Federal Rule of Bankruptcy Procedure 3003(c)(3) provides that “the [bankruptcy] court shall fix and for cause shown may extend the time within which proofs of claim or interest may be filed.”  For various reasons, creditors sometimes miss the claims “bar date” and need to seek permission from the court to file a late filed claim or deem the late-filed claim allowed.  In order to succeed, the creditor must convince the court that the late claim was the result of excusable neglect.  In re Garden Ridge Corp., 348 B.R. 642, 645 (Bankr. D. Del. 2006).  Excusable neglect is not defined within the Bankruptcy Code.  Instead, “it is based on equity and depends on the particular circumstances and facts of the case.”  Id., citing Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P’ship, 507 U.S. 380, 395, 113 S.Ct. 1489, 123 L.Ed. 2d 74 (1993).

Courts generally consider four factors in deciding whether a claimant has established excusable neglect.  In re Garden Ridge Corp., 348 B.R. at 645, citing Hefta v. Official Comm. of Unsecured Creditors (In re American Classic Voyages Co.), 405 F.3 133 (3d Cir. 2005).  These factors include (i) the danger of prejudice to the debtor; (ii) the length of delay and its impact on the judicial proceedings; (iii) the reason for the delay, including whether the delay was within the reasonable control of the movant; and, (iv) whether the creditor acted in good faith.  Id.  “All factors must be considered and balanced; no one factor trumps the others.”  Id.

In Garden Ridge, the creditor who filed the late claim acknowledged to the court that it made a mistake in missing the deadline, but urged the court to weigh the “Pioneer factors” and not enforce the claims bar date.  Turning first to the issue of prejudice, the court noted that the claim was filed one week after the claims bar date.  The court can consider several factors in deciding whether prejudice exists.  These include “whether the debtor was surprised or caught unaware by the assertion of a claim that it had not anticipated; whether the payment of the claim would force the return of amounts already paid out under the confirmed plan or affect the distribution to creditors; whether payment of the claim would jeopardize the success of the debtor’s reorganization; whether the allowance of the claim would adversely impact the debtor actually or legally; and whether allowance of the claim would open the floodgates to future claims.”  Id. at 646, citing Pro-Tec Serv., LLC v. Inacom Corp. (In re Inacom Corp.), No. 00-2426, 2004 WL 2283599 *4 (D. Del. October 4, 2004), citing In re O’Brien Envtl. Energy, Inc. 188 F.3d 116, 126-28 (3d Cir. 1999).

After considering the four factors, the Garden Ridge court found that factors 1, 2 and 4 (prejudice, length of delay, and good faith) supported the creditor’s request for allowance of the late filed claim.  The court recognized that the creditor was “careless in its obligation to file its claim by the deadline,” however, this factor alone was not enough to support denial of the claim.

The creditor in Garden Ridge was fortunate in that its claim was not disallowed even though it was filed one week after the bar date.  However, Garden Ridge should remind creditors that they carry the burden of establishing excusable neglect and should take all necessary steps to insure their claims are filed before the passing of the bar date.  In Hoos & Co. v. Dynamics Corp. of Am., 570 F.2d 433, (2d Cir. 1978), the Second Circuit explained why courts strictly enforce the claims bar date in a bankruptcy proceeding:

The practical, commercial rationale underlying the need for a bar date are [sic] manifest.  The creditors and bankruptcy court must be able to rely on a fixed financial position of the debtor in order to intelligently evaluate the proposed plan of reorganization for plan approval or amendment purpose.  After initiating a carefully orchestrated plan of reorganization, the untimely interjection of an unanticipated claim, particularly a relatively large one, can destroy the fragile balance struck by all the interested parties in the plan.  Given the time sensitivity of such financial undertakings, the consequent delay in reevaluation necessitated by the late allowance of the claim may often spell disaster to recovery, even where ultimate approval is forthcoming.  These considerations and realities militate in favor of restraint and caution in allowing untimely claims.

Federal Rule of Bankruptcy Procedure 2004(a) states that “[o]n motion of any party in interest, the court may order the examination of any entity.”  Courts construing Rule 2004(a) have found its scope “unfettered and broad.”  In re Washington Mutual, Inc., 408 B.R. 45, 49 (Bankr. D. Del. 2009), citing In re Bennett Funding Group, Inc., 203 B.R. 24, 28 (Bankr. N. D. N.Y. 1996).  Federal Rule of Bankruptcy Procedure 2004(b) establishes some of the parameters of what is commonly referred to as a “Rule 2004 Examination”:

The examination … may relate only to the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor’s estate.  [Additionally, in a] case under chapter 11 … the examination may also relate to the operation of any business and the desirability of its continuance, the source of any money or property acquired or to be acquired by the debtor for purposes of consummating a plan and the consideration given or offered therefor, and any other matter relevant to the case or to the formation of a plan.

In its broadest sense, 2004 examinations are referred to as a “fishing expedition”.  Bennett Funding Group, 203 B.R. at 28.  Rule 2004 examinations are not intended to be abusive, but instead provide opportunities for “discovering assets, examining transactions, and determining whether wrongdoing has occurred.”  Washington Mutual, 408 B.R. at 50, citing In re Enron Corp., 281 B.R. 836, 840 (Bankr. S.D. N.Y. 2002).

The scope of Rule 2004 examinations, however, has its limits.  For example, examinations cannot be used to abuse or harass a party, nor can the examinations “stray into matters which are not relevant to the basic inquiry.”  Washington Mutual, 408 B.R. at 50, citing In re Table Talk, Inc., 51 B.R. 143, 145 (Bankr. D. Mass. 1985)(additional citations omitted).

The decision in Washington Mutual arose from the Debtors’ motion for a Rule 2004 examination of the entity that had purchased Washington Mutual’s assets after they were sold by the FDIC. The issue before the court was whether a 2004 examination could be limited due to a pending adversary proceeding or litigation in another forum.  Washington Mutual, 408 B.R. at 50. The court begin its analysis by recognizing the “pending proceeding” rule. Under this rule, “once an adversary proceeding or contested matter has been commenced, discovery is made pursuant to Federal Rule of Bankruptcy Procedure 7026, et seq., rather then by a [Rule] 2004 examination.  Id., citing Bennett Funding Group, 203 B.R. at 28.  Courts also restrict the use of Rule 2004 exams where the party requesting the examination could benefit their pending litigation outside the bankruptcy court which happens to be against the Rule 2004 examinee.  Washington Mutual, 408 B.R. at 50, citing In re Enron Corp., 281 B.R. at 842.

The reasons for restricting 2004 examinations when other litigation is pending are straightforward.  First, in adversary proceedings and contested matters, the parties are governed by the general rules of discovery.  Second, Rule 2004 examinations do not provide the same safeguards as those afforded under Federal Rule of Bankruptcy Procedure 7026.  In a 2004 exam, for example, a witness does not have a general right to be represented by counsel during a deposition and there are limitations on the right to object to immaterial or improper questions.  Washington Mutual, 408 B.R. at 50, citing In re Dinubilo, 177 B.R. 932, 940 (Bankr. E.D. Cal. 1993).

When a court is faced with a motion for 2004 examination and there is a pending adversary proceeding, the court must balance the abuses sought to be avoided by the “pending proceeding” rule against the trustee’s fiduciary duty to maximize value for the estate.  Under this approach, the appropriate test is whether the Rule 2004 examination seeks to discover evidence related or unrelated to the pending adversary proceeding.  Washington Mutual, 408 B.R. at 51.  Applying this test to the facts before it, the Washington Mutual court found that the “pending proceeding” rule did not prohibit the debtors’ use of a Rule 2004 examination against the asset purchaser.  The party that purchased the assets, and who opposed the 2004 examination, was not a party to the “pending proceeding,” though it might intervene at a later time.  According to the court,  there was no basis for concern that the debtors were attempting to circumvent the Federal Rules of Civil Procedure for an action in which the asset purchaser was not a party.  Washington Mutual, 408 B.R. at 53.


On May 12, 2012, the United States District Court for the District of Delaware (the “District Court”) issued an opinion (the “Decision”) in the SemCrude bankruptcy in response to the SemCrude reorganized debtors’ (“Debtors”) motion to dismiss an appeal. Several of Debtors’ oil producers (the “Producers”) appealed from orders entered by the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Bankruptcy Court’s orders included an Order Establishing Procedures for the Resolution of Liens Asserted Pursuant to Producers’ Statutory Lien or Similar Statutes (the “Lien Procedures Order”) and the Order Confirming Debtors’ Fourth Amended Joint Plan (the “Plan” and “Confirmation Order”). After considering the parties’ positions, the District Court granted the Debtors’ motion to dismiss, finding that the Producers’ appeal was equitably moot. This post will look at the doctrine of equitable mootness and the reasoning for the Court’s Decision.

Doctrine of Equitable Mootness

“The doctrine of equitable mootness provides that an appeal should be dismissed as moot when, even though effective relief could conceivably be fashioned, implementation of that relief would be inequitable.” Decision at *4, citing In re Continental Airlines, 203 F.3d. 203, 209 (3d Cir. 2000)(“Continental II”). Courts considering whether an appeal is equitably moot undertake a “discretionary balancing of equitable and prudential factors.” Id. citing In re Continental Airlines 91 F.3d 533, 560 (3d Cir. 1996)(en banc)(“Continental I”). Under Continental I, the Third Circuit listed five factors courts should consider in deciding whether to dismiss an appeal as equitably moot. Dec. at *5, citing Continental I at 560. These include:

(1) whether the reorganized plan has been substantially consummated; (2) whether a stay has been obtained; (3) whether the relief requested would affect the rights of the parties not before the Court; (4) whether the relief requested would affect the success of the plan; and (5) the public policy of affording finality to bankruptcy judgments.


Analysis by the Court

Applying the law to the facts before it, the District Court found that Producers neither sought to expedite their appeal, nor seek a stay of the confirmation order while their appeal was pending. Dec. at *6. The failure to either expedite the appeal or stay confirmation were two factors important to the Court, noting that “[b]ecause of the nature of bankruptcy confirmations … it is obligatory upon [an] appellant … to pursue with diligence all available remedies to obtain a stay of execution.” Dec. at *5, citing Nordhoff Invs., Inc. v. Zenith Elecs. Corp., 258 F.3d 180, 186-87 (3d Cir. 2001).

Next, the District Court considered the effect that granting an appeal might have on other parties. The Court noted that the effect that a reversal of the Bankruptcy Court would have on third parties supported a finding of equitable mootness. Dec. at *6. The reasoning behind the doctrine of equitable mootness supported this finding – the doctrine “protects the interests of non-adverse third parties who are not before the reviewing court but who have acted in reliance upon the plan as implemented.” Id., citing Continental I, 91 F.3d at 562 (internal question marks omitted).

The District Court also found that equitable mootness supported dismissal “if the relief requested … would jeopardize the success of the reorganization plan by causing its reversal or unraveling …” Dec. at *6, citing In re Genesis Health Ventures, Inc., 204 F. App’x 144, 146 (3d Cir. Oct. 4, 2006). Were the District Court to grant the Producers the relief they requested, the Court noted that it would “jeopardize the entire reorganization Plan.” Dec. at *7. Finally, the District Court found that dismissal of the appeal was appropriate under public policy considerations. Id. Again citing to Continental I, the District Court recognized “the importance of allowing approved reorganizations to go forward in reliance on bankruptcy court confirmation orders may be the central animating force behind the equitable mootness doctrine.” Dec. at *7, citing Continental I, 91 F.3d at 565.

After considering the factors relevant under the doctrine of equitable mootness, the Court in the SemCrude bankruptcy found that dismissal was appropriate. According to the District Court, the Producers’ failure to seek a stay or expedite an appeal, coupled with the need to keep a confirmed plan intact, supported dismissing the appeal. To do otherwise would unravel a plan that was confirmed over two and a half years ago.


As more companies file for bankruptcy, creditors and other interested parties of a debtor must quickly familiarize themselves with the automatic stay.  Section 362(a)(1) of the Bankruptcy Code stays “the commencement or continuation … of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement” of a bankruptcy proceeding.  Generally speaking, the automatic stay is intended to give the debtor a “breathing spell” from its creditors.  To do so, the stay stops various forms of collection efforts against the debtor.

The automatic stay is not without limitations, however.  In drafting the Bankruptcy Code, Congress carved out exceptions where the automatic stay does not apply.  Further, the Federal Rules of Bankruptcy Procedure provide procedural safeguards for a party seeking relief from the automatic stay.  Given the frequency with which automatic stay issues arise in bankruptcy proceedings, this post is intended to provide a brief summary of the scope of the automatic stay.  Further, the latter part of this post looks at cases frequently cited by parties seeking relief from the automatic stay in the Delaware Bankruptcy Court.

Scope of the Automatic Stay

Section 362(a)(3) of the Bankruptcy Code defines the scope of the automatic stay.  Under this section, the automatic stay bars any “act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.”  In order to have the stay “lifted,”  section 362(d) authorizes a bankruptcy court to “grant relief from the stay provided
under subsection (a) of this section, such as by terminating, annulling, modifying or conditioning such stay …(1.) for cause, including the lack of adequate protection of an interest in property of such party in interest.”

In order to trigger the automatic stay, there must be an act against either the debtor or against property of the debtor or of the estate. The automatic stay does not stay actions taken against non-debtor third parties. The Third Circuit has recognized that although the automatic stay has a broad scope,  the clear language under 362(a) applies only against a debtor.  See McCartney v. Integra Nat’l Bank North, 106 F.3d 506, 509 (3d Cir. 1997).  As a consequence “it is universally acknowledged that an automatic stay of proceedings accorded by § 362 may not be invoked by entities such as sureties, guarantors, co-obligors, or others with a similar legal or factual nexus to the … debtor.”  Id.

Relief from Stay

Under section 362(d)(1) of the Bankruptcy Code, the bankruptcy court “shall” lift the automatic stay for “cause.”  If a creditor seeking relief from the automatic stay makes a prima facie case of “cause” for lifting the stay, the burden going forward shifts to the debtor pursuant to Bankruptcy Code § 362(g). See In re 234-6 West 22nd St. Corp., 214 B.R. 751, 756 (Bankr.S.D.N.Y. 1997).

The Bankruptcy Code does not define “cause.” Instead, whether cause exists to lift the automatic stay should be determined on a case by case basis. See Izzarelli v. Rexene Prod. Co. (In re Rexene Prod. Co.), 141 B.R. 574, 576 (Bankr.D.Del. 1992). See also, In re Texas State Optical, Inc., 188 B.R. 552, 556 (Bankr. E.D.Tex. 1995) (finding that “cause” for modification of the automatic stay is “an intentionally broad and flexible concept that permits … [a] [b]ankruptcy [c]ourt, as a court of equity, to respond to inherently fact-sensitive situations.”) Courts determine what constitutes “cause” based on the totality of the circumstances in each particular case. Baldino v. Wilson (In re Wilson), 116 F.3d 87, 90 (3d Cir. 1997).

In re Rexene provides the “balancing test” to determine whether cause exists to lift the automatic stay. 141 B.R. at 576. Under Rexene, the balancing test looks at three factors to decide whether to lift the automatic stay, including: (a.) whether prejudice will be caused to the estate or the debtor;
(b.) whether hardship to the movant from continuing the stay outweighs any hardship to the debtor; and (c.) whether the movant has a reasonable probability of prevailing on the merits of the suit. Id.

In addition to the factors outlined above, a bankruptcy court may also consider the following general policies when deciding whether to grant a motion to lift the stay. These policies include: (1) whether the court has jurisdiction to hear the underlying claims arising from the underlying action; (2) whether granting movant relief from stay would provide a complete resolution of the issues presented in the underlying action; (3) whether granting the movant relief from the automatic stay would interfere with the debtors’ bankruptcy proceeding; (4) whether the interest of judicial economy and the expeditious and economical resolution of litigation weigh in favor of granting the movant relief from the automatic stay; (5) whether the parties are ready for trial in the underlying action; and, (6) whether the impact the stay has on the movant justifies the relief requested in the motion. In re: SCO Group, Inc., 395 B.R. 852, 857-58 & 859 (Bankr. D. Del. 2007).


Bankruptcy courts consider many factors when deciding whether to lift the automatic stay.  The broad scope of issues that can be considered by the court illustrate the flexibility provided for under the Bankruptcy Code.  Aside from the factors above, the timing of the request to lift the stay (i.e. requesting relief from stay days versus months after the commencement of a bankruptcy proceeding) also plays an important role in whether a court decides to lift the automatic stay.  A future post on this blog will look at recent decisions addressing the automatic stay.

Those not familiar with the Federal Rules of Bankruptcy Procedure are often surprised to learn that service by mail is sufficient in a bankruptcy proceeding.  Federal Rule of Bankruptcy Procedure 7004(b)(3) authorizes service on a corporation (foreign or domestic) within the United States by first class mail as follows:

… by mailing a copy of the summons and complaint to the attention of an officer, a managing or general agent, or to any other agent authorized by appointment or by law to receive service of process and, if the agent is authorized by statute to receive service and the statute so requires, by also mailing a copy to the defendant.

A recent decision in the Custom Food Products (“CFP”) bankruptcy discusses what is required in order for service by mail to be deemed proper.  In the CFP bankruptcy, the liquidating trustee (the “Trustee”) brought suit against a defendant (the “Defendant”), alleging the Defendant received avoidable transfers under section 547 of the Bankruptcy Code.  After the Trustee commenced the adversary action, he mailed the summons and complaint to Defendant’s remittance address (a Chicago address) instead of Defendant’s business address in North Carolina.  Defendant’s remittance address was a Bank of America lockbox which Defendant set up to receive payments only.  See Decision at *2.

Defendant never filed a responsive pleading to the complaint, resulting in the court entering a default judgment against the Defendant.  After the court entered a default judgment, the Trustee sent a copy of the judgment to Defendant’s business address.  After receiving the default judgment, Defendant filed a motion with the court seeking to have the default judgment set aside.

The court began its analysis by recognizing that Federal Rule of Civil Procedure 60(b)(4) allows the court to set aside a default judgment if the judgment is void.  A default judgment is void if the complaint was never properly served.  Decision at *3, citing Sun Healthcare Group, Inc. v. Mead Johnson Nutritional (In re Sun Healthcare Group, Inc.), 2004 Bankr. LEXIS 572 at *19 (Bankr. D. Del. Apr. 30, 2004).  Pursuant to Federal Rule of Bankruptcy Procedure 7004(b)(3), proper service of a summons and complaint may be made upon a corporation by first class mail if it is sent to an officer or agent of the corporation.  Decision at *3.  Rule 7004(b)(3) requires “strict compliance … particularly when the plaintiff knows the defendant’s business address and the identity of the person designated to receive service of process.  Id., citing In re Golden Books Family Entm’t, 269 B.R. 300, 305 (Bankr. D. Del. 2001)(holding that service was not effective where pleadings were sent to a post office box addressed to the “assistant controller”).

The court in CFP found that the Trustee’s attempt to effectuate service by sending the complaint to the Defendant’s remittance address “failed to comply with Rule 7004(b)(3).”  Decision at *4.  The court based its decision on the fact that the post office box where the complaint was sent was a lockbox at Bank of America and Bank of America was not authorized to receive service of process for the Defendant.  The court also found significant that the Trustee knew the Defendant’s business address.

Having found that there was no effective service, the court declared the default judgment void.  Given the large number of avoidance actions filed in the Delaware Bankruptcy Court, the CFP decision is worth review as it looks at some of the requirements for proper service of process.  The CFP decision was issued by the Honorable Peter J. Walsh.  Judge Walsh previously served as the Chief Judge of the United States Bankruptcy Court for the District of Delaware.


In September of this year, the Honorable Mary F. Walrath, the presiding Judge in the DHP Holdings bankruptcy, issued a decision addressing  the effect of a forum selection clause when deciding a motion to change venue.  This issue came before the court in an adversary action filed by DHP against The Home Depot.  After DHP filed for bankruptcy, the company sued Home Depot for $5.5 million alleging Home Depot owed the company for an outstanding account receivable.  Opinion at *2.  In its Answer, Home Depot raised various defenses, one being that venue in Delaware was improper pursuant to a forum selection clause under the parties’ Supplier Buying Agreement (the “SBA”).  Home Depot filed a motion to transfer venue pursuant to the terms of the SBA.


The court began its analysis by noting that motions to transfer venue require consideration of several factors.  Factors for consideration include the parties’ forum preferences, where the claims arose, convenience to the parties and witnesses, as well as the location of books and records.  Opinion at *5, n.5.  Even though the court should consider various factors, it nevertheless has discretion to determine on a case by case basis whether convenience and fairness support transfering venue.  Id. at *5.

Turning first to the SBA’s forum selection clause, the court noted that selection clauses are “prima facie valid” and are generally enforced unless there is a strong showing that the clause would be unreasonable under the circumstances.  Id. Other courts have found forum selection clauses unenforceable where the clause was obtained through “fraud or overreaching.”  Id. at *5, citing M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 18 (1972).  DHP argued that the forum selection clause should be given less weight because it was part of a form contract and therefore not a bargained-for contract provision.  The court disagreed, finding that the “lack of actual negotiations over the forum selection clause does not affect its validity.”  Opinion at *6, citing Foster v. Chesapeake Ins. Co., Ltd., 933 F.2d 1207, 1219 (3d Cir. 1991).

Although the court found that the forum selection clause (which supported a change in venue) valid,  it also found that the presence of the forum selection clause was not determinative.  Instead, such provisions are only a significant factor that is included in the court’s analysis.  Opinion at *6.  The court next looked at whether the forum selection clause arose in either a core or non-core matter.  This distinction was significant as the court observed that forum selection clauses generally are more likely to be enforced in non-core matters.  Opinion at *7.

In deciding whether a matter is core or non-core, courts often consider two sources – section 157(b) of the Bankruptcy Code, as well as a two-part test under In re Guild & Gallery Plus, Inc., 72 F.3d 1171, 1178 (3d Cir. 1996).  Opinion at *8.  Section 157(b) provides a list of proceedings that may be considered core.  The Third Circuit’s decision in Guild & Gallery Plus, on the otherhand, provides that a proceeding is core (1) if it involves substantive rights provided by title 11, or (2) if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case.”  Opinion at *8.

The court next considered whether each of the causes of action brought in the DHP adversary action were core or non-core.  DHP asserted three causes of action against Home Depot: (1) turnover of property under 542(b) of the Bankruptcy Code; (2) breach of contract; and (3) disallowance of claim under 502(d).  Opinion at *2.  Starting first with the turnover claim, the court observed that although such claims are core proceedings, the court must nevertheless determine whether DHP properly invoked this section of the Bankruptcy Code.  On this point, the court found that DHP’s claim against Home Depot was non-core because it involved a “disputed” claim.  In doing so, the court recognized that “[m]ost courts require that the debt be undisputed for the action to be core.”  Opinion at *11, citing U.S. v. Inslaw, Inc., 932 F.2d 1467, 1472 (D.C. Cir. 1991).

After finding that all the counts in the complaint were non-core, the court went on to consider the factors for and against transferring venue.  Here, the court found that “most of the factors either favor transfer [of venue] or are neutral.”  Opinion at *22.  Having reached this conclusion, the court granted the motion to transfer venue.


The decision in DHP is helpful in several respects.  First, it looks at the effect of a venue selection clause in the context of a motion to transfer venue.  Next, the court distinguishes between core and non-core matters, a common issue in bankruptcy proceedings.  Finally, the decision reviews those factors courts consdier in determining whether to grant a motion to change venue.  A copy of the decision is available here for review.   The DHP bankruptcy is in the United States Bankruptcy Court for the District of Delaware.


On August 20, 2010, Petroflow Energy Ltd. (“Petroflow”), filed a petition for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  Months prior to Petroflow’s filing for bankruptcy, the company’s subsidiaries, North American Petroleum Corporation USA and Prize Petroleum LLC, filed petitions for bankruptcy in Delaware.  After Petroflow filed for bankruptcy in August, it filed a motion with the Bankruptcy Court seeking to have the orders entered in the “First Filed Debtors’ Cases” (i.e. North American Petroleum’s and Prize Petroleum’s cases), made applicable to Petroflow’s bankruptcy proceeding.

There is nothing extraordinary about the relief Petroflow seeks in its motion.  By filing the motion, the company seeks to save the time and expense of having to file, notice and present the same motions that if filed in the “First Filed Cases.” However, in order to obtain such relief, Petroflow requests the Court exercise its equitable powers pursuant to section 105 of the Bankruptcy Code.  This post will look at how the Court can turn back the clock so that the orders entered in a previously filed case will have the full force and effect in a newly filed bankruptcy proceeding.

Equitable Power of the Court

Under section 105(a) of the Bankruptcy Code, a bankruptcy court can “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”  In its motion, Petroflow cites to an Eighth Circuit decision for the proposition that “the overriding consideration in bankruptcy … is that equitable principles govern.”  In re NWFX, Inc., 864 F.2d 588, 590 (8th Cir. 1988).  However, a bankruptcy court’s equitable jurisdiction has its limits.  Again, looking at the Petroflow motion, the Debtor cites In re Cooper Props. Liquidating Trust, Inc., for its holding that a bankruptcy court must protect the equities of a debtor “as long as that protection is implemented in a manner consistent with the bankruptcy laws.”  61 B.R. 531, 537 (Bankr. W.D. Tenn. 1986)(emphasis added).

Petroflow’s motion seeks entry of an order finding that the first day orders in the “First Filed Cases” apply to the Petroflow bankruptcy.  Without this relief, Petroflow would have to seek the same relief granted in the North American Petroleum and Prize Petroleum cases, which in turn would create an unnecessary burden on Petroflow, its creditors and the Court.  In support of its motion, Petroflow cites to other bankruptcy proceedings where similar orders were entered by the Court.  These bankruptcy proceedings include Semcrude, Chi-Chi’s, Lehman Bros. and WorldCom.

As I mentioned before, there is nothing extraordinary about the relief sought by Petroflow.  The motion is worth review, however, as it is provides an example of how parties can invoke the equitable jurisdiction of the Court under section 105 of the Bankruptcy Code.

The Petroflow bankruptcy is before the Honorable Christopher S. Sontchi.  Click here to read my post from May of this year discussing the North American Petroleum bankruptcy.  That post looks at why the company filed for bankruptcy, as well as what the company’s objectives are while in bankruptcy.


On August 4, Judge Mary F. Walrath issued an opinion in the Eclipse Aviation bankruptcy that discusses the scope of the Court’s subject matter jurisdiction.  This issue – the subject matter jurisdiction of the bankruptcy courts – comes up less frequently in decisions than issues such as plan confirmation, relief from stay or avoidance actions (to name a few).  Often, the subject matter jurisdiction of a proceeding is simply not in dispute.  This reason alone is why Judge Walrath’s decision is worth review:  it provides a brief but thorough look at how the Court decides whether it has jurisdiction over a particular matter.


The procedural context of the Eclipse Aviation decision is interesting in itself.  The Plaintiff, a purchaser of aircraft from the Debtor, filed a motion to dismiss the Complaint it had previously filed as an adversary action.  Plaintiff originally filed the Complaint seeking declaratory relief that it possessed certain property interests in undelivered aircraft that were in the Debtor’s possession.  During the course of the bankruptcy, Debtor was unable to consummate a sale of its assets and the case quickly converted to a chapter 7 liquidation.  Once a chapter 7 trustee (the “Trustee”) was appointed, the Trustee sought to sell the estate assets including the planes that Plaintiff claimed an interest in.

The Trustee soon sold the planes that were the subject of the Plaintiff’s adversary action.  During the sale process, the Plaintiff filed an objection to the Trustee’s sale.  Through its objection, Plaintiff obtained certain concessions from the buyer of the airplanes.  Based on these concessions, the Plaintiff sought to dismiss the adversary action without prejudice for lack of subject matter jurisdiction.

Court’s Analysis

The Plaintiff sought to dismiss its adversary action, arguing that the Court no longer had jurisdiction over the adversary proceeding because the sale of the aircraft was complete.  In deciding the issue of jurisdiction, the Court began by distinguishing between “core” and “non-core” proceedings.  Citing In re Guild and Gallery Plus, Inc., 72 F.3d 1171, 1178 (3d Cir. 1996), core proceedings are defined as “all proceedings that invoke a substantive right provided by title 11 or could arise only in the context of a bankruptcy case.”  In contrast, non-core proceedings are related to a case under title 11.  In re Resorts Int’l, Inc., 372 F.3d 154, 162 (3d Cir. 2004).

The question then arises, what does it mean for a case to be “related to” a case under title 11?  Citing In re Pacor, 743 F.2d 984, 994 (3d Cir. 1984), Judge Walrath explained that related to jurisdiction allows a bankruptcy court the power to hear cases that do not fall under title 11provided there is some relationship, or “nexus,” between the related civil proceeding and the title 11 case.  Under Pacor, an action is related to the bankruptcy “if the outcome could alter the debtor’s rights, liabilities, options, or freedom from action … and which in any way impacts upon the handling of the administration of the bankruptcy estate.”  Id.

Turning first to the Plaintiff’s claims arising under section 363 of the Bankruptcy Code, the Court agreed with the Plaintiff that those claims became moot upon entry of the sale order.  Because the sale was final, the claims under 363 could not serve as a basis for the Court to exercise subject matter jurisdiction.  Next, the Court looked at Plaintiff’s claims under section 541 of the Bankruptcy Code (alleging that the aircraft was property of the Plaintiff).  Here, the Plaintiff argued that the sale order conveyed to the buyer all of estate’s right, title and interest.  According to Plaintiff, the estate had no further interest in the aircraft and therefore the Court had no jurisdiction for these claims.

On the issue of jurisdiction to hear the 541 claim, the Court disagreed with the Plaintiff and found that it did have subject matter jurisdiction.  Plaintiff argued that the 541 claims related to property that was no longer property of the estate following approval of the sale.  However, the Court held that it has exclusive jurisdiction to determine whether or not the aircraft at the center of the adversary action were property of the estate at the time of the sale.  The Court also found that the buyer of the aircraft assumed certain liabilities of the bankruptcy estate and should therefore be allowed to “utilize the rights, claims, and/or defenses of the bankruptcy estate that it also acquired.”  See Opinion at pp. 18-19.  Finally, the Court found that it had “related to” jurisdiction because the bankruptcy estate “is not completely insulated from the outcome” of the Plaintiff’s claims.  Opinion at p. 19.

Click here to read a copy of Judge Walrath’s decision in Eclipse Aviation.


On April 1, 2010, Judge Kevin J. Carey , Chief Judge of the United States Bankruptcy Court for the District of Delaware issued an opinion (the “Opinion“) in the Spansion bankruptcy rejecting the Debtor’s proposed plan of reorganization.  This post will look at the requirements provided for under the Bankruptcy Code in order for a Court to confirm a plan of reorganization.  Further, the post will look briefly at why the Court in Spansion declined to confirm the Debtor’s proposed plan.


As stated in the Opinion, Spansion manufactures and sells semiconductor products (“flash memory”) used in cell phones and other consumer and industrial electronics.  In 2008, half of Spansion’s sales consisted of flash memory used in wireless products or “embedded applications” such as electronic games and DVD players.  Spansion filed for bankruptcy hoping to restructure its business so that it could focus on the more profitable embedded products, shifting resources from the less profitable wireless business.

Bankruptcy and the Proposed Plan

Spansion filed for bankruptcy in Delaware on March 1, 2009.  By October of 2009, the Debtor, the Official Committee of Unsecured Creditors (the “Committee”) and certain secured noteholders agreed to a consensual plan of reorganization.  By November, however, the Committee withdrew its support for the plan and the parties continued with negotiations.  In late December, Spansion filed a Second Amended Joint Plan (the “Plan”), and the Bankruptcy Court thereafter approved the Disclosure Statement and scheduled a plan confirmation hearing.

In considering the various objections to the Plan, the Court began its analysis by recognizing that in order for the Plan to be confirmed, it must comply with section 1129 of the Bankruptcy Code.  Citing the Court’s decision in Exide Technologies, Judge Carey observed:

The plan proponent bears the burden of establishing the plan’s compliance with each of the requirements set forth in section 1129(a), while the objecting parties bear the burden of producing evidence to support their objections.  In a case such as this one, in which an impaired class does not vote to accept the plan, the plan proponent must also show that the plan meets the additional requirements of section 1129(b), including the requirements that the plan does not unfairly discriminate against dissenting classes and the treatment of the dissenting classes is fair and equitable.  In re Exide Tech., 303 B.R. 48, 58 (Bankr.. D. Del. 2003)(internal citations omitted).

One of the issues presented to the Court concerned whether the Debtor had under-valued its business under the Plan, to the detriment of unsecured creditors.  During the confirmation hearing, the Court heard testimony from three different expert witnesses on value (one expert for the Debtor and two experts for other interested parties).  In calculating their values of the company, the Court found that each expert used “customary valuation methodologies:  discounted cash flow analysis, publicly traded company analysis and comparable M&A transaction analysis.”  Opinion at *24.

After considering the testimony of each expert, the Court found that the valuation offered by the senior noteholders, not the Debtor’s expert, “was appropriately weighted and rested on assumptions that, of the three [expert] reports, were the most sound for determining the Debtors’ worth at this time and in this industry.”  Opinion at *33.  The Court preferred the noteholders’ valuation over the Debtor’s because it found the valuation “more transparent” and “more in line with common valuation practices.”  Id.

The Court next looked at whether the “Equity Incentive Plan” offered in the Plan was reasonable and proposed in good faith.  Here the Court noted that the “point of inquiry” to determine whether a plan is offered in good faith under section 1129(a)(3) is “whether such a plan will fairly achieve a result consistent with the objectives and purposes of the Bankruptcy Code.”  Opinion at *35, citing In re PWS Holding Corp., 228 F.3d 224, 242 (3d Cir. 2000).

Hearing arguments for and against the Incentive Plan, and weighing the Debtor’s testimony in support of the Incentive Plan, the Court found that the record did not “demonstrate sufficiently that the Equity Incentive Plan is usual or reasonable for this market at this time.”  Opinion at *38.  In order for Spansion’s Plan to be confirmed, the Court concluded that Spansion must “devise an incentive scheme that garners uniform support from its constituencies or is demonstrably reasonable and within the market.”  Id.

Why did the Court reject Spansion’s proposed Incentive Plan?  The parties opposing the Plan argued that the Incentive Plan was too generous and was offered to benefit management at the expense of unsecured creditors.  The Debtor, on the other hand, argued that the Incentive Plan allowed the company to attract and retain key employees.  Looking to the evidence presented at the confirmation hearing, the Court noted that peer groups of comparable companies (used as a comparison for the Incentive Plan) was selected by the Debtor’s board instead of a compensation expert.  Further, the companies used for the benchmark comparison were those that emerged from chapter 11 bankruptcy between 2003 and 2006.  This comparison, the Court found, did not reflect the dramatic and adverse effects the economy and employee compensation experienced during the last two years.  Opinion at *37.


Although this post highlights what the Court found was wrong with the Spansion Plan, it is important to note that many of the objections to the Plan were overruled.  For example, the Court found that certain (but not all) of the releases contained within the Plan represented a valid exercise of Spansion’s business judgment.  Further, the Spansion Plan included a reserve for administrative claims which the Court viewed as a “reasonable compromise of competing concerns” between the administrative claimants and the Debtor.  Opinion at*50.  The Spansion Opinion, therefore, is helpful in that it shows some of the hurdles a debtor must overcome in order to achieve plan confirmation.


Section 548 of the United States Bankruptcy Code allows for the avoidance of transfers that are either intentionally or constructively fraudulent.  Section 548 provides, in relevant part, as follows:

(a)(1)  The trustee may avoid any transfer … of an interest of the debtor in property, or any obligation … incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily — (A) made such transfer or incurred such obligation with actual intent to hinder, delay or defraud any entity to which the debtor was or become, on or after the date that such transfer was made or become, on or after the date that such transfer was made or such obligation was incurred, indebted; or (B)(i) received less than reasonably equivalent value in exchange for such transfer or obligation; and (ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation; (II) was engaged in a business or a transaction … for which any property remaining with the debtor was an unreasonably small capital; (III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debtor’s matured …

At first glance, section 548 appears to cast a wide net that would classify many types of transactions as fraudulent transfers.  However, a recent decision by Judge Brendan L. Shannon in the Elrod Holdings bankruptcy shows the evidentiary hurdles a plaintiff must overcome in order to establish a fraudulent transfer claim under section 548.


In 2006, Elrod Holdings (the “Debtor”) filed for chapter 7 liquidation in the United States Bankruptcy Court for the District of Delaware.  The Debtor began its business in 1965 designing, manufacturing and installing spectator seating for motor sport raceways.  In 2005, the Elrod family sold 75% of their stock in the company to a company called Champlain for $35 million.  Champlain paid the Elrods $26 million in cash and the remainder in notes.

Soon after the sale to Champlain, the Debtor’s business quickly deteriorated.  By June 2006, the Debtor, Elrods and certain lenders sought to restructure the company’s debt.  A few months after the restructuring, Safeco, the Debtor’s bonding company, demanded that the Elrods provide personal guarantees before Safeco would issue further bonds on projects for which the Debtor was a contractor.  When the Elrods refused to provide personal guarantees to Safeco, Safeco refused to issue construction bonds, resulting in the Debtor quickly running out of money.

Fraudulent Conveyance Claims

As part of the pre-bankruptcy restructuring, the Elrods agreed to purchase certain equipment from the Debtor and lease the same equipment back to the Debtor.  After the commencement of the bankruptcy proceeding, George Miller, as the chapter 7 trustee, commenced an adversary action alleging that the Elrod’s “participated and/or aided and abetted in the [sale leaseback], with the actual intent to hinder, delay, and/or defraud the Debtor’s creditors.”  In addition to claiming that the sale leaseback was actually fraudulent, the trustee argued that the leaseback of the equipment was constructively fraudulent.

Court’s Analysis

Looking first at whether there was “actual intent” for the fraudulent transfer claims, the Court noted (and the parties agreed) that it was the Debtor’s intent that was key to determine whether a conveyance was fraudulent, not the intent of the party receiving the conveyance.  The Elrods argued that there was no fraudulent intent on the part of the Debtor.  The chapter 7 trustee, on the other hand, argued that the Elrod’s intent to hinder, delay or defraud should be imputed to the Debtor because the Elrods dominated or controlled the Debtor.

In order to decide whether the intent of the Elrods would be imputed to the Debtor, the Court looked at the “intent imputation doctrine” recognized by the United States Bankruptcy Court for the Southern District of New York in Jackson  v. Miskin (In re Adler, Coleman Clearing Corp.), 263 B.R. 406, 445 (S.D.N.Y. 2001)(finding that under “the domination and control rule, the requisite intent derives from a transferee who is in the position to dominate or control the debtor’s disposition of his property, a circumstance that section 548(a)(1)(A) anticipates by its provision that the fraudulent conveyance by the debtor may be voluntary or involuntary.”)  Applying Adler, the intent of the transferees (the Elrods) can be imputed to the Debtor if (i) the Elrods possessed the requisite intent to hinder, delay or defraud the Debtor’s creditors; (ii) the Elrods were in a position to dominate and control the Debtor; and (iii) the Elrod’s domination and control related to the Debtor’s disposition of its property.

In deciding whether the Elrods had the requisite fraudulent intent, the Court observed that fraudulent intent may be based on circumstantial evidence.  Citing In re Vaniman Int’l Inc., the Court noted that “[a]s a general rule, fraudulent intent is found on the basis of circumstantial evidence because ‘fraudulent intent is not susceptible to direct proof.'”  In re Vaniman Int’l Inc., 22 B.R. 166 (Bankr. E.D.N.Y. 1982).  Signs of fraud include evidence of a close relationship among the parties to a transaction, the transaction involves a “secret and hasty transfer” or contains inadequate consideration.

The Trustee argued that a close relationship did exist between the parties and that the Elrod’s refusal to execute the bond agreement evidenced fraud.  For purposes of summary judgment, the Court found that the Trustee had identified some of the “badges of fraud.”  Having made this determination, the Court next addressed whether the Elrods were in a position of control.  Here, the Court noted that vicarious intent is an extreme situation that is dependent upon nearly total control of a debtor by the transferee.  A typical case where transferee intent is imputed on the Debtor is one where the transferee is the sole shareholder of the Debtor and has complete control.  The Trustee argued that although the Elrods comprise only a minority of the Debtor’s board, they still exercised functional control of the Debtor.  Even so, the Court found that functional control is not enough.  To prevail, the Trustee must show that the Elrods had “formal, legal control as well as functional control.”

After finding that actual intent did not exist, the Court next turned to the Trustee’s allegations that the transfer of property was constructively fraudulent.  Here the Court begin its analysis with the rule that whether a transfer conferred “realizable commercial value” was central to deciding whether the transfer at issue was constructively fraudulent.  On this point, the Court found several examples of value provided by the Elrods in the sale leaseback transaction.  First, the Elrods submitted an appraisal showing that the price at which the Elrods purchased the equipment from the Debtor was greater than the actual value of the equipment.  Next, the Elrods introduced evidence that the rental payments from the Debtor to the Elrods were at a below market interest rate that was to the Debtor’s benefit.  The Trustee, on the other hand, offered no evidence to show the value provided by the Elrods was less than a reasonably equivalent value.  Based on these findings, the Court granted summary judgment for the Elrods on the Trustee’s fraudulent transfer claim.


Under most circumstances, claims alleging fraud must be pled with particularity.  The decision in Elrod shows that a plaintiff alleging fraud must satisfy certain factual thresholds in order to overcome a motion for summary judgment.  Further the decision shows the challenges for plaintiffs who seek to impute the allegedly fraudulent conduct of a third party on to a debtor.