The debtors initiated a marketing strategy to sell all or substantially all of their assets. At the conclusion of that process, the debtors determined that a sale to CBay, Inc. and Medquist Transcriptions, Ltd. was the best opportunity and commenced the filing to consummate that sale transaction.

A Wall Street Journal article about the proposed sale can be found here.

While acknowledging that “proceedings over which a bankruptcy court can legitimately exercise related-to jurisdiction include suits between third parties that conceivably may have an effect on the bankruptcy estate,” the Third Circuit carefully parsed the language of “any conceivable effect” and found that it had a much more narrow focus based upon the Court’s own decision in Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir. 1984).

In Pacor, the Third Circuit denied removal of a claim by Higgins against Pacor to the Bankruptcy Court overseeing the Johns-Manville bankruptcy. In refusing to allow removal, the Third Circuit noted that “the primary action between Higgins and Pacor would have no effect on the Manville bankruptcy estate.” Accordingly, there was no related-to jurisdiction. Rather, the Court stated that the Higgins-Pacor action “is a mere precursor to the potential third-party claim for indemnification by Pacor against Manville. Yet the outcome of the Higgins-Pacor action would in no way bind Manville . . . .”

In the instant case, the Third Circuit also quoted from its decision in Federal-Mogul Global, Inc., 300 F.3d 368 (3d Cir. 2002) where it reaffirmed Pacor, stating expressly that “whether a lawsuit could ‘conceivably’ have an effect on the bankruptcy proceeding . . . [demands inquiry into] whether the allegedly related lawsuit would affect the bankruptcy proceeding without the intervention of yet another lawsuit.” Moreover, the Third Circuit cited its more recent decision in In re Combustion Eng’g, Inc., 391 F.3d 190 (3d Cir. 2004) where it again reaffirmed Pacor’s and Combustion’s statement of “related-to” jurisdiction.

Applying the Pacor test to the Grace facts, the Court stated: “Grace will not be bound by any judgment against [Montana]. Rather, an entirely separate action would be necessary for any liability incurred by Montana to have an impact on Grace’s estate. Specifically, Montana would first have to be found liable by its state courts and would then have to successfully bring an indemnification or contribution claim against Grace in the bankruptcy court. This is precisely the situation in which we have found that related-to jurisdiction does not exist.”

Finally, the Third Circuit rejected several other arguments made by Grace and Montana. It denied any “unity of interest” argument on the basis that Montana’s potential liability was based not on a unity of interest, but on an alleged independent legal duty owed by Montana to the Libby Claimants. The Court also denied that its decision was governed by ‘law of the case’ arising from a non-precedential opinion issued by the Court in connection with earlier Grace proceedings. First, the Court distinguished the earlier opinion, but also noted that there was no identity of parties and issues. Thus, the law of the case doctrine did not apply.

For a discussion of the underlying bankruptcy court opinion, click here.

According to the declaration of John Miles in support of the filing, Anaverde owns a master-planned, partially entitled residential development in Palmdale, California. The project includes approximately 3500 undeveloped lots and an adjacent development known as Chandar is planned for 157 single family homes. Mr. Miles notes that the project is partially graded and has had some landscaping done, but is otherwise incomplete.

 The sub-prime crisis of 2008 is listed as one of the bases for the filing. Notes Mr. Miles: “there is very little market appetite for the homes which were to be built on the project site.”

According to a motion filed with the Bankruptcy Court, Anaverde seeks to sell substantially all of its assets to a stalking horse, New Anaverde LLC, an entity formed by some of Anaverde’s equity investors.

The Honorable Mary F. Walrath has been assigned to the case. The case number is 10-10113-MFW.

According to a declaration filed in support of the petition, the debtors are leading developers and publishers of products for the Kindergarten through Grade 12 education and public library markets.

The case has been assigned to The Honorable Brendan Linehan Shannon.

The Park declaration notes that the bankruptcy cases were commenced primarily because of the decline in the commercial and residential construction activity in the U.S.

According to the Park declaration, the Debtors, and certain “Required Supporting Holders” entered into a restructuring support agreement on December 31, 2009. In accordance with the restructuring support agreement, the Debtors filed their bankruptcy cases and a Plan and accompanying Disclosure Statement on January 4, 2010. The proposed plan – if confirmed – provides for payment in full of general unsecured claims. 

The case has been assigned to the Honorable Mary F. Walrath, and the main case number is 10-10003.

The survey, conducted for The News Journal by WorkplaceDynamics, measured factors such as management, environment, compensation and communication.

To view a copy of the Morris James article, please click here.

In its description of the Morris James Bankruptcy and Creditors’ Rights Group, Chambers notes: “This firm has a solid reputation for creditor-side work, and also draws admiration for its work on smaller liquidation matters. The pragmatic Stephen Miller is praised for his success in interested-party work and his proficiency in both debtor and creditor matters. Carl Kunz is regarded as ‘a good, bright negotiator’ by clients, who appreciate his calm demeanor and ability to ‘keep the volume down when there is acrimony.'"

Chambers ranks law firms and attorneys in particular areas of law based upon the results of tens of thousands of interviews conducted during a six-month period. The qualities assessed during the interviews are those most valued by the client: technical legal ability, professional conduct, client service, commercial awareness, diligence, and commitment.

The Debtors filed an objection to Section 503(b)(9) (“503(b)(9)”) administrative claims they alleged were misclassified on the basis that the claimant, Added Value Services, Inc. (“AVS”) provided services and not goods, as is required under 503(b)(9) of the Bankruptcy Code. The Court, holding that goods must be “movable,” agreed with the Debtors and found that AVS’s claim was misclassified as a 503(b)(9) claim.

Moss Landing Commercial Park, LLC (“Moss Landing”) appealed a Bankruptcy Court Order that required Moss Landing to dismiss without prejudice the action it filed against the reorganized Debtors in California. In the California action, Moss Landing sought, among other things, injunctive relief requiring the Debtors to remediate environmental contamination they caused to land purchased by Moss Landing prior to the confirmation of Debtors’ Plan. In its appeal, Moss Landing contended that (1) the bankruptcy discharge did not apply to actions against a reorganized debtor for injunctive relief and (2) the Debtors failed to provide it, a known creditor, with actual notice of the confirmation hearing on the Plan, and therefore, Moss Landing could not be bound by the Plan. The Debtors countered that (1) the Plan injunction bars all entities from commencing or continuing any action on account of any claim or liability arising on or before the Plan effective date, (2) Moss Landing, as a successor in interest to a party who settled the remediation claim with the Debtors, was not entitled to notice, and (3) Moss Landing alternatively moved for money damages and because the injunctive claims could be converted to money damages, the Plan injunction bars the action. 

 The District Court affirmed the Bankruptcy Court’s decision, holding it was not erroneous. The Plan provided, in part, that “Confirmation will, as of the Effective Date: (i) discharge the Debtors from all Claims or other debts and Interests that arose on or before the Effective Date….” The Plan also prohibited commencement or continuation of any action unrelated to a distribution right under the Plan against the reorganized Debtors. The District Court noted that such Plan provisions are critical to the fresh start envisioned by the Bankruptcy Code and to the extent money damages were sought, the California action clearly fell within the confines of the Plan’s injunction. 

With regard to Moss Landing’s remaining arguments, the District Court stated that the Bankruptcy Court did not foreclose relief to Moss Landing. Instead, the Bankruptcy Court determined that these issues should be resolved in the Bankruptcy Court. The District Court affirmed the Bankruptcy Court’s Order.

Chevron entered into pre-petition contracts with SemCrude, L.P., SemFuel, L.P., and SemStream, L.P. for the sale or purchase of crude oil, regular unleaded gasoline, and/or butane, isobutene and propane. The sale/purchase agreements all contained netting provisions that provided that if either party failed to meet its payment or delivery obligations, then the other party could offset any deliveries or overdue payments against the defaulting party or any of its affiliates. It was undisputed that the three debtors were affiliates of each other. As of the petition date, Chevron owed a balance of approximately $1.4 million to SemCrude, L.P. However, Chevron was owed approximately $10.2 million by SemFuel, L.P. and $3.3 million by SemStream, L.P. Chevron Products Company (“Chevron”) moved for relief from the automatic stay to effect a triangular setoff of these debts owed between it and three separate debtors. 

Chevron asserted that an exception to this mutuality rule exists. It argued that a pre-petition contract executed by a creditor, a debtor, and one or more third parties either satisfied the mutuality requirement or allowed the parties to contract around the mutuality requirement. The Bankruptcy Court noted that at first glance it appeared that Chevron had identified an exception supported by caselaw. However, these cases directly or indirectly traced back to a single case, In re Berger Steel Co., 327 F.2d 401 (7th Cir. 1964), decided by the United States Court of Appeals for the Seventh Circuit under the former Bankruptcy Act. This case contemplated that a contractual exception to the mutuality requirement found in section 68 of the former Bankruptcy Act (section 68 of the Bankruptcy Act of 1898 contained similar, but not identical, language to section 553) might exist. The Bankruptcy Court stated that the Berger Steel court found that the parties did not have a triangular setoff agreement. After making this factual finding, the Berger Steel court distinguished its case from cases cited by the proponent by noting that the cases allowing triangular setoff were decided under applicable non-bankruptcy law rather than under the more restrictive confines of the Bankruptcy Code. Thus, the Bankruptcy Court determined that the Berger Steel decision did not address the broader question of whether a triangular setoff was permissible under the Bankruptcy Act. Subsequent caselaw to the Berger Steel decision recognized there might be an exception to the mutuality requirement; however, none found that such exception actually applied.

The Bankruptcy Court addressed two issues raised by this case: (1) whether private agreements can create mutual debt and (2) whether there is an exception to the mutual debt requirement.

Private Agreements Cannot Create Mutuality

Mutuality is strictly construed against the party seeking setoff. Further, debts are mutual when they are owed to and from the same entity and in the same capacity. Using the required narrow construction of mutuality, the Bankruptcy Court concluded that mutuality cannot be supplied by a multi-party agreement that contemplated triangular setoff. Such an agreement does not create indebtedness or right to collect from one party to another. The Bankruptcy Court stated that the language of 11 U.S.C. § 553 supports such an interpretation. Section 553 speaks not only of “mutual debt,” but of a mutual debt owing between a particular creditor and a particular debtor.

There is No Exception To the Mutuality Requirement

The Bankruptcy Court utilized the plain language of 11 U.S.C. § 553 to conclude that there is no contract exception to the mutual debt requirement under section 553. The Bankruptcy Court stated that nothing in the plain language of the statute indicates that there is a contractual exception to the mutual debt requirement and, absent such indication, it would be improper to recognize one. Further, the Bankruptcy Court noted that its holding was consistent with the purpose of section 553 and the Bankruptcy Code generally. In reaching this conclusion, the Bankruptcy Court recognized that one of the primary purposes of the Bankruptcy Code is to ensure all creditors are treated fairly and enjoy equality of distribution absent a compelling reason to depart from this principle. Allowing parties to contract around section 553’s mutuality requirement would allow some creditors to unfairly obtain payment from a debtor, thereby upsetting the priority scheme of the Bankruptcy Code. Thus, the Bankruptcy Court held that no exception to the mutual debt requirement in 11 U.S.C. § 553 could be created by private agreement.

On January 20, 2009, Chevron filed a Motion for Reconsideration of this Opinion.

In this Chapter 7 case, the American Remanufacturers, Inc.’s (the “Debtors”) business involved remanufacturing automobile parts for resale. Prior to and after the bankruptcy, the Tri-City purchased automotive parts produced by the Debtors and received credits for used parts it sold to the Debtors. The Chapter 7 Trustee commenced an adversary proceeding against Metro Auto Xpress trading as Tri-City Automotive Warehouse (“Tri-City”) alleging breach of contract, unjust enrichment, quantum meruit, and avoidance and turnover of estate property.  The Bankruptcy Court granted Tri-City’s motion to dismiss the avoidance and recovery claims.

The Bankruptcy Court rejected the argument that if the Court granted the setoffs, the result would be to elevate Tri-City to secured status and thus, diminish the estate to the detriment of other creditors as irrelevant. The Court quoted Collier’s and stated that such a result is “precisely the purpose of a setoff.” As Collier’s states, “…setoff in bankruptcy is the equivalent of a lawful preference….Section 503(a)… treats rights arising through setoff in the same manner as rights arising from a security agreement or other relevant security devise.” 5 Collier on Bankruptcy ¶ 553.02 (15^th ed. rev. 2008). 

Further, the Court held that valid setoffs are not avoidable as preferential or fraudulent transfers because setoffs are not transfers of estate property. Again the Court referred to Collier’s which notes that avoidance actions require a “prepetition ‘transfer’ of an interest of the debtor in property….The term ‘transfer’ is defined in the Code section 101, and the definition intentionally omits ‘setoffs.’ The legislative history to section 101 explains the omission in clear terms; ‘Inclusion of ‘setoff’ is deleted’…section 553 provides that this title, i.e., title 11, does not affect setoff rights.  Thus, setoff cannot be a preference or a fraudulent transfer.” Id. at ¶ 553.09[1][a].

The Court also dismissed Debtors’ attempt to avoid post-petition transfers pursuant to 11 U.S.C. § 549. Section 549 permits avoidance of a transfer of estate property that is not authorized by the court. Thus, if the Court finds that Tri-City is entitled to setoff as preserved by 11 U.S.C. § 553, then such a finding provides the court authorization contemplated by § 549(a)(1)(2)(B). 

Finally, because valid setoffs cannot be avoided, § 550 is not applicable.