Delaware Business Bankruptcy Report : Delaware Business Bankruptcy Report : Morris James LLP Lawyers & Attorneys

Factual Background

GIT was a publicly traded holding company for several businesses, including manufacturers and sellers of refractory products, which are “construction-type materials specifically designed and manufactured for use in high-temperature applications.”  One such manufacturer – A.P. Green Industries, Inc. (“APG”) – was purchased by GIT in 1998.  However, APG used asbestos in some of its products prior to 1976, subjecting APG to voluminous asbestos litigation.  To a lesser degree, APG was also the subject of silica-related personal injury claims – in fact, as of February 2002, APG was defending a single class action suit consisting of 169 claims.

In February of 2002, GIT, APG, and certain related entities (collectively, the “Debtors”) filed for protection under Chapter 11 of the Bankruptcy Code.  The proposed plan of reorganization (the “Plan”) called for, in relevant part, entry of an injunction (the “Silica Injunction”) channeling silica-related claims to a silica trust (the “APG Silica Trust”), as well as an asbestos injunction (The “Asbestos Injunction”) which would channel all asbestos claims into a trust specifically created to address and resolve such claims (the “APG Asbestos Trust” and, together with the APG Silica Trust, the “Trusts”).  Hartford and Century were among the insurers whose policies were to be assigned to APG Silica Trust.

In exploring whether the silica-related liability was sufficiently onerous to jeopardize the Debtors’ reorganization if not resolved via the APG Silica Trust and the Silica Injunction, the Debtors obtained a list of silica claimants from another company’s bankruptcy and then solicited confirmation votes from those claimants’ counsel.  An explosion of silica claims ensued, with a total of 5,125 votes being cast on the Debtors’ Plan on behalf of persons alleging that APG was responsible for their claimed silica- related injuries.

Hartford, Century and AIG objected to the Plan, asserting that the APG Silica Trust and the Silica Injunction were the products of collusion with the asbestos claimants’ counsel and were neither necessary nor appropriate for the debtors’ successful reorganization.  Hartford, Century and AIG took particular issue with the following elements of the silica claims: (1) of the silica claims filed, 56.9% included diagnoses by a physician or facility that was banned in an asbestos bankruptcy for a separate entity (the “Manville Bankruptcy”); and (2) more than half of the silica claims were based upon diagnostic methods which were categorized in the Manville Bankruptcy as “rang[ing] from questionable to abysmal.  In total, Hartford, Century and AIG questioned the legitimacy of 91.5% of the silica claims made against the Debtors.

In response to these concerns, the Bankruptcy Court requested additional information from the silica claimants regarding their diagnoses and exposure to APG’s silica products, and the claims determined to be at issue dropped from 5,125 to around 4,600.  Ultimately, however, the Bankruptcy Court concluded that the APG Silica Trust and the Silica Injunction were necessary to the Debtors’ reorganization and confirmed the Plan on November 14, 2007. 
 
Moreover, the Bankruptcy Court determined that that Hartford and Century lacked standing to object to the Plan because: (1) the assignment of the insurance policies in contravention of the terms therein was not injurious because both the Bankruptcy Code and state law rendered those provisions a nullity; (2) any potential financial harm arising out of the assignments was too speculative as Hartford and Century made no contribution to the APG Silica Trust and retained their coverage and contractual defenses under the terms of the Plan.  As a creditor, AIG’s standing was not contested.
 
The District Court affirmed the Bankruptcy Court’s confirmation of the Plan and its determination that Hartford and Century lacked standing to challenge the Plan.

Though presented with two separate issues regarding Hartford and Century’s standing – first, whether Hartford and Century had standing to object to confirmation of the Plan and second whether Hartford and Century had standing to appeal the confirmation ruling – the Third Circuit held that its determination that Hartford and Century had standing to contest confirmation of the Plan and resulting remand of the proceeding might aid in the resolution of the other issues and thus declined to determine the issue of appellate standing.  As indicated above, the majority concluded that Hartford and Century had presented sufficient evidence of the requisite “specific, identifiable trifle of injury and thus had standing to challenge the Plan.

Concerned with the potentially broad reach of the majority’s opinion, Judge Nygaard composed a dissent, in which Judges Fuentes, Fisher, and Scirica joined, citing the preservation of Hartford and Century’s contractual rights and the Third Circuit’s opinion in Combustion Engineering in support of their conclusion that Hartford and Century had not suffered any injury which might entitle them to object to the Plan.  A breakdown of the division of the judges is as follows:

                        Majority                                                                                 Dissent
            Chief Judge McKee                                                          Judge Nygaard (author)
                Judge Ambro                                                                         Judge Scirica
                Judge Smith                                                                         Judge Fuentes
              Judge Chagares                                                                     Judge Fisher
           Judge Jordan (author)
              Judge Vanaskie

Discussion

The majority determined that the dramatic increase in silica-related claims resulting from the plan confirmation process, in conjunction with the allegations of collusion between the Debtors and the silica claimants – which found support in the record – were sufficient to establish the injury required for standing.  In order to object to the confirmation of a plan of reorganization in the Bankruptcy Court, a party must meet the Article III requirements for standing that litigants in all federal cases face.  That is, they must demonstrate an “injury in fact” that is “concrete”, “distinct and palpable” and “actual or imminent.” 

The majority then examined standing as it related, in particular, to bankruptcy cases.  Observing that 11 U.S.C. § 1109(b), which also addresses standing in the Bankruptcy Court, “has been construed to create a broad right of participation in Chapter 11 cases,” the majority amplified its previously established “party in interest” test with the Seventh Circuit’s bankruptcy-specific determination that a party in interest is “anyone who has a legally protected interest that could be affected by a bankruptcy proceeding.”

This determination – as well as the majority’s subsequent clarifications – effectively put to rest the notion that the “party in interest” requirement in the context of a bankruptcy is “more exacting” than the constitutional injury-in-fact requirement.

Hartford and Century argued that they qualified as parties in interest because they were the funding sources who would have to address the liabilities of the APG Silica Trust, giving them a personal – and certainly more than a trifling – stake in whether the Plan was approved.  GIT contended that Hartford and Century lacked standing because the Plan preserved their coverage defenses and therefore was “insurance neutral,” making pecuniary injury arising out of the Plan too speculative to establish standing.

First, the majority found that the Plan at issue was not, in fact, “insurance neutral,” despite the attempt to follow the language of a Plan which was determined to be insurance neutral by the Third Circuit in Combustion Engineering.  Unlike the Plan in Combustion Engineering, which “neither increased the insurer’s pre-petition obligations nor impaired their pre-petition contractual rights under the insurance policies”, the Plan at issue appeared “to have staggeringly increased – by more than 27 times – the pre-petition liability exposure.” 

Second, the majority held that the Plan’s adverse effects on Hartford and Century were not too speculative to be recognized.  Citing the Supreme Court opinion of Clinton v. City of New York, the majority discarded the argument that Hartford and Century’s injuries’ contingent status rendered them incognizable, and focused instead on the “explosion of new [silica-related] claims” and the resultant “entirely new set of administrative costs” associated therewith, as well as the allegations of collusion surrounding the creation of the APG Silica Trust, which implicated the integrity of the bankruptcy process and with respect to which Hartford, Century, and other insurers slated to provide coverage to the APG Silica Trust were the only ones with the incentive to explore and challenge these “profoundly serious charge[s]”. 

The majority was not swayed by the fact that the Bankruptcy Court had considered Hartford and Century’s arguments, reasoning that the ability to participate fully as a party would provide Hartford and Century with an opportunity to more fully flesh out and present their concerns.

Dissent

The concerns of the dissenting judges are set forth clearly and concisely in the first sentence of their opinion and are as follows: that “[t]he majority’s grant of standing to parties who have no injury, either actual or contingent, is a departure from the well-established requisite of an injury in fact, and it has broad deleterious implications for the jurisprudence of Article III standing.”  In sum, the dissent rests on the fact that the Plan preserved Hartford and Century’s contractual rights, and that any additional liability which Hartford and Century now face is simply “another way of describing the leitmotif of the insurance industry within its normal course of business.”

First, the District Court affirmed the Bankruptcy Court’s denial of Chevron’s Motion for Relief From Stay, reasoning that the District Court correctly concluded that “a ‘contract exception’ to the mutuality requirement does not exist based upon the plain language of Section 553.”  This decision is notable because multiple courts and the predominant bankruptcy treatise, Collier on Bankruptcy, say otherwise.  See, e.g., 5 COLLIER ON BANKRUPTCY ¶ 553.03[3][b][ii] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.) (“[I]f the parties all agree in a prepetition contract that a setoff may be taken between A, B and C, then the agreement may be enforced in bankruptcy to the extent it is enforceable under applicable nonbankruptcy law.”); Schechter v. Acme Screw Co. (In re Assured Fastener Prods. Corp.), 773 F.2d 105, 106-07 (7th Cir. 1985); Bloor v. Shapiro, 32 B.R. 993, 1001-02 (S.D.N.Y. 1983); In re Virginia Block Clo., 16 B.R. 560, 562 (W.D. Va. 1981).

The District Court also agreed with the Bankruptcy Court that no contractual exception to the mutuality requirement existed “based upon the plain language of Section 553.”  The District Court agreed that “this conclusion is also consistent with the primary goal of the Bankruptcy Code to ensure equal and fair treatment among similarly situated creditors.”

Second, the District Court affirmed the Bankruptcy Court’s denial of Chevron’s Motion for Reconsideration because Chevron failed to present the safe harbor legal theory in its initial Motion for Relief From Stay, and “[r]econsideration is not a proper vehicle to advance new legal theories or introduce already available evidence.”
 

The Court was confronted with the issue of whether to apply Fed. R. Civ. P. 15(a) or Fed. R. Civ. P. 59(e) to decide Plaintiff’s Motion.  Plaintiff contended that his request for leave to amend should be governed by Fed. R. Civ. P. 15(a), which provides that leave to amend should be freely granted.  In response, Defendants contended that Plaintiff’s Motion was governed by the more restrictive requirements of Fed. R. Civ. P. 59(e).  In the alternative Defendants contended that Plaintiff’s proposed amendments were futile.  Defendants contended that the Amended Complaint also failed to meet the “plausibility test” articulated by the Supreme Court in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007).  The District Court did not reach issues regarding futility of the Complaint, because it agreed with Defendants on the application of Rule 59(e) to this case.

Plaintiff argued that Rule 15(a) applied and relied upon Fletcher-Harlee v. Pote Concrete Contractors, Inc., 482 F.3d 247(3d Cir. 2007).  Fletcher-Harlee provides that Rule 15(a) amendments may “be freely given when justice so requires.”  Id. at 253.  In contrast, Defendants pointed to the more recent Third Circuit decision of Walsh v. Quinn, 327 Fed. Appx. 353 (3d Cir. 2009), in which the Third Circuit concluded that Rule 59 and/or Rule 60 governs post-judgment requests for leave to amend.  Walsh relies, at least in part, upon Ahmed v. Dragovich, 297 F.3d 201, 207 (3d Cir. 2002).

While Walsh is an unpublished, non-precedential decision, Judge Farnan was persuaded by the reasoning of Walsh and Ahmed that the liberality of Rule 15(a) should not apply until the judgment is set aside or vacated under Rule 59 or Rule 60.  Accordingly, the Court applied Rule 59(e) to determine whether the judgment should be reopened.

Rule 59(e) is a difficult standard to meet.  A motion pursuant to Rule 59(e) may only be granted if the Court is presented with: (1) an intervening change in the controlling law; (2) the availability of new evidence; or (3) the need to correct a clear error of law or fact or to prevent manifest injustice.  Max’s Seafood Café v. Quinteros, 176 F.3d 669, 677 (3d Cir. 1999).  Plaintiff failed to demonstrate any of the requirements of Rule 59(e) and accordingly, the Court denied Plaintiff’s Motion.

Plaintiff has appealed this decision to the United States Court of Appeals for the Third Circuit.
 

The Committee argued that: (1) Bank of America constituted a “transferee” for purposes of § 550; (2) all of the transactions surrounding the sale of property should be collapsed in order to infer constructive fraud by Bank of America; and (3) Bank of America had constructive knowledge of the events surrounding the sale of property and therefore was a party to the constructively fraudulent conveyance.

First, the Court held that Bank of America was not a “transferee” for purposes of § 550 because its status as a trustee rendered it a mere conduit, akin to a courier or an intermediary, and not one with “dominion and control” as required under the applicable case law. Remarking that the term “transferee” is neither defined in the Bankruptcy Code nor discussed in the legislative history of Section 550, the Court adopted the “dominion and control” test set forth in In re Factory 2-U Stores, Inc., 2007 WL 2698207, at *3 (Bankr. D. Del. Sept. 11, 2007), which requires a transferee to have “dominion over the money or other asset [and] the right to put the money to one’s own purposes.” The Court reasoned that having possession over funds does not automatically render one a transferee of funds, especially where the entity in possession receives no benefit from said transfer and is holding the funds for the sole purpose of later making those funds available to a third party. Accordingly, the Court held that Bank of America was not a “transferee.”

Second, the Court concluded that the transactions surrounding the sale of property should not be collapsed because the Complaint was devoid of allegations of actual or constructive fraud as to Bank of America, or any involvement of Bank of America in the questioned transaction.

Third, because the Committee failed to identify the amounts of the transfers at issue or name a proper transferee acting in a non-trustee capacity, the Court held that the Complaint failed to state a valid fraudulent conveyance claim.

Accordingly, for the reasons articulated above, the Motion to Dismiss was granted and the Motion to Amend was denied.

In this case, AVS had sought allowance of an administrative expense claim pursuant to Section 503(b)(9) of the Bankruptcy Code. 11 U.S.C. § 503(b)(9) provides that, after notice and a hearing, there shall be an allowed administrative expense for “the value of any goods received by the debtor within 20 days before the commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.” 11 U.S.C. § 503(b)(9).

AVS was one of the Debtors’ vendors who provided inspection, ticketing and repackaging of apparel that the Debtors purchased from other vendors. In the 20 day period prior to the Debtors’ bankruptcy filings, AVS invoiced the Debtors for $63,000 and sought administrative payment. The Debtors objected to AVS’s claim on the basis that it had been misclassified as a 503(b)(9) claim because AVS had provided “services” and not “goods” as required by the statute.

Examining the statute, the Court noted that to qualify for administrative expense claim treatment under the Bankruptcy Code, AVS had to provide “goods” to the Debtors. As there is no definition of goods contained in the Bankruptcy Code, the Court looked to other sources, noting “where words are employed in a statute which had at the time a well-known meaning at common law or in the law of this country, they are presumed to have been used in that sense.” 

First, the Court looked to the Uniform Commercial Code governing sales of goods. The UCC defines goods as “all things . . . which are movable at the time of identification to the contract for sale . . . .” See generally, UCC 2-107. The Court also looked to the common dictionary definition of goods that also included “movable property.” Examining the Bankruptcy Code, the Court noted that the Code itself is replete with references to both goods and services in the disjunctive: “Since the term ‘goods’ and the term ‘services’ are disjunctively connected throughout the Bankruptcy Code, these terms must be ascribed separate meanings [according to canons of statutory construction]; ‘goods’ cannot include services.”

Considering that AVS’s claim was for inspection of goods, and unpacking and ticketing the goods received from other vendors, the Court concluded that AVS had provided services, and not goods: “Although AVS performed the activities that constitute the basis of the claim on ‘things that are movable,’ the actual activities AVS “sold” are properly characterized as intangible services.”
AVS attempted to argue that it was the value of goods that is recoverable under 503(b)(9). As AVS had provided value in that the goods were not salable without AVS’s work, it contributed to the “value of goods,” and should be entitled to an administrative claim. The Court dispensed with this argument by noting that a similar argument had been rejected by the Michigan bankruptcy court in In re Plastech Engineered Products, Inc., 2008 WL 5233014 (Bankr. E.D. Mich. 2008) (“It is the goods, and not the value that must be received by the debtor to trigger § 503(b)(9).”).

Although the court acknowledged that AVS had undoubtedly provided “value,” the Court held that AVS had not provided “goods,” and was therefore not entitled to an administrative claim under 503(b)(9).