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

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.
 

In this adversary proceeding in which the trustee of Student Finance Corporation (“SFC”) asserted, inter alia, fraudulent transfer and preference claims against defendants Pamela Bashore Gagne, Robert L. Bast, the Brennan Family Trusts, and W. Roderick Gagne as trustee of the Brennan Family Trusts (collectively, the “Family Defendants”), the Family Defendants moved to strike certain damage claims. The trustee raised the damage claims in his initial disclosures. The damages allegedly arose from (1) the asserted overpayment of loan commitment fees paid by SFC to the Family Defendants during the period from 1999 through 2001, and (2) stock redemption payments in the total amount of approximately $7 million made by SFC to the Family Defendants during the period from February 2000 through January 2001.

This adversary proceeding was commenced on December 22, 2004, and, thereafter, the District Court withdrew the reference, and granted defendants’ motion to dismiss various counts, including those for deepening insolvency, negligent misrepresentation, aiding and abetting a breach of fiduciary duty, civil conspiracy and turnover of estate property. The trustee then amended his complaint. At the time that the Court wrote this opinion, only two causes of action remained – the fraudulent transfer and preference claims. The Family Defendants contended that they did not receive fair notice of the damage claims, as required under Fed. R. Civ. P. 8(a). The question at the center of this motion was whether the remaining causes of action were encompassed by the damages asserted in the initial disclosures.

The trustee contended that the Family Defendants had notice of the transactions from the start of the lawsuit. The Court disagreed. In the factual background sections of the amended complaint preceding the surviving claims, the trustee described certain transactions that the Family Defendants allegedly entered into with SFC, but did not describe the transactions giving rise to the damages claims at issue. The trustee contended that the transactions were discussed elsewhere in the complaint in the context of the dismissed counts, and applied to the remaining counts because of incorporation clauses. The Court dismissed this argument as “empty formalism.” The Court noted that not every transaction described elsewhere in the complaint related to the surviving claims, and also noted that the trustee misquoted his own complaint in advancing his argument, by contending that the fraudulent conveyance claim related to “transactions,” when the actual complaint only cited a single transaction, which was unrelated to the damage claims at issue. Likewise, a reading of the preference count did not reveal any intention to include the loan commitment or stock redemption payments. Therefore, the Court concluded that the fraudulent conveyance and preference counts did not give the Family Defendants fair notice of the claims at issue.

The trustee next contended that the Family Defendants’ answer and affirmative defenses were “stated broadly enough to cover the claims at issue.” The Court rejected this argument too, as the burden is on the plaintiff to state his claim. The question is not whether the defendant might appear to be aware of the claims.

The trustee also contended that his responses to certain of the Family Defendants’ interrogatories and his expert reports provided sufficient notice of the claims at issue. However, those responses, which went to the issue of damages were stated in general terms, and were inadequate to put the Family Defendants on notice. Moreover, the trustee served the expert reports and interrogatory responses after the close of discovery, by agreement between the parties. The Court noted, however, that an extension of time to answer discovery does not open the door for the plaintiff to assert new claims at that late date. The Court also noted that an expert report is not a pleading, and is not a vehicle for asserting new claims.

Last, the Family Defendants asserted that permitting the trustee to go forward with these new claims would prejudice them because it would require that discovery be re-opened. The Court agreed, finding it would prejudice the Family Defendants to require them to defend against these damage claims at this late date.

Therefore, the Court granted the motion to strike the damage claims, but denied, without discussion, the Family Defendants’ request for costs.

The United States District of Delaware denied the motion of defendants Discovery Re and United States Fidelity & Guaranty Company to withdraw the reference in this adversary proceeding commenced by the OHC Liquidation Trust. Pursuant to an order of then District Court Chief Judge Sue L. Robinson, effective October 6, 2001, under 28 U.S.C. §  157(a), all cases in the District of Delaware under Chapter 11 of the Bankruptcy Code are automatically referred to the Bankruptcy Court. However, under 28 U.S.C. § 157 a party may seek mandatory or permissive withdrawal of the reference so that the case or proceeding may be heard in the District Court. The defendants in this matter sought withdrawal of the reference on mandatory withdrawal grounds, or, in the alternative, on permissive grounds. The District Court found that mandatory withdrawal was not applicable where, as here, only state law claims were in play, and further found that the factors favoring permissive withdrawal were not satisfied.

The OHC Liquidation Trust, as liquidating trust for the estate of Oakwood Homes Corporation, filed an adversary proceeding in the United States Bankruptcy Court for the District of Delaware against Discovery Re and United States Fidelity & Guaranty Company, asserting seven claims arising under the Bankruptcy Code and contract law. Thereafter, the defendants filed a motion to dismiss, which the Bankruptcy Court granted as to the claims based on the Bankruptcy Code. The surviving claims were for (i) breach of contract, (ii) breach of implied covenant of good and faith and fair dealing, and (iii) unjust enrichment. By a decision dated July 11, 2006, the Bankruptcy Court held that these remaining claims constituted a core proceeding. Thereafter, the defendants filed a motion seeking to withdraw the reference.

The basis for the motion was that the remaining claims were all state law claims, and that mandatory withdrawal under 28 U.S.C. § 157(d) was required. Alternatively, the defendants argued for permissive withdrawal because the adversary proceeding was commenced after confirmation of the Oakwood Homes plan, and for reasons of judicial economy.

The District Court rejected the defendants’ argument for mandatory withdrawal, finding that it is only required where the action requires a “substantial and material” consideration of a federal statute outside the Bankruptcy Code. Because the adversary proceeding concerned only state law claims, mandatory withdrawal was not warranted.

The District Court also rejected the defendants’ request based on permissive withdrawal, noting that there is a presumption that bankruptcy proceedings shall proceed in bankruptcy court. The Third Circuit, in In re Pruitt, 910 F.2d 1160, 1168 (3d Cir. 1990) articulated five factors for determining whether permissive withdrawal is warranted: (i) promoting uniformity of bankruptcy administration; (ii) reducing forum shopping and confusion; (iii) fostering economical use of debtor/creditor resources; (iv) expediting the bankruptcy process, and (v) timing of the request for withdrawal. Considering these factors, the District Court stated that the Bankruptcy Court had already ruled on the defendants’ motion to dismiss and had conducted discovery. Also, this was a core proceeding that would affect the structure of debtor-creditor rights in the Oakwood Homes bankruptcy case. Finally, the District Court found that letting the adversary proceeding remain in the Bankruptcy Court would diminish the risk of forum shopping and promote consistent administration of the estate.

Accordingly, the District Court denied the defendants’ motion to withdraw the reference.

After receiving a six million dollar judgment, the plaintiff, Saudi American Bank (“SAMBA”) claimed entitlement to prejudgment interest under Delaware law. SAMBA claimed that a guaranty and credit agreement (on which the underlying judgment was based) both provided that interest was to be paid but did not apply an applicable interest rate. The Delaware legal rate of interest that would have been applicable was 11%.

The defendant claimed that Saudi Arabian law governed the credit agreement and guaranty as well as a Payment Letter executed between the parties. The credit agreement contained a choice of law provision which expressly provided that Saudi Arabian law governed the agreement. The Payment Letter contained no choice of law provision but, because the agreement was executed in Saudi Arabia, and payment was to incur in Saudi Arabia, the defendant claimed that the Payment Letter also was governed by Saudi Arabian law. Finally, though the guaranty expressly stated that it was to be governed by New York law, the defendant argued that the guaranty was derivative of the rights granted under the credit agreement and Payment Letter and thus Saudi Arabian law should apply to the guaranty as well.

Noting that the parties did not dispute that the guaranty allowed SAMBA to recover its interest and expenses incurred in enforcing SAMBA’s rights under the guaranty, the court likewise held that the issue of whether SAMBA was entitled to prejudgment interest could be determined expressly under the guaranty without reference to the Payment Letter or the credit agreement.

The court held that the guaranty was to be governed solely by New York law. The court noted that it was obligated to apply the conflict of laws rules of the state of Delaware, the state in which the court was sitting. Under Delaware law, express choice of law provisions are generally given effect absent some jurisdiction having a materially greater interest in the subject matter. The court found that Delaware, as the site of the bankruptcy, had “some, albeit diminimus,” interest in the matter. However, the interest that Delaware might have was not a materially greater interest than the state of New York. Consequentially, the court determined that New York law should apply to the calculation of prejudgment interest under the guaranty. The court also believed that the application of New York’s rate was more equitable than applying the Delaware rate, which was higher.

UPDATE:  In connection with the decision above, the District Court ordered SAMBA to provide an accounting of the attorneys' fees it was seeking to recover.  SAMBA provided an itemization of some $2.1 million in fees and an additional $195,000 in expenses.  However, SAMBA conceded that it was unable to account for and carve out all the fees related to the grant of summary judgment and that associated litigation.  SAMBA argued that much litigation arose out of the same facts and that it was therefore unable to (and should not be required to) break out its accounting directly related to the Shaw litigation.  The Court disagreed and, in its February 13, 2007 Memorandum Opinion and Order awarded SAMBA $345,714.50 in fees and no expenses.  The $345,714.50 was the amount identified by plaintiff as being attributable solely to the recovery action against Shaw.