personally liable A debt which is not listed in the debtor’s schedules is not discharged unless the case is designated as a “no asset” case (“no harm, no foul” rule) A discharge does not affect the liability of anyone else (e.g., guarantor or joint tortfeasor) A discharge does not enjoin collection against property securing a pre-bankruptcy debt. Thus, after bankruptcy, a creditor may foreclose on the security for a debt – car, residence etc. – because of a default Only an individual can obtain a discharge in a Chapter 7 or Chapter 13 bankruptcy (however, discharge injunctions often in confirmed plans of reorganization ) Nature , Extent, and Validity of Liens Challenge to alleged secured creditor’s claim/lien

Common Types o f Adversary Proceedings Before filing an adversary proceeding in Bankruptcy court… U.S. Bankruptcy Court for the District of New Jersey presumptively refers nearly every adversary proceeding to mediation. Remember Local Rule D.N.J. LBR 9019-2 Are you representing the debtor, the trustee, secured creditors, official committees or parties? You may need to file an Application for Retention of Professional Remember Federal Rule of Bankruptcy Procedure 2014 Local Rule D.N.J. LBR 2014-1 (Employment of Professional Persons) also applies

Common Types of Contested Matters A contested matter refers to disputes that are initiated and resolved by motion or application filed in the main case Bankr. Rule 9014 governs procedure in contested matters Procedure is less formal; so for example, some civil rules of procedure are incorporated, but others are not. Bankr. Rule 9014(c) Many disputes in a bankruptcy case may be initiated and decided by motion practice using a quasi-adversarial system, but less formal than Adversary Proceedings Discretion for Court to order that additional Part VII Bankruptcy Rules may apply

Common Types of Contested Matters Common issues resolved as a contested matter include : Objections to claims; M otions for relief from the automatic stay; Exemptions and the valuation of property; L ease assumption/rejection issues; Cash collateral and post-petition financing issues; and E ven employment and fee applications.

Common Types of Contested Matters Stay Relief Automatic stay under § 362(a) is one of primary benefits to the debtor in filing bankruptcy. It halts actions against the debtor and property of the debtor and is very broad in scope. The purpose of the stay is to give a debtor “breathing room” to reorganize or to obtain a fresh start. The stay benefits all creditors of the debtor by freezing the status quo.

Common Types of Contested Matters Stay Relief What does the stay prohibit? Commencement or continuation of any litigation against debtor or estate property Enforcement of judgment against debtor or estate Act to obtain estate property or property from the estate Act to collect, assess or recover pre-bankruptcy claim

Common Types of Contested Matters Stay Relief What does the stay not prohibit? Criminal actions against the debtor Withholding income to pay domestic support Certain acts to perfect a security interest Certain acts by taxing authorities such as audits, notice of deficiency and assessment Continuation of eviction proceedings, if judgment for possession obtained prior to bankruptcy

Common Types of Contested Matters Claims Adjudication Like a mini-trial on underlying claim Permitted to take limited discovery and ultimately present evidence in plenary hearing Objections may be to validity, amount, priority, or specific components of claim Assumption / Rejection of Executory Contracts and Leases § 365 provides for Debtor’s election to reject or assume/assign executory contracts or leases What is “executory” under the Bankruptcy Code? What must Debtor do if it rejects ? What must Debtor do if it assumes?

“Core” vs. “Non-Core” Matters Stern v. Marshall , 131 S. Ct. 2594 (2011) The Supreme Court held that a bankruptcy judge does not have constitutional authority to enter final judgment on a state law counterclaim asserted by a debtor in response to a creditor's claim, unless the counterclaim will necessarily be resolved in ruling on the creditor's claim . The Court ultimately found that, even though Congress had provided in 28 U.S.C. §157(b)(2)(C) that a counterclaim against a party that has filed a proof of claim is a matter of “core” bankruptcy jurisdiction, the bankruptcy court in Vickie Marshall’s case “lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim .”

“Core ” vs. “Non-Core” Matters Executive Benefits Ins. v. Arkinson , 134 S. Ct. 2165 (2014) The Supreme Court clarified the contours of a bankruptcy judge’s constitutional jurisdictional authority. The Court held that when a bankruptcy court is confronted with a claim that is statutorily denominated as "core " under 28 U.S.C. §157(b)(2), but is not constitutionally determinable by a bankruptcy judge under Article III of the U.S. Constitution, the bankruptcy judge should treat such a claim as a non-core "related to" matter that the district court reviews anew . Nevertheless , even if the bankruptcy court's entry of judgment was invalid, the district court's de novo review and entry of its own final judgment may cure error.

“Core ” vs. “Non-Core” Matters Wellness Int’l Net. Ltd. v. Sharif , 135 S. Ct. 1932 (2015) The Supreme Court held that Article III is not violated when parties consent to bankruptcy court adjudication of  Stern claims. The Court reasoned that because Congress created the bankruptcy courts for a limited purpose and gave them limited power subject to the control of the judiciary, there is no separation of powers problem with the bankruptcy courts exercising the powers Congress delegated to them, which include the ability to adjudicate non-bankruptcy claims when the parties consent.

Procedural Issues Jurisdiction, venue, etc. Title 28 controls several aspects of bankruptcy, including jurisdiction, venue, removal, appeals, bankruptcy trustees and judges. Some significant provisions include: Bankruptcy Court Jurisdiction (28 U.S.C. § 1334) Bankruptcy Court Venue (28 U.S.C. § 1408) Change of Venue (28 U.S.C. § 1412) Removal from state court (28 U.S.C. § 1445 - § 1452) Appeals (28 U.S.C. § 158)

Procedural Issues Federal Rule of Bankruptcy 7004 provides the service rules. Federal Rules of Civil Procedures applies in adversary proceedings. Personal service is the same as under Rule 4(e)-(j) of the F.R.Civ.P. Jury trials are very rare in Bankruptcy proceedings. Both parties may consent to a jury. Demand for a jury must be timely. Federal Rule of Bankruptcy 9027 provides the rules for r emoval of proceedings. Withdrawal of standing order of reference The authority of the bankruptcy court to rule on all bankruptcy cases and proceedings under 28 U.S.C. §157 . This is known as a reference. A motion to withdraw the reference of a case or proceeding, if granted by the district court, would remove this reference.

Procedural Issues Claims and Priority “Absolute Priority Rule” in bankruptcy Secured vs. unsecured claims Role of Official Committee of Unsecured Creditors What should you do if your client is interested in serving? Proofs of Claim When filing one is necessary vs. not Contents and form Administrative priority claims § 503(b)(9) claims Relation to reclamation (§ 546 of Bankruptcy Code and interplay with UCC § 2-702) Discovery Bankr . Rule 2004 discovery vs. Bankr. Rule 7026, et seq. discovery

Evidentiary Issues in Bankruptcy Litigation Federal Rule of Bankruptcy Procedure 9017 provides that the Federal Rules of Evidence apply in bankruptcy cases. Federal Rule of Bankruptcy Procedure 9014(d) provides that “testimony of witnesses with respect to disputed material factual issues shall be taken [in contested matters] in the same manner as testimony in an adversary proceeding .”

Evidentiary Issues in Bankruptcy Litigation Bankruptcy proceedings require compliance with basic evidentiary rules. However, most bankruptcy courts are more fluid and informal than what you would encounter in federal district or state trial courts. Remember: There are no juries ! (well, almost never – Bankr . Rule 9015). Bankruptcy judges are usually more concerned with practical business solutions rather than being bogged down with evidentiary disputes.

Plan Contested Proceedings Contested Disclosure Pre-Confirmation of Plan Debtor failed to sufficiently disclose adequate information under § 1125. Creditors can object to the disclosure and seek further information from the Debtor . Contested Confirmation of Plan Debtor develops a plan to repay all or part of its debts. The contents of the Debtor’s plan must include a classification of claims and must specify how each class of claims will be treated under the plan. 11 U.S.C. § 1123. A creditor must file a proof of claim in order to be treated as a creditor for purposes of voting on a plan and distribution under it. Fed. R. Bank. P. 3003(c). Creditors can then object to a Debtor seeking to confirm its bankruptcy plan . Other types of objections Cramdown issues Feasibility issues Is it “fair and equitable?”

Plan Contested Proceedings Contested Issues Arising Post-Confirmation Debtor failed to adhere to terms of its bankruptcy plan. Debtor failed to disclose certain assets in connection with its bankruptcy plan. Creditors may request modifications to Debtor’s bankruptcy plan.

International Aspects UNCITRAL Model Law and Chapter 15 of Bankruptcy Code 21 st Century means more global economy More entities with assets located throughout the world More cross-border cases being filed all the time Key concepts in a Chapter 15 proceeding All about “cooperation” among jurisdictions How to protect your client’s interests if it finds itself as a creditor or party-in-interest in a Chapter 15 case? Understanding “recognition” and what it means

Thank You! Questions? Panelists : Hon. Rosemary Gambardella Stephen M. Packman Douglas G. Leney