Judicial Update
by Ian Fredericks, Young Conaway Stargatt & Taylor LLP
April – June 2005
Included are summaries of cases that I thought members of the committee might find interesting. The summaries appear in date order beginning in April. Please contact me with any suggested areas of the law that members would prefer that I focus on, including consumer or business and legal areas of importance (i.e., retention, compensation, plan process, etc.).
IRA Accounts May Be Excluded from the Bankruptcy Estate Pursuant to §522
Rousey v. Jacoway, 544 U.S. ___, 125 S.Ct. 1561, 161 L.Ed. 2d 563 (April 4, 2005) (Thomas, J.)
Holding that, pursuant to §522(d)(10)(E), an individual retirement account (“IRA”) may be exempted by a debtor. In so holding, the court found that:
- a right to payment under an IRA is “on account of… age,” even though a debtor may withdraw the funds early subject to a 10 percent penalty; and
- an IRA fits within the meaning of “similar plans,” as those terms appear in §522 and relate to “stock bonus, pension, profit sharing or annuity plans or contracts,” because an IRA provides a substitute for wages and is not a mere savings account.
Court Reduces Debtors’ Counsel’s Fees under §330 of the Bankruptcy
In re Condor Sys. Inc., Nos. 01-55472 (Bankr. N.D. Calif. April 6, 2005) (Grube, J.)
After requesting fee audits by the U.S. Trustee and the committee of the final fee applications of debtors’ counsel, the court reduced the fees sought with respect to work performed in conjunction with retention and compensation issues from over 11 percent of the total fees sought to 7.5 percent. Debtors’ counsel requested payment of approximately $300,000 in fees that related to retentions of professionals and compensation. The bankruptcy court determined that the amount was excessive, especially because large amounts related to defending against objections to fees that were disallowed. The bankruptcy court also reduced fees related to intra-office conferences because counsel could not adequately explain why attendance by more than one professional at a conference was warranted, as required by the court’s guidelines for professionals’ compensation. Finally, the court disallowed fees relating to services performed by paraprofessionals that it determined to be clerical in nature, including “arranging for the retrieval of an order from the court…, calendaring dates…, updating creditors’ addresses and service lists… or preparing envelopes….”
Court Reduces Debtors’ Accountant’s Fees under §330 of the Bankruptcy
In re Condor Sys. Inc., Nos. 01-55472 (Bankr. N.D. Calif. April 6, 2005) (Grube, J.)
The court reduced fees sought by the debtors’ accountants. First, the time entries included vague descriptions from which the court could not ascertain the type of work done. The court also disallowed fees relating to services performed by paraprofessionals that it determined to be clerical in nature, including “filing, assembling or compiling documents, organizing files, calendaring dates, making copies, faxing or transmitting and moving records.” Although the professional was permitted to bill in half-hour increments, the court found the practice excessive and reduced the overall compensation. Finally, the court did permit lumping where there was evidence that the tasks “were significantly interrelated [and] treated as one task.”
Chapter 7 Debtor May Not Strip an Entirely Unsecured Consensual Lien
In re Pistritto, 2005 Bankr. LEXIS 656 (Bankr. D. Del. April 19, 2005) (Walrath, C.J.)
Holding that a chapter 7 debtor may not avoid or “strip off” a consensual lien on real property under §506(d) of the Bankruptcy Code that, as a result of the value of the property and the superior liens, is entirely unsecured. The bankruptcy court followed the Supreme Court’s holding in Dewsnup v. Timm, 502 U.S. 410 (1992), which precluded “stripping down” the undersecured portion of a consensual lien.
Fraud Claim Barred by §1144 of the Bankruptcy Code
Haskell, et al v. Goldman Sachs & Co. (In re Genesis Health Ventures Inc.), 324 B.R. 510 (Bankr. D. Del. May 3, 2005) (Wizmur, J.)
The bankruptcy court dismissed the plaintiffs’ complaint and held that a fraud claim brought approximately three years post-confirmation, which related to pre-confirmation fraud, was time barred by §1144 of the Bankruptcy Code. In 2001, the bankruptcy court approved the debtor’s plan of reorganization, and, almost three years later, a group of debenture holders filed a complaint alleging that the defendants fraudulently reported the debtor’s value in conjunction with the plan confirmation hearing. Although the plaintiffs sought money damages, rather than revocation of the confirmation order, the bankruptcy court held that §1144’s 180-day time limitation within which to challenge a confirmation order barred the claim. Because “the impact of a significant money damages award [($200 million)] against the debtor would be to ‘redivide the pie’ [and] to upset the confirmed plan…[,]“ and “§1144 was designed to limit challenge to the viability of [a debtor] emerging from chapter 11, to fix liabilities …, and to provide certainty and finality to the confirmation process[,]” the bankruptcy court dismissed the complaint over an argument that the fraud was only recently discovered.
Unfunded Contributions Are Assets within the Meaning of ERISA, But an Employer Is Not a Plan Fiduciary Merely Because It Breaches Its Obligation to Fund
Navare v. Luna In re Luna, 406 F.3d 1192 (10th Cir. May 3, 2005) (Tymkovich, J.)
Holding that unpaid contributions are “assets” within the meaning of 29 U.S.C. §1002(21)(A), which provides that any person who “exercises any authority or control respecting management or disposition of [the plan’s] assets” may be held liable for loss. In so holding, the court rejected the argument that unpaid contributions become plan assets only when “banked” or deposited into the plan. The Tenth Circuit followed the Second Circuit’s decision in U.S. v. LaBarbara, 129 F.3d 81 (2nd Cir. 1997) and rejected decisions of the Eleventh Circuit.
The court also held that an employer, which is not expressly identified as a fiduciary in the plan documents, is not an implied fiduciary under ERISA solely due to a failure to fund a plan. Specifically, such conduct alone is insufficient to establish that the employer “exercises any authority or control respecting management or disposition of [the plan’s] assets.” The court held that the plain meaning of the language requires a greater degree of responsibility than failing to fund the plan and rejected case law to the contrary.
Court Denies Request for Payment of an Administrative Expense for Beneficial Services Provided by a Professional who Was Never Retained
In re Garden Ridge Corp., 2005 Bankr. LEXIS 1150 (Bankr. D. Del. Jun. 15, 2005) (Walrath, C.J.)
Holding that a professional that was not retained by the estate, but nevertheless provided services that benefited the estate, may not be compensated by §503(b)(1)(A) as an administrative expense. The bankruptcy court, bound by the Third Circuit’s decision in F/S Airlease II Inc. v. Simon, 844 F.2d 99 (3rd Cir. 1988), denied administrative expense status to the debtors’ pre-petition real estate consultants because they were not retained. Although the debtors filed an application to retain their pre-petition real estate consultants, the application was withdrawn after objections were received by parties-in-interest. However, after the application was withdrawn, the consultants assisted in transitioning the debtors’ new real estate consultants into the case and sought reimbursement for the period between the petition date and the date the new consultants were ultimately retained. The court denied the request based on the Third Circuit’s decision in Simon, even though the circumstances in favor of payment were compelling in this case and the withdrawn retention was not the fault of the professional.
Although the Bankruptcy Court Issued an Erroneous Injunction, Those Harmed Had No Recovery Because No Bond Was Issued
In re UAL Corp., 2005 U.S. App. LEXIS 11831 (7th Cir. Jun. 21, 2005) (Easterbrook, J.)
The Seventh Circuit held that a court that issues an injunction preventing the sale of securities in order to preserve a debtor’s NOLs (there was fear that a mass sale by shareholders could be considered a change in control) should require the debtor to post a bond to protect the enjoined shareholders from damage arising from loss of liquidity and underdiversification because, in the event the injunction is later determined to be erroneous, the sole means for recovery lies with the bond. Absent a bond, however, a court may order restitution in order to reverse the effects of the injunction and to implement the entitlements that predated the litigation. In this case, the shareholders alleged harm amounting to loss of liquidity and uncompensated risk, neither of which corresponded to any gain enjoyed by the debtors. Because the debtors did not realize any gain, restitution was inappropriate.
If you would like a copy of any of the above opinions, please contact Ian S. Fredericks.