The Honorable Kevin J. Carey

On September 3, 2014, Brent Williams, the Plan Trustee (“Trustee”) for Touch America Holdings, Inc., filed a complaint initiating an adversary proceeding against, among others, AT&T Corp. (AT&T”).  In a 36 page decision dated April 25, 2017, Judge Carey of the Delaware Bankruptcy Court granted AT&T’s motion for summary judgment, bringing the litigation to an end.  Judge Carey’s opinion is available here (the “Opinion”).  The dispute hinged on a number of contracts entered into in Touch America’s bankruptcy, all of which had been approved by the Court.

Judge Carey’s Opinion

Judge Carey’s Opinion begins with a 20 page recitation of undisputed facts.  He then provides an overview of the standard for summary judgment before addressing the decisive contract language.  He begins with the primary factor that can prevent a summary judgment ruling in a contract interpretation case – ambiguity.  “In a dispute over the meaning of a contract, the threshold question is whether the contract is ambiguous.”  Opinion at *26 (quoting Lockhead Martin Corp. v. Retail Holdings, N.V., 639 F.3d 63, 69 (2d Cir. 2011)).  “If a contract is unambiguous, the court should assign the plain and ordinary meaning to each term and interpret the contract without the aid of extrinsic evidence.”  Id. (quoting Alexander & Alexander Servs. v. These Certain Underwriters at Lloyd’s, 136 F.3d 82, 86 (2d Cir. 1998)).

Despite the Trustee’s argument that there was ambiguity in one of the contracts at issue (which seems to undercut the Trustee’s argument for summary judgment), Judge Carey held that “the fact that something is not stated explicitly does not mean that the language of the contract is ambiguous. I do not find the pertinent language to be ambiguous, and will assign the plain and ordinary meaning to each term and interpret the contracts without the aid of extrinsic evidence.”  Opinion at *28.

After summarizing the extrinsic evidence provided by the parties, Judge Carey held that “the terms of the SPC Settlement Agreement, as well as the other agreements at issue, [are] unambiguous. Accordingly, I will not consider the extrinsic evidence introduced by any of the parties.”  Opinion at *35.  In one paragraph, he cited to each of the controlling contract provisions to resolve this conflict, holding that the explicit, unambiguous language of the contracts and agreements at issue warranted a ruling on summary judgment in favor of AT&T.

One of the key issues, is language included in one of the agreements pursuant to which assets were transferred to AT&T.   New York and other courts consistently maintain that the term “’related to’ … is clear and unambiguous.”  Opinion at *27 (quoting Coregis Ins. Co. v. American Health Found., 241 F.3d 123, 129 (2d Cir. 2001).).  One court has stated that such a provision “constitutes the broadest language the parties could reasonably use.”  Opinion at *28 (quoting Fleet Tire Serv. v. Oliver Rubber Co., 118 F.3d 619, 621 (8th Cir. 1997)).  While the Trustee suggested other possible meanings of the language, Judge Carey held that those arguments were insufficient to create an ambiguity, as the alternative interpretations are simply not reasonable.  Id.

If a contract calls for the broadest language that parties could reasonably use, it is likely that the party for whose benefit that language was used will win the day.  No matter how effective a litigator you employ, the attorneys drafting a contract have more impact on the outcome of future litigation.  It can seem expensive to have a comprehensive contracted created.  Yet, one has but to consider how much more this litigation would have cost if AT&T lost on its motion for summary judgment, to realize that the time of the drafters of these agreements was a worthwhile expense.

Summary

In a 9 page decision dated October 6, 2016, Judge Carey of the Delaware Bankruptcy Court granted the motion of Portland General Electric (“PGE”) for relief from the automatic stay of the Bankruptcy Code.  Judge Carey’s opinion is available here (the “Opinion”).  PGE moved that the stay be lifted so that it could initiate litigation against various debtor entities arising out of alleged breaches of a construction agreement between PGE and the Debtors called the “Turnkey Engineering, Procurement & Construction Agreement for Carty Generating Station” (the “EPC Contract”).

Background

In 2013, the Debtors entered into the EPC Contract for PGE.  The Debtors’ ultimate  parent company, Abengoa, signed a Guaranty and the Debtors obtained a performance bond.  In November the relationship between PGE and the Debtors began deteriorating and in December 2015, PGE terminated the EPC Contract.

Around the same time, PGE sought recovery pursuant to the performance bond, but its claim was denied. On December 31, 2015, in accordance with the provisions of the Guaranty, Abengoa commenced an ICC arbitration with PGE.  Abengoa joined the Debtors and the bond providers to the arbitration, relying upon clauses in the Guaranty that provided for arbitration as the exclusive forum.  

In February 2016, PGE sought to enjoin the arbitration. In March 2016, PGE commenced an action against the Sureties in the U.S. District Court for the District of Oregon. On March 29, 2016, the Debtors filed their voluntary petitions for relief under chapter 11.  On May 25, 2016, PGE filed its Motion for Relief from the Stay to pursue claims against the Debtors in the District of Oregon.

Judge Carey’s Opinion

Judge Carey started his discussion of applicable law by outlining the factors required to grant a motion for relief from stay as provided in Rexene Products, 141 B.R. 574, Judge Carey then cited 11 U.S.C. 362(g), which provides that, In any hearing under subsection (d) or (e), concerning relief from the stay of any act under subsection (a) of this section—

(1) the party requesting such relief has the burden of proof on the issue of the debtor’s equity in property; and
(2) the party opposing such relief has the burden of proof on all other issues.

Judge Carey held that pursuant to this section of the Bankruptcy Code, it is not PGE’s burden to show that the Debtors would not be harmed by stay relief.  Opinion at *5.  He then quickly determined that (1) the Debtors have failed to carry their burden to demonstrate harm and (2) the potential hardship to PGE considerably outweighs the hardship to the Debtors.

Judge Cary agreed with PGE that allowing the Oregon District Court to manage this matter seems the best and most efficient resolution. He acknowledged that a request to initiate, rather than resume, litigation commenced pre-petition is somewhat unusual. However, Judge Carey determined that because proceedings on related matters had already commenced and the Oregon District Court had already ruled on a related issue, it was best positioned to resolve the question of whether the underlying litigation should be resolved in arbitration or through litigation.

On August 9, 2016, Judge Kevin Carey of the Delaware Bankruptcy Court issued an Order both dismissing a complaint and striking a defendant’s Notice of Supplemental Authority.   The decision was issued in the Quantum Foods bankruptcy, in the adversary proceeding No. 16-50045.  A copy of the Opinion is available here.

On February 18, 2016, the Committee filed its complaint against the defendant, IPC, seeking to avoid and recover allegedly preferential transfers.  On April 25, 2016, IPC filed the motion to dismiss.  The Committee filed its response on May 23, 2016 and IPC filed a reply on June 6, 2016.  Then, on June 29, 2016, IPC filed a Notice of Supplemental Authority in Support of Motion to Dismiss.  On June 30, 2016 the Committee filed the Motion to Strike the notice of supplemental authority.  Opinion at *2.

Judge Carey quickly covered the standard governing motions to dismiss, which was provided by the Supreme Court in Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) and Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007), and was then distilled into a three-step process by the Third Circuit:

First, the court must “tak[e] note of the elements a plaintiff must plead to state a claim.” Second, the court should identify allegations that, “because they are no more than conclusions, are not entitled to the assumption of truth.” Finally, “where there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief.”

Burtch v. Milberg Factors, Inc., 662 F.3d 212, 221 (3d Cir. 2011).  Opinion at *3.  Judge Carey then states that the complaint contains “only a few vague factual allegations,” “fails to allege any facts to support a claim under § 502(d),” and “the information in the exhibit does not provide any context or describe the nature of the transfers.”  Opinion at *4-5.  He then dismissed the complaint.  However, as is the standard for Delaware Bankruptcy judges, he states that “leave to amend a complaint should be freely given when justice so requires” and gives the Committee leave to amend its complaint.  Opinion at *5.

Judge Carey then turns to the motion to strike, looking initially to Local Rule 7007-1(b), which states: No additional briefs, affidavits or other papers in support of or in opposition to the motion shall be filed without prior approval of the Court, except that a party may call to the Court’s attention and briefly discuss pertinent cases decided after a party’s final brief is filed or after oral argument.  Local Rule 7007-1(b).  As IPC did not seek permission for its additional filing, Judge Carey granted the motion to strike without further ado.

One of the first practice pointers I received when I started practicing law was to regularly review the the Local Rules to ensure that I always comply with them.  I have seen the Local Rules violated with regularity, but only with prior court approval.  This is NOT one of those times when it is better to ask for forgiveness than permission.

Defenses to a Preference Action

The Bankruptcy Code provides creditors with many defenses to preference actions. While the efficacy of the preference defendants’ attempt to reduce exposure in this case is still in question, it does not look like it will be an easy decision for the court or a briefly litigated issue.  Other defenses are more common, and more easily gauged.  Included among these are the “ordinary course of business defense” and the “new value defense.” For reader’s looking for more information concerning claims and defenses in preference litigation, attached is a booklet I prepared on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

On July 25, 2016, Judge Kevin Carey of the Delaware Bankruptcy Court issued a thorough decision pursuant to a motion for judgment on the pleadings analyzing the intersection of a preference defendant’s post-petition administrative claim and their preference exposure.  A copy of the Opinion is available here.

In the Opinion, Judge Carey cites the Third Circuit’s Friedman’s decision extensively:  Friedman’s Liquidating Tr. v. Roth Staffing Co., LP (In re Friedman’s, Inc.), 738 F.3d 547 (3d Cir. 2013).  According to the Friedman’s court, “As articulated by the Third Circuit in Friedman’s, the preference analysis cannot be affected by post-petition activity.”  Further, “The judicial consensus is that setoff is only available in bankruptcy when the opposing obligations arise on the same side of the . . . bankruptcy petition date.”  Opinion at *7.

Judge Carey provides a thorough explanation of the various theories by which preference defendants may attempt to reduce their preference liability through post-petition transfers.  He holds that a post-petition transfer cannot act as new value to reduce a preference payment, but is not prohibited from offsetting a preference payment as both arise post-petition.  Opinion at *7-8.  He then turns to the plaintiff’s argument in its motion for judgment on the pleadings that pursuant to Section 502, the defendant is not entitled to any payment, including administrative payments, until the preference payment is satisfied.  In the Opinion, Judge Carey holds to the contrary, concluding his Opinion with the following quote from the Friedman’s decision:

If it is a rule in bankruptcy that all creditors must be treated equally, surely the exceptions swallow the rule. It could be said that some creditors are treated more equally than others. There are special provisions for aircraft leases and shopping center leases, and some claims are given priority over others. The balancing of interests in, for instance, wage orders, has been held to justify the type of unequal treatment condemned in cases that would include the post-petition payment in the preference analysis. See, e.g., In re Primary Health Sys., Inc., 275 B.R. 709, 709 (Bankr. D. Del. 2002) (holding payments pursuant to court order allowing debtor to pay employee wages and benefits to be out of reach of § 547). Inequality per se is not to be avoided; indeed, reasoned and justified inequality sometimes prevails, usually based on what is in the best interest of the estate. For this reason, the courts positing that the interpretation that “results in absolutely equal treatment of all unsecured claims” is the “most reasonable interpretation of section 547(c)(4),”. . . are misguided.

Opinion at *10.

Defenses to a Preference Action

The Bankruptcy Code provides creditors with many defenses to preference actions. While the efficacy of the preference defendants’ attempt to reduce exposure in this case is still in question, it does not look like it will be an easy decision for the court or a briefly litigated issue.  Other defenses are more common, and more easily gauged.  Included among these are the “ordinary course of business defense” and the “new value defense.” For reader’s looking for more information concerning claims and defenses in preference litigation, attached is a booklet I prepared on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

John O’Toole writes:

On July 13, 2016, Judge Kevin J. Carey denied a former shareholder’s (the “Movant”) Motion to Proceed Qui Tam (the “Motion”) against the chapter 11 debtors (the “Debtors”) in In re Syntax-Brillian Corporation, Case No. 08-11407 (KJC) (Bankr. D. Del. Jul. 13, 2016).  A copy of the opinion is available here.  The Motion would have allowed the Movant to exercise his power under the False Claims Act (“FCA”) to bring a civil action on behalf of the United States against, among others, the Debtors.  As a threshold matter, Judge Carey determined that because the Movant had previously entered into a “Settlement Agreement Resolving Shareholder Claims” by which he agreed to release any claims “concerning, arising from or related to” the Debtors and the chapter 11 cases, the Movant lacked standing to bring the Motion.  Despite the Movant’s lack of standing, the Court heard the Motion because former shareholders who were not parties to the Settlement Agreement, and thus had standing, filed papers in support of the Motion.

The Court ultimately denied the Motion because the Movant failed to “establish a prima facie case under the [FCA].”  Opinion at *6.  In order to proceed qui tam “under the [FCA] a plaintiff must prove: (1) the defendant presented or caused to be presented to an agent of the United States a claim for payment; (2) the claim was false or fraudulent; and (3) the defendant knew the claim was false or fraudulent.”  Opinion at *6.  The Movant’s allegations suggested only that the government should have taken action to protect him and other former shareholders from the alleged fraud perpetrated by the Debtors, not that the government itself had been aggrieved by the Debtors’ fraud.  Thus, as the “primary purpose of the FCA is to indemnify the government…against losses caused by a defendant’s fraud,” Judge Carey determined that the Motion was deficient.  Opinion at *5.

Also of note is a footnote in the Court’s opinion that indicates that, even if the Movant had standing and the assertions in the Motion validly stated a claim under the FCA, the Court does not have jurisdiction.  The Court stated that it “lacks jurisdiction to determine [the Motion] because qui tam suits under the [FCA] must be heard in a federal district court.”  Opinion at *7 n. 18.


John O’Toole is a summer associate, resident in the firm’s Wilmington office.

Summary

In a 10-page decision dated June 6, 2016, Judge Carey of the Delaware Bankruptcy Court denied a motion to dismiss filed by a holder of a “Golden Share” of Intervention Energy Holdings, LLC (the “Debtor”).  Judge Carey’s opinion is available here (the “Opinion”).  A “Golden Share” is “A type of share that gives its shareholder veto power over changes to the company’s charter. A golden share holds special voting rights, giving its holder the ability to block another shareholder from taking more than a ratio of ordinary shares. Ordinary shares are equal to other ordinary shares in profits and voting rights. These shares also have the ability to block a takeover or acquisition by another company.” Opinion at n.9 (quoting Investopedia – Golden Share, INVESTOPEDIA, http://www.investopedia.com/terms/g/goldenshare.asp.

In this case, the holder of the Golden Share was EIG Energy Fund XV-A, L.P. (“EIG”).  EIG had provided multiple rounds of debt financing to the Debtors.  However, the Debtors were unable to service their loans and eventually defaulted on their payments.  In exchange for EIG entering into a forbearance agreement, EIG was granted a single common unit (a share of an LLC), and the Debtors revised their LLC Agreement to require unanimous consent in order to file bankruptcy.  Opinion at *4.  The Debtors filed bankruptcy without EIG’s consent, and EIG responded by filing its motion to dismiss.  The Opinion ruled on EIG’s motion to dismiss.

While Delaware is well known for allowing companies liberal freedom of contract when creating an LLC agreement, there are some rights that courts have not allowed entities to give up.  Opinion at n.7.  Numerous courts have held that “an advance agreement to waive the benefits conferred by the bankruptcy laws is wholly void as against public policy.”  Opinion at *6.  Judge Carey held that because the forbearance agreement required “that [the Debtor] both amend its LLC Agreement to institute the unanimous Consent Provision and grant the blocking share, the intent of the parties is unmistakable.”  Opinion at *8.

Thus, because it was the intent of the parties to take action that is against public policy, Judge Carey denied EIG’s motion to dismiss the bankruptcy and held that the Debtors had authority to file for bankruptcy.  Judge Carey opined (in a rather lengthy sentence), “A provision in a limited liability company governance document obtained by contract, the sole purpose and effect of which is to place into the hands of a single, minority equity holder the ultimate authority to eviscerate the right of that entity to seek federal bankruptcy relief, and the nature and substance of whose primary relationship with the debtor is that of creditor—not equity holder—and which owes no duty to anyone but itself in connection with an LLC’s decision to seek federal bankruptcy relief, is tantamount to an absolute waiver of that right, and, even if arguably permitted by state law, is void as contrary to federal public policy.”  Opinion at *9.

While Bankruptcy is an issue of law many people don’t think about until they hit rock bottom, given the success statistics for companies in the U.S., particularly new companies, it is worth taking a page out of the playbook of the doomsday preppers – preparing for the worst, while hoping for the best.

In addition, a newly-published Alert on the decision penned by my colleague Raymond Patella can be found on the Fox Rothschild website.

In a 9 page decision signed March 3, 2016 in the AES Thames bankruptcy, Judge Carey of the Delaware Bankruptcy Court held that the recipient of allegedly preferential transfers had received the transfers from the Debtor in the ordinary course of business.  He thus concluded that the Trustee could not avoid and recover the transfers at issue.  Judge Carey’s opinion is available here.

Background

On January 23, 2012, the Court entered an order converting the Debtor’s case to chapter 7. On January 24, 2012, the Charles M. Forman was appointed as the Chapter 7 Trustee.  As the Trustee, he was obligated to maximize the assets of the Debtor available for distribution to creditors.  He filed a preference action against Moran Towing Corp. (“Moran”) alleging that the payments made in the 90-day preference period were made outside of the ordinary course of business.  The parties agreed on all the facts, disputing only the legal implications.

As Judge Carey stated, “The dispute boils down to whether the Transfers during the Preference Period are similar to the transfers made during the Historical Period.”  Opinion at *6.  The agreed facts were as follows: Moran provided the Debtor with services during the preference period in an identical manner as it had for the three years prior.  The real dispute was how to calculate the timing of the payments from the Debtor.  Under their Agreement, the Debtor would pay Moran for all cargoes loaded during the previous calendar month on the 25th day of each month.  The Trustee argued that it is appropriate in this case to analyze only whether the Debtor consistently paid Moran on the Due Date or, if thereafter, to calculate the number of days the payment was made after the Due Date, and Judge Carey agreed.  Opinion at *7.

The Trustee argued that during the Historical Period the Debtor paid Moran on average 2.45 days after the Due Date, while during the Preference Period the Debtor paid Moran on average 15.63 days after the Due Date. The Trustee also points out that during the lengthy Historical Period, only 4 of 164 invoices (or 2.44%) were paid 10 days or later after the Due Date.  Moran argues in response that during the Historical Period, payments ranged between -28 (i.e., 28 days before the Due Date) and 35 days after the Due Date. Therefore, the range of payments during the Preference Period (10-19 days) falls within the Historical Period range.  Opinion at *7-8.

Judge Carey’s Opinion

“The determination of whether a creditor has met its burden under section 547(c)(2)(A) is a subjective test involving the consistency of transactions between the creditor and the debtor before and during the preference period.”  Opinion at *5.

Judge Carey ruled against the Trustee, holding that “When reviewing the parties’ payment history, a late payment of 10 or 19 days, although infrequent, is not unprecedented in the parties’ relationship.”  Opinion at *8.  Judge Carey held that “the business relationship between Moran and the Debtor falls within the type of relationship the ordinary course of business defense is intended to protect.”  Opinion at *9.

My $.02

Of most interest to me in reviewing this case was Judge Carey’s opinion that “The Trustee’s reliance on the average payment statistics are countered by Moran’s reliance on the range of payment statistics.”  Opinion at *8.  Often parties in a preference action rely entirely on average days to payment and standard deviation.  It is interesting to note that the Court takes a far less statistical and far more defendant-friendly view of the issue.

In a 10 page opinion released January 5, 2016 in the Tropicana Entertainment bankruptcy (Bank. D. Del. 08-10856), Judge Carey of the Delaware Bankruptcy Court provided  a critical opinion concerning the handling of a dispute arising from two debtors’ division of professional payments.  Judge Carey’s opinion is available here (the “Opinion”).

Background

In May of 2009 both the OpCo and LandCo debtors in the Tropicana bankruptcy had their plans confirmed.  The plans became effective June 30, 2009.  The two entities cases were procedurally consolidated, but not substantively consolidated.  Because they were unable to reach an agreement on the issue it became necessary for the Court to decide what percentage of professional fees should be charged to each estate.  In his Allocation Decision, Judge Carey determined that “professional fees incurred through June 30, 2009 should be allocated 75% to the OpCo Debtors and 25% to the LandCo Debtors.”  Opinion at *2.  As the bankruptcy cases had been jointly handled through OpCo’s bankruptcy case, and all payments of professional fees had been made with funds OpCo understood to be part of its bankruptcy estate, it sought reimbursement from LandCo for 25% of all professional fee payments.  LandCo argued that the Allocation Decision was narrower than OpCo’s interpretation, and only provided that 25% of fees unpaid at the time of the effective dates would be paid by LandCo.  Opinion at *2-3.

Judge Carey’s Ruling

While the dispute between the two entities is real, this issue is not in touch with reality.  If LandCo was required to pay 25% of all the profession fees in the Tropicana bankruptcy, it would be required to pay approximately $11.3 million to OpCo.  Opinion at *9.  Thus, LandCo alleges, it would have been cash flow insolvent on the day its plan became effective.  Opinion at *9.

The last thing any bankruptcy judge wants to see happen is for a recently reorganized debtor to immediately slip back into bankruptcy.  As he has had a front-row seat to the entirety of the Tropican restructuring, with regular information about the liquidity and budget of the debtors, this is not a result Judge Carey would have approved.  As the Opinion makes clear, the Allocation Decision was meant to address a split only of those professional fees unpaid as of the effective date.  Opinion at *3.  In what I would think is an act of impressive restraint, Judge Carey limits his criticism to a short statement that “the OpCo Debtors’ inclusion of a claim for Professional Fees under the post-confirmation Intercompany Agreement is overreaching, inequitable and inconsistent with the confirmed Plans.”  Opinion at *9.

Judge Carey finishes his critique by stating that “there is no reason to allow the OpCo Debtors to drive a truck through the small back door that they argue the LandCo Debtors left open.”  Opinion at *9.  While the Tropicana bankruptcy is nearing the end, after the irritation Judge Carey doubtless feels with this dispute, I would not envy the Debtors’ principals if they have to appear before Judge Carey again in the near future.

Summary

In a 22 page decision released April 20, 2015, Judge Carey of the Delaware Bankruptcy Court provided guidance as to the calculation of lease rejection damages.  Judge Carey’s opinion is available here (the “Opinion”).  The interpretation of 11 U.S.C. Section 502(b)(6) differs depending on the court which is addressing the issue.  This is an issue that the Third Circuit has not ruled on and, as far as I am aware, the first time the Delaware Bankruptcy Court has published an opinion directly addressing the issue.  The dispute: The statute caps a landlord’s rent claim at “the greater of one year, or 15 percent.”  So, what is the 15% referring to: The total amount of payment due under the lease, or 15% of the remaining lease period?  Because many leases include increasing rent payments, the total amount due calculation will typically be larger than the amount due over the next 15% of the lease term.  The quick answer of Judge Carey’s Opinion?  15% refers to the time remaining, not the amount remaining.

Background

Filene’s Basement (the “Debtor”) had, like countless debtors before, rejected a lease through the bankruptcy process.  In this instance the landlord decided that rather than settling, like most litigants do, this landlord fought the good fight and held out until the Court issued its order.

The Debtor had also failed to satisfy a mechanic’s lien and left a significant of abandoned furniture and fixtures that the landlord had to remove.  The landlord sought to have the expense of both of these issues excluded from the 502(b)(6) cap, thereby increasing its claim for the full value of the mechanic’s lien and the removal costs.  Naturally, the Debtor requested the Court to cap the entirety of the landlord’s claim at the amount calculated under 502(b)(6).

Judge Carey’s Opinion

Judge Carey reviewed briefly the split of decisions as well as discussing the principles governing the interpretation of statutes.  In this discussion, his analysis of ambiguity deserves particular attention.  Judge Carey opines that “just because a particular provision may be, by itself, susceptible to differing constructions does not mean that the provision is therefore ambiguous.”  Opinion at *8.  Judge Carey quotes the Third Circuit’s opinion in Price v. Delaware State Police Federal Credit Union (In re Price), which provides that “a provision is ambiguous when, despite a studied examination of the statutory context, the natural reading of a provision remains elusive.”  370 F.3d 362, 369 (3d Cir. 2004)

Judge Carey then recites 502(b)(6), which provides: “the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease . . .”  He determines that 15%, not to exceed three years, unmistakably means that “15%” is a measure of time.  Opinion at *9.  Indeed, it would be strange to rephrase this provision as the landlord implicitly does here: $2.6 million (15%), not to exceed three years.

Judge Carey then analyzes the additional parts of the landlord’s claim, determining that any parts of the claim that “result[] from the termination of the Lease” will be included in the cap.  Opinion at *19.  Ultimately, Judge Carey holds that a mechanic’s lien results from a failure to pay another entity and not from the rejection, whereas the abandoned equipment does result from the rejection.  Thus, the mechanic’s lien was added to the claim and the cleanup of the abandoned equipment is included in the cap.  He places weight on the language of 502(b)(6) which caps claims arising from the “termination” of the lease and not just the “rejection” of the lease.  Opinion at *20.  Naturally, if the lease was not terminated, the landlord would have to obligation to remove the abandoned material.  However, even if the lease was not terminated, the landlord could be liable for the mechanic’s lien.

As with all matters brought before the Delaware Bankruptcy Court, you want to cite controlling precedent if possible.  In this instance, there was no controlling precedent on the interpretation of 502(b)(6)’s “15%” language, which means that a litigant is entering one of an attorney’s most distasteful situations, an unpredictable situation.

In a 28 page opinion released November 25, 2014 in the Tropicana Entertainment bankruptcy (Bank. D. Del. 08-10856), Judge Carey of the Delaware Bankruptcy Court provided an opinion regarding a defendant’s motion to dismiss an amended complaint.  Judge Carey granted the majority of the motion to dismiss, denying a second request for leave to amend because “The Trustee has now had ample opportunity to present a properly pled complaint.”  This ruling illustrates the importance of providing all the necessary details and required allegations in a complaint, particularly if the Court has already provided you with one “do-over”.  Judge Carey’s opinion is available here (the “Opinion”).

Background

Pursuant to the confirmed plans in the Tropicana bankruptcy cases, Lightsway Litigation Services, LLC was appointed as the trustee of a Litigation Trust (the “Trustee”) tasked with pursuing claims against insiders of the Debtors. On February 17, 2010, the Trustee filed a complaint against Yung, Wimar, Columbia and others asserting claims for breach of fiduciary obligations, breach of contract, breach of the implied covenant of fair dealing, and equitable subordination. The defendants filed a motion to dismiss the complaint and, after a hearing, the Court entered an Order denying the motions to dismiss, but directing the Trustee to file an amended complaint.  On February 9, 2011, the Trustee filed the First Amended Complaint against Yung, Wimar and Columbia (the “Defendants”).  Opinion at *3.

The Defendants filed another motion to dismiss.  After briefing and oral argument, the Court entered the Opinion and corresponding Order granting the motion in part and denying it in part.

Judge Carey’s Ruling

While the amended complaint contains five claims, all of which are addressed in the motion to dismiss and the Opinion, the only claim this post will discuss is the Trustee’s amended claim that “[Defendant] Yung breached fiduciary duties owed to the Debtors based upon his equity ownership and control of the management, operation, and finances of the Debtors.”  Opinion at *17 (internal quotations omitted).

This section of the Opinion spans pages 17-21, providing a detailed analysis of who is owed fiduciary duties, and when.  Beginning when a company is healthy, and all duties are owed to the equity holders, in this case the parent company, and ending when a company is distressed and all duties are owed to the creditors, at the individual company level.  As stated by the Court, “[t]he solvency or insolvency of the corporation determines which constituency has the right to pursue a derivative claim based on a breach of fiduciary obligation.”  Opinion at *20.

Citing the Delaware Chancery Court’s decision Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 792 (Del. Ch. 2004), the Opinion states that “To meet the burden of pleading insolvency, a plaintiff must plead facts showing that the debtor-corporation has either 1) a deficiency of assets below liabilities with no reasonable prospect that the business can be successfully continued in the fact thereof, or 2) an inability to meet maturing obligations as they fall due in the ordinary course of business.”  Opinion at *20-21.  In this case, the Trustee failed to plead specific facts, alleging only that “[the Defendant’s] misconduct propelled the Debtors into insolvency, which ultimately led to the filing of the bankruptcy cases in the Spring of 2008.”  Opinion at *20.

While there is no doubt that the Debtors filed for bankruptcy, “[the complaint contains] no facts to provide a basis from which [the Court] can infer whether any or all of the Debtors were insolvent or when insolvency occurred.”  Opinion at *21.  And although the Defendants did not raise insolvency in their motion to dismiss the original complaint, the Defendants are not required to defend against claims that were not included in the complaint.  This led to the Court’s ruling that “The Trustee has now had ample opportunity to present a properly pled complaint. The request for leave to again amend the complaint is denied.”  Opinion at *21.

In this case, the failures of the Trustee in crafting a complaint that satisfied the standards of the Delaware Bankruptcy Court, even with two bites at the apple, led to the Court’s dismissal of a cause of action that could have resulted in significant damage awards for the Trustee.  If you read no other parts of this decision, make sure to carefully review pages 17-21 before filing any amended complaints in the Delaware Bankruptcy Court.