Court Crier: Financial Restructuring and Bankruptcy

In May v. SunTrust Mortgage, Inc., the Massachusetts Supreme Judicial Court addressed whether a borrower, who grants a mortgagein a consumer credit transaction may rescind the transaction under the Massachusetts Consumer Credit Cost Disclosure Act, defensively by way of common law recoupment after the expiration of the four-year statute of limitations for a rescission.  In noting that rescission and recoupment are distinct under Massachusetts common law, the court held that the borrower could not transpose its right to a rescission as a defensive recoupment. (April 14, 2014)

In Illinois Insurance Guaranty Fund v. Reliance Insurance Co. in Liquidation, the Commonwealth Court of Pennsylvania considered whether expenses related to investments of guaranty fund assets should be assigned priority level (a) as administration costs and expenses under section 544 of The Insurance Department Act of 1921 (“Act”), 40 P.S. § 221.4.  A number of Guaranty Associations (GAs) argued that for priority purposes, their investment management costs should not be treated differently from other reimbursed expenses (e.g. bank costs) during liquidation proceedings. The court disagreed, reasoning that protecting investment income would be inconsistent with the Act’s primary policy objective of protecting innocent policyholders whose insurance carriers have become insolvent. Further, the Act’s language is clear that costs eligible for reimbursement are those reasonable and necessary to facilitate the GA’s duty to handle claims, and not investment expenses. (March 21, 2014)

In Pehoviak v. Deutsche Bank National Trust Co., the Massachusetts Court of Appeals considered whether the holder of the first mortgage on a property acted with good faith and reasonable diligence, where the holder of the mortgage sent a notice of foreclosure to junior lien holders in compliance with M. G. L. c. 244, § 14, but did not forward the notices to the prospective buyer after repeated requests for documentation.  The court rejected the mortgage holder’s argument that compliance with M. G. L. c. 244, § 14, satisfied its duty to act with good faith and reasonable diligence, and it held that sending notice and fulfilling its duty to the prospective buyer were two distinct issues. (March 11, 2014)

In U.S. Bank National Association v. Schumacher, the Massachusetts Supreme Judicial Court addressed whether compliance of M. G. L. c. 244, § 35A, is part of the mortgage foreclosure process and whether the mortgagee’s failure to satisfy that statute’s requirements is an issue that may be heard in a summary process action to recover possession of land.  The court reasoned that, because it provides the mortgagor with the opportunity to cure a default in order to avoid future foreclosure proceedings, compliance with M. G. L. c. 244, § 35A is a pre-foreclosure process.  Thus, the court held that the mortgagee’s failure to comply with the statute’s requirements did not give rise to issues that were judiciable in the summary process proceeding. (March 12, 2014)

In In re: Paul Ruitenberg, III, the United States Court of Appeals for the Third Circuit addressed whether a spouse’s interest in an equitable share of marital property, pending her divorce from the debtor,  is considered a pre-petition “claim” against the bankruptcy estate of the debtor-spouse for purposes of § 101(5) of the Bankruptcy Code. The court held that a non-debtor spouse has an allowable pre-petition claim against the spouse’s bankruptcy estate for equitable distribution of marital property because the contingent nature of the right to payment does not change the fact that the right to payment exists and thereby constitutes a claim. (March 13, 2014)

In Law v. Siegel, the United States Supreme Court addressed whether the Bankruptcy Court exceeded the limits of its authority when it ordered that money protected by the homestead exemption be made available to pay the defendant’s attorney fees.  The Court weighed whether the application of the plain language of the Bankruptcy Code (which would require it to reverse the Ninth Circuit)  outweighed the understandable impulse to affirm the capacity of the bankruptcy courts to punish an individual for deplorable conduct in attempting to hide income from creditors. The Court determined that while the plaintiff’s conduct was outrageous, the Court could not find a colorable basis for upholding the Ninth Circuit based on  a plain reading of the Bankruptcy Code providing the homestead exemption. (March 4, 2014)

In In re Nortel Networks Inc., the United States Court of Appeals for the Third Circuit upheld the denial of a motion to compel arbitration where the agreement did not reveal an intent to arbitrate in plain language.  The agreement at issue stated that the parties would “negotiate in good faith an attempt to reach agreement” as to allocation of the funds and use “dispute resolvers” if needed.  This language was not sufficiently clear to require arbitration as opposed to other forms of dispute resolution. (December 6, 2013)

In In re:  KB Toys Inc., the United States Court of Appeals for the Third Circuit found that a trade claim that is subject to disallowance in the hands of the original claimant is similarly disallowable in the hands of a subsequent transferee.  Commonly, in bankruptcy, creditors against a debtor entity look to sell their claims as opposed to engaging in lengthy and risky litigation. Claim purchasers buy these claims and hope to receive a distribution.  The Third Circuit held that claim purchasers who purchase a claim from an entity who received a voidable preference that remains unreturned, purchases a claim that is subject to disallowance as a result of said voidable preference. (November 15, 2013)

In Munce’s Superior Petroleum Products, Inc. v. N.H. Department of Environmental Services, the New York Supreme Court, Appellate Division, First Circuit, affirmed the bankruptcy court’s decision to treat a post-petition contempt fine as an administrative expense priority under 11 U.S.C. § 503(b)(1)(A).  The contempt fine, ordered by a New Hampshire trial court against appellants for not complying with an earlier-issued state court order compelling appellants to take certain remedial measures to comply with New Hampshire environmental law, was issued after appellants filed its Chapter 11 bankruptcy petition.  The court held that, because the underlying violation of New Hampshire environmental law occurred pre-petition, the bankruptcy court was correct to rule that the automatic stay did not apply to the state court orders and to classify the fine as an administrative expense priority. (November 20, 2013)

In Simon v. FIA Card Services, N.A., the United States Court of Appeals for the Third Circuit addressed the intersection of the Bankruptcy Code and the Fair Debt Collection Practices Act (FDCPA). The court held that there was no preclusion of FDCPA claims where communications sent to a bankruptcy debtor were alleged to violate the Bankruptcy Code, but found that defendants could not comply with one law without violating the other. The debtor plaintiffs seeking Chapter 7 bankruptcy protection received a letter from defendant stating that defendant might challenge the dischargeability of the credit card debt, and including a notice of examination of the debtors’ records and offer of settlement. Since the plaintiffs received the letter through their counsel, and not directly, the court allowed the claims alleging violation of the Bankruptcy Code and civil rules governing subpoenas. The court affirmed the dismissal of plaintiffs’ claims that defendant violated the FDCPA because its requirements conflicted with a provision of the Bankruptcy Code. (October 7, 2013)

In In re AMR Corporation, the United States Court of Appeals for the Second Circuit held that ipso facto clauses in a nonexecutory contract are not unenforceable pursuant to 11 U.S.C. §365 (e) or any other Bankruptcy Code provision identified by the creditor, U.S. Bank Trust National Association. The court referred to the specificity of the cited provisions of the Bankruptcy Code in determining that Congress “clearly knows how to limit or negate the effect of ipso facto clauses when it wants to.” This preciseness, paired with an absence of textual support in the Code, was fatal to the creditor’s position. (September 18, 2013)

In In Re ABC Learning Centres Limited, the United States Court of Appeals for the Third Circuit addressed whether an Australian insolvency proceeding should be recognized as a foreign main proceeding under Chapter 15 of the Bankruptcy Code, 11 U.S.C. § 1502, and whether the debtor’s fully-encumbered property in the United States was subject to an automatic stay under 11 U.S.C. § 1520(a).  The court held that the debtor’s Australian liquidation proceeding was a foreign main proceedings pursuant to Chapter 15 of the Bankruptcy Code and not manifestly contrary to U.S. public policy.  The court also held that, because the debtor maintained equitable interests in its U.S. property, it was considered “property of the debtor” and was subject to the automatic stay under Section 1520(a). (August 27, 2013)

In In Re Semcrude L.P., the United States Court of Appeals for the Third Circuit addressed whether a creditor’s appeal challenging a bankruptcy plan was equitably moot. The court held that the appeal should not be considered equitably moot because the record did not support the debtors’ contentions that the relief requested would jeopardize the bankruptcy plan, and frustrate the public policy favoring finality of bankruptcy judgments. (August 27, 2013)

In In re: Lazy Days’ RV Center, Inc., the United States Court of Appeals for the Third Circuit addressed whether a bankruptcy court had jurisdiction to rule on a post-settlement dispute involving a reorganized debtor’s assignment of a land lease after filing for bankruptcy. The court found that the bankruptcy court had jurisdiction because its opinion voiding the anti-assignment clause of a lease was not advisory. The bankruptcy court also had subject matter jurisdiction to resolve a dispute involving a settlement it had previously confirmed which would not involve it wading into the underlying state law. The court held that the bankruptcy court was not required to hold an adversary proceeding before reopening a case. (July 30, 2013)

In Law v. Siegel, the United States Supreme Court granted certiorari on the following issue: 

Whether it is appropriate for the bankruptcy trustee to surcharge the debtor’s constitutionally protected homestead? (June 17, 2013)

In The Majestic Star Casino, LLC v. Barden Development, Inc., the United States Court of Appeals for the Third Circuit addressed whether a debtor subsidiary’s tax status is “property” of the bankruptcy estate, and, if so, whether it is property belonging to that subsidiary or to its non-debtor corporate parent.  The debtor filed an adversary complaint, asserting that the revocation of its classification as a subchapter S corporation (QSub) by its non-debtor corporate parent caused an unlawful post-petition  forfeiture of pass-through tax benefits.  Finding that the debtor had no property interest in its QSub status, the court held that the debtor lacked standing to initiate an adversary proceeding to seek avoidance of the alleged “transfer” of its QSub status. (May 21, 2013)

In Schepisi & McLaughlin, P.A. v. Lofaro, et al., the Superior Court of New Jersey, Appellate Division, reviewed a dispute between a creditor and the debtor’s former attorney over entitlement to funds held in a trust account.  The funds were recovered by the creditor in an action he brought in Florida against the debtor and a Florida corporation that owed the debtor money.  The court determined that the debtor’s former attorney failed to comply with the court rules governing charging liens and that the terms of the contingency fees may not provide the proper measure of his compensation.  As a result, an evidentiary hearing was required to ascertain what services the debtor’s former attorney performed that would warrant a fee, if any. (April 26, 2013)

In Consedine v. Penn Treaty Network America Insurance Company and American Network Insurance Company, the Commonwealth Court of Pennsylvania addressed petitions seeking to convert the rehabilitations of two insurance company defendants into liquidations.  The court denied the request to convert the rehabilitations into liquidations since the rehabilitator failed to meet his burden of proving that continued rehabilitation would substantially increase the risk of loss to policyholders, creditors and the public, or would be futile. (December 28, 2012)

In Nuveen Municipal Trust v. Withumsmith Brown, P.C., the United States Court of Appeals for the Third Circuit addressed whether the District Court had subject matter jurisdiction over a dispute arising from a loan transaction based on its relation to the bankruptcy proceeding of a non-party. The court held that federal “related to” jurisdiction exists under 28 U.S.C. § 1334(b) because the outcome of the action could conceivably affect the pool of assets available in the bankruptcy estate. The court also held that a federal court can apply the New Jersey Affidavit of Merit statute, but is not required to apply the procedural protections afforded to plaintiffs under the statute. (August 16, 2012)

In In re: Stergios Messina, the United States Court of Appeals for the Third Circuit addressed whether a trustee has a duty to object to claimed exemptions within the 30-day limit imposed by Fed. R. Bankr. P. 4003(b). Under the recent United States Supreme Court decision in Schwab v. Reilly, such an objection need not be within the 30-day limit where it is based on a debtor’s market value estimation and the estate’s right to retain value in the property beyond the exempted interest.  Because the exemption at issue related to proceeds recovered by the trustee’s voidance of the debtor’s mortgage, the court held that, pursuant to Schwab, there was no 30-day time limit. (August 6, 2012)

In In re Bradley Orton, the United States Court of Appeals for the Third Circuit addressed a debtor’s use of the “wildcard” exemption in 11 U.S.C. 522(d)(5).  The debtor had listed his interest in an oil/gas lease as $1.00 and claimed that any future appreciation was also exempt as the trustee had not objected.  In holding against the debtor, the court distinguished between claiming: (i) an asset itself or its fair market value and (ii) a specific dollar interest in an asset. (July 12, 2012)

In In re Michael Calabrese, Jr., the United States Court of Appeals for the Third Circuit considered whether retail sales taxes are excise taxes or trust fund taxes under the Bankruptcy Code.  Due to concern that failing businesses may attempt to discharge sales taxes owed to the government,  the court held that sales taxes are properly classified as estate taxes and never dischargeable. (July 20, 2012)

In In re American Capital Equipment, LLC, the United States Court of Appeals for the Third Circuit addressed “whether a bankruptcy court can determine at the disclosure statement stage that a Chapter 11 plan is unconfirmable without first holding a confirmation hearing.  The court held that “a bankruptcy court has the authority to do so if it is obvious that the plan is patently unconfirmable, such that no dispute of material fact remain and defects cannot be cured by creditor voting.” (July 25, 2012)

In Federal Insurance Company v. DBSI, Inc., the Bankruptcy Court of Delaware decided whether the Trustee has standing to object to the payment of certain insurance policy proceeds in an interpleader action. The court found, where the debtor had no existing covered claims and there is no further possibility for coverage, the proceeds are not property of the estate; thus, the Trustee had no standing to object to the payment of insurance policy proceeds. (June 27, 2012)

In RadLAX Gateway Hotel, LLC v. Amalgamated Bank, the United States Supreme Court addressed whether a Chapter 11 bankruptcy plan may be confirmed over the objection of a secured creditor pursuant to if the plan provides for the sale of collateral free and clear of the creditor’s lien, but does not permit the creditor to “credit-bid” at the sale. The Court held that such a plan may not be confirmed because the cash generated by the auction is not the “indubitable equivalent” of the creditor’s claim. (May 29, 2012)

In Wright v. Owens Corning, the United States Court of Appeals for the Third Circuit expanded the test for determining when a “claim” exists under the Bankruptcy Code as set out in the prior case of JELD-WEN, Inc. v. Van Brunt (In re Grossman’s Inc). The court held that a “claim” arises under the Code when an individual is exposed to a product or other conduct giving rise to an injury that underlies a “right to payment” under the Code. The court further held that, for persons who have “claims” under the Code based solely on the retroactive effect of the rule announced in JELD-WEN’s, those claims are not discharged when the notice given to those persons was with the understanding that they did not hold claims. (May 18, 2012)

In Dietz v. Chase Home Finance, the Superior Court of Pennsylvania affirmed the entry of judgment on the pleadings against home owners who brought negligence and defamation action against their mortgage holder. The Superior Court held that the Fair Credit Reporting Act preempted the Dietz’s claims. (April 2, 2012)

In In re Semcrude L.P., the United States Court of Appeals for the Third Circuit addressed whether a creditor’s appeal challenging a bankruptcy plan was equitably moot. The court held that the appeal was equitably moot because the bankruptcy plan had been substantially consummated, the creditor had not obtained a stay, and the relief requested would have affected the rights of parties not before the court, jeopardized the plan, and frustrated the public policy favoring finality of bankruptcy judgments. (January 3, 2012)

In In re Machne Menachem, Inc., the United States Court of Appeals for the Third Circuit addressed whether a corporate director’s advances to the corporation were loans entitling him to a bankruptcy claim. Because there was no documentation relating to loan terms and no intent to borrow shown on behalf of the corporation, the court held that there was insufficient evidence to characterize the advances as loans. (January 3, 2012)

In Reliance Insurance Co. in Liquidation v. Aramark Corp., the Commonwealth Court of Pennsylvania addressed whether the Liquidator stated a viable claim for reimbursement from Aramark for the claims paid by guaranty associations allegedly covered by a $25 million contingent liability policy under which Aramark was insured. The court dismissed the Liquidator’s Complaint for failure to exhaust statutory remedies under the Insurance Department Act and also found that the state guaranty associations must be joined as indispensible parties. (December 9, 2011)

In Tobyhanna Army Depot FCU v. Monroe County TCB, the Commonwealth Court of Pennsylvania addressed the issue of a third-party non-debtor’s standing to assert an automatic stay under the Bankruptcy Code.  The court held that, absent a showing of unusual circumstances, the third-party non-debtor lacked standing. (November 1, 2011)

In In re: Niles C. Taylor, the United States Court of Appeals for the Third Circuit addressed whether sanctions were appropriate against a creditor and its counsel for violations of Federal Rule of Bankruptcy Procedure 9011.  The court held that the creditor and its counsel were subject to sanctions because they pursued a motion for relief based on claims known to be untrue, and failed to make a reasonable inquiry concerning the representations made in their motion papers. (August 24, 2011)

In IMO Gerald M. Saluti, the Supreme Court of New Jersey addressed whether disciplinary actions against lawyers fell within an exception to the Section 362 automatic bankruptcy stay.  The court held that the disciplinary sanctions fit within the governmental exception under U.S.C.A. 362(b)(4), and were enforced notwithstanding the attorney’s prior filing for bankruptcy. (August 25, 2011)

In In re: Marcal Paper Mills, Inc., the United States Court of Appeals for the Third Circuit addressed whether under the Employee Retirement Income Security Act (ERISA), as amended by the Multiemployer Pension Plan Amendments Act (MPPAA), the portion of withdrawal liability that is attributable to the post-petition time period constitutes an administrative expense entitled to priority under the Bankruptcy Code. The court held that withdrawal liability can be apportioned between pre- and post-petition time periods and the post-petition portion can be classified as an administrative expense. (June 16, 2011)

In In re: Stanley J. Caterbone, the United States Court of Appeals for the Third Circuit addressed whether an untimely notice of appeal from a bankruptcy court ruling on a Chapter 11 petition deprives appellate courts of jurisdiction over the appeal. The court ruled that under 28 U.S.C. Section 158(c)(2) and the Federal Rules of Bankruptcy Procedure, an untimely filing prevents the district and circuit court from reviewing the appeal and that such appeals are to be dismissed for lack of subject matter jurisdiction. (April 4, 2011)

In In re: Montgomery Ward, LLC, the United States Court of Appeals for the Third Circuit addressed whether a plan administrator was precluded from bringing a second bankruptcy action by res judicata. The court held that because the plan administrator was not in privity with the first debtor, the second action was not barred. (March 9, 2011) 

In Commonwealth Financial Systems v. Smith, the Superior Court of Pennsylvania addressed an issue of first impression: whether computerized files of an original creditor are admissible as the business records of a successor-debt buyer. The court held that computerized business records of a predecessor company must be authenticated pursuant to Pennsylvania Rule of Evidence 803(6) which requires the proponent of documentary evidence to establish circumstantial trustworthiness. The court rejected the national trend in other federal and state courts which have held that a document prepared by a third party is properly admitted as part of the business records of the acquiring business if the business integrated the document into its records and relied upon it. (February 14, 2011)

In In Re: American Home Mortgage Holdings, the United States Court of Appeals for the Third Circuit addressed an issue of first impression regarding the definition of "commercially reasonable determinants of value" (CRDV) in Section 562 of the Bankruptcy Code. The court held that the CRDV should be measured by the market price of the asset at issue if the market is functioning properly. The court further held that "[i]t is only when the market is dysfunctional and the market price does not reflect an asset's worth should one turn to other determinants of value." (February 16, 2011) 

In Ransom v. FIA Card Services, the Supreme Court of the United States addressed whether, under a Chapter 13 "means test" analysis, a debtor may take an ownership cost deduction for a car despite the fact that he did not make loan payments. The Court held that a debtor who does not make loan or lease payments may take an operating cost deduction, but not an ownership deduction. (January 11, 2011)

In In re: Francisco Rodriguez, the United States Court of Appeals for the Third Circuit addressed whether the automatic stay provision of the Bankruptcy Code prohibits a lender from seeking to recoup unpaid pre-petition escrow payments from a bankruptcy debtor outside of the bankruptcy proceedings . Both the bankruptcy court and the district court determined that the lender was permitted to calculate the missed escrow payments outside of the bankruptcy proceeding. The Third Circuit disagreed and remanded the matter back to the district court, holding that the lender should have included its claim for unpaid escrow amounts as part of its proof of claim filed in the bankruptcy court. (December 23, 2010)

In Showalter v. Pantaleo, the Superior Court of Pennsylvania discussed whether the trial court erred in finding that the plaintiffs could not prove the continuity element of their adverse possession claim because the landowner filed for bankruptcy before the expiration of the 21 year period of occupancy. Affirming the trial court's decision, the Superior Court held that the plaintiffs could not establish that they possessed the subject property for 21 continuous years because, when the landowner filed for bankruptcy and the subject property became a part of the bankruptcy estate, their possession was interrupted. (November 18, 2010)

In Stern v. Marshall, the Supreme Court of the United States granted a Petition for Writ of Certiorari to decide questions relating to core jurisdiction in bankruptcy proceedings. In particular, the Court agreed to consider the following issues: "(1) Whether the [underlying circuit court] opinion, which renders §157(b)(2)(C) surplusage in light of §157(b)(2)(B), contravenes Congress' intent in enacting §157(b)(2)(C)"; (2) "[w]hether Congress may, under Articles I and III, constitutionally authorize core jurisdiction over debtors' compulsory counterclaims to proofs of claim"; and (3) whether the circuit court's decision creates "a circuit split ... by holding that Congress cannot constitutionally authorize non-Article III bankruptcy judges to enter final judgment on all compulsory counterclaims to proofs of claim." (September 28, 2010)

In IUE-CWA, et al. v. Visteon Corp., et al., the United States Court of Appeals for the Third Circuit considered whether 11 U.S.C. §1114 limits a debtor's ability to unilaterally terminate or modify, during bankruptcy proceedings, those retiree benefits that it could-consistent with plan documents, collective bargaining obligations, and the prescriptions of the Employment Retirement Income Security Act of 1974-unilaterally terminate or modify outside of bankruptcy proceedings. In relevant part, § 1114(e) restricts a trustee's ability to modify retiree benefits unless the bankruptcy court orders, or the trustee and the authorized representative agree to, the modification. The court found that § 1114 applies to all retiree benefits and restricts a debtor's ability to modify or terminate retiree benefits, regardless of whether the debtor can unilaterally terminate or modify those benefits outside of bankruptcy pursuant to language in the plan documents reserving that right. (July 13, 2010)

In Hamilton v. Lanning, the Supreme Court of the United States, addressing a Chapter 13 bankruptcy matter, considered the meaning of the term "projected disposable income," as stated in Section 1325(b)(2)(A)(i) of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The Court held that when considering a debtor's projected disposable income for purposes of the debtor's payments to creditors, courts must consider the debtor's actual income and use a forward-looking approach. In addition, the Supreme Court held that courts may go beyond mechanical calculations and account for changes in the debtor's income that are known, or virtually certain, at the time of confirmation. (June 7, 2010)

In Trevdan Building Supply v. Toll Brothers, Inc., the Superior Court of Pennsylvana considered whether an unpaid materialman's equitable claim was superior to a security interest possessed by an assignee of the contractor. In Trevdan, Houston Drywall, Inc. (HD) contracted with Toll Brothers, Inc. (Toll Brothers) to perform drywall work on several of Toll Brothers' residential construction projects. HD then entered into an agreement with Trevdan, the materialman, to supply the building materials for the project. Thereafter, HD sold its rights to unpaid present and future invoices to Gulf Coast Bank & Trust Company (Gulf Coast). Gulf Coast sent notice of its assignment to Toll Brothers, and directed that all future payments to HD be made directly to Gulf Coast. After HD ceased operations on the project, Trevdan (the materialman) demanded payment from Toll Brothers for materials it had supplied to date. After Toll Brothers refused, Trevdan filed suit. Meanwhile, HD filed for Chapter 7 bankruptcy. The trial court ultimately granted Gulf Coast's request for payment of all outstanding invoices and denied Trevdan's request for payment for the materials it had supplied. The Superior Court reversed, and held that "as an unpaid materialman, Trevdan holds an equitable lien against the funds Toll Brothers withheld during the construction project." The court reasoned that the contract between HD and Toll Brothers required HD to pay all outstanding liens and sums due for materials and to certify that all such payments had been made as a condition of payment under the contract. Because the contractor, HD, had breached its obligation under the agreement by not satisfying all liens and ensuring payment to its materialmen, the owner (Toll Brothers) was permitted to retain sufficient funds to satisfy HD's payment obligations. The court further held that the materialman's lien was not inferior to Gulf Coast's security interest because, among other things, "Gulf Coast's right to payment of [HD's] receivables never matured because [HD] failed to satisfy its contractual obligations." (May 28, 2010)  

In JELD-WEN v. Van Brunt, the United States Court of Appeals for the Third Circuit overruled the Frenville case and established a new test for determining when a party holds a "Claim" under the Bankruptcy Code. JELD-WEN was the successor-in-interest of a home improvement store that sold asbestos-containing products to Ms. Van Brunt in 1977. In 1997, the home improvement store filed a petition under Chapter 11 of the Bankruptcy Code and obtained confirmation of a Plan of Reorganization during that same year. Van Brunt first manifested symptoms of mesothelioma in 2006, and filed a complaint against JELD-WEN in 2008. JELD-WEN filed a Motion in the bankruptcy court to reopen the Chapter 11 case and sought a determination that Van Brunt's claims were discharged. Both the bankruptcy court and the district court concluded that Van Brunt's claims were not discharged because they arose after the effective date of the Plan. JELD-WEN appealed the ruling to the Third Circuit. The Third Circuit, sitting en banc, overruled its prior precedent and held that a claim arises "when an individual is exposed prepetition to a product or other conduct giving rise to an injury, which underlies a 'right to payment' under Bankruptcy Code." The court held that the prior Frenville test did not accurately determine the existence of a "Claim" under the Bankruptcy Code because it failed to account for the fact that a "Claim" can exist under the Bankruptcy Code before a right to payment exists under state law. The Third Circuit remanded the case for consideration of the facts under the new standard. (June 2, 2010)

In In re: Exide Technologies, the United States Court of Appeals for the Third Circuit addressed whether an agreement was an executory contract that could be rejected under the Bankruptcy Code. As the term is used in the Bankruptcy Code, an executory contract is one where the "obligation of both the bankrupt and the other party to the contract are so far underperformed that the failure of either to complete performance would constitute a material breach[,] excusing the performance of the other." Exide Technologies filed for bankruptcy and sought to reject an agreement with EnerSys Delaware, Inc. on the basis the it was an executory contract. The bankruptcy court held that the parties' agreement was an executory contract subject to rejection under 11 U.S.C. § 365(a). The Third Circuit reversed. The court found that EnerSys had substantially performed the contract in such a manner that none of its material obligations remained unperformed. Therefore, the contract was not executory, and Exide could not reject it. (June 1, 2010) 

In In re: Philadelphia Newspapers, LLC, the Third Circuit Court of Appeals considered the implications of section 1129(b)(2)(A) of the Bankruptcy Code on reorganization plans. Specifically, the court considered whether section 1129(b)(2)(A) requires a debtor, who proposes a sale of assets free of liens as part of a reorganization plan, to allow creditors whose loans are secured by those assets to bid their credit at the auction. The court held that section 1129(b)(2)(A) contains no statutory right to credit bidding, and that subsection (iii) unambiguously permits a debtor to proceed with any plan that provides secured lenders with the "indubitable equivalent" of their secured interest in the assets. Therefore, the Court affirmed the District Court's approval of the debtor's proposed bid procedures. (March 22, 2010)

In United Student Aid Funds, Inc. v. Espinosa, the Supreme Court of the United States considered whether a bankruptcy order that confirms the discharge of student loan debt without undertaking an undue hardship analysis and without the commencement of an adversary proceeding is a void judgment under Federal Rule of Civil Procedure 60(b)(4). In Espinosa, the debtor filed a bankruptcy petition under Chapter 13, and submitted a plan that proposed that he repay only the principal on his student loan debt, but not the interest. The creditor received notice of the plan, but did not object to the plan's proposed discharge of the student loan interest without a determination of undue hardship, nor did it object to the debtor's failure to initiate an adversary proceeding to determine the dischargeability of the debt. The bankruptcy court confirmed the plan and provided notice to the creditor, who did not respond to that notice. Some time later, the creditor sought to collect on the unpaid student loan interest that had been discharged during the bankruptcy proceedings. Although the Supreme Court found that the bankruptcy court's failure to undertake an undue hardship analysis before confirming the debtor's plan was "plain legal error," the Court held that the order was nonetheless enforceable and binding on the creditor because it had notice of the error and failed to timely appeal. Thus, the Court refused to find the judgment void under Fed. R. Civ. P. 60(b)(4). (March 23, 2010)

In Official Comm. of Unsecured Creditors of Allegheny Health Educ. and Research Found. v. PriceWaterhouseCoopers, LLP, the Supreme Court of Pennsylvania addressed questions of first impression under Pennsylvania law concerning the availability of an imputation-based in pari delicto defense in an auditor-liability scenario, where the plaintiff sought to recover for allegedly fraudulent conduct in which the auditor participated. Pursuant to the in pari delicto defense, where the plaintiff's culpability is at least as great as the defendant's, the action is barred. The court held that: 1) the proper test to determine the availability of defensive imputation in scenarios involving non-innocents depends on whether or not the defendant dealt with the principal in good faith; and 2) the in pari delicto defense is available in the auditor-liability setting where the auditor has materially dealt in good faith with the client-principal. (February 16, 2010) 

The United States Court of Appeals for the Third Circuit, in In re: W. R. Grace & Co., addressed a bankruptcy court's jurisdiction. W.R. Grace & Co. and the State of Montana appealed an order from the District Court for the District of Delaware that affirmed an order from the bankruptcy court denying W.R. Grace's motion to expand a preliminary injunction. The bankruptcy court's injunction applied to claims in a case involving asbestos litigation against W.R. Grace, who had sought Chapter 11 protection. The proposed expansion would have enjoined claims in a third-party lawsuit arising from W.R. Grace's mining operations. The Third Circuit affirmed, holding that a federal bankruptcy court does not have jurisdiction over a third-party lawsuit if that lawsuit would affect the bankruptcy proceeding only through the intervention of yet another lawsuit. (December 31, 2009) 

In In re: 15375 Memorial Corporation, the United States Court of Appeals for the Third Circuit considered whether the debtors' Chapter 11 bankruptcy petitions were filed in good faith. In concluding that the debtors' petitions were not filed in good faith and were, thus, properly dismissed, the court explained that the bankruptcy filings did not maximize the debtors' estate. As a result, the petitions failed to serve a valid bankruptcy purpose. The court also held that the timing of the petitions established that they were filed primarily as a litigation tactic in pending litigation in which the debtors faced substantial liability. The court reaffirmed the settled principle that "filing a Chapter 11 petition merely to obtain tactical litigation advantages is not within the legitimate scope of the bankruptcy laws. "The court also reasoned that where the timing of the Chapter 11 petition is such that "there can be no doubt that the primary, if not sole, purpose of the filing was a litigation tactic, the petition may be dismissed as not being filed in good faith." (December 22, 2009)