Bankruptcy Litigation

NEWSLETTER OF THE BANKRUPTCY AND INSOLVENCY COMMITTEE

NEWSLETTER OF THE BANKRUPTCY AND INSOLVENCY COMMITTEE

Summer 2008 American Bar Association SECTION LITIGATION AmericanOFBar Association

SECTIONTHIS OF LITIGATION INSIDE ISSUE VOLUME 13

No. 3

INSIDE THIS ISSUE

THE NEW WAVE OF EQUITY COMMITTEES IN BANKRUPTCY: What Are They and Are They Here to VOLUME Stay? . . . . . . . . . 14 . . . . . . . .No. . . . . .2 ..1 CHOICE OF BANKRUPTCY VENUE: SOUND STRATEGY OR FORUM SHOPPING? . . . . . . . . . . 1

When Receiverships BANKRUPTCY COURTS’ RECENT and Bankruptcies RULINGS ON TWENTY DAY CLAIMS . Collide: . . . . . . . . . . . . . . . . . . . . 7

1 An Overview RECENT CIRCUIT.............................. SPLIT: DOES THE CODE APPLY TO FOREIGN ASSET AVOIDANCE ACTIONS? . 22 Judge’s Column:

Co-Chairs Stephen Basic Porterfield Litigation Sirote & Permutt Pointers and Birmingham, AL Courtroom (205) 930-5278 Etiquette for Bankruptcy [email protected]

...................................... 21 Lawyers Kathleen B. Burke Jones Day Cleveland, OH (216) 589-3939 Message From The [email protected]

Chairs .......................................... 28 Co-Editors John R. Burns, III Baker & Daniels Fort Wayne, IN (260) 424-8000 [email protected] Andrew P. Lederman Sonnenschein Nath & Rosenthal New York, NY (212) 768-6886 [email protected]

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Mark A. Platt Fulbright & Jaworski L.L.P.MEETING ABA ANNUAL Dallas, TX (214) 855-7172 August 7—10, 2008 The Jumeirah Essex House [email protected] New York, NY

When Receiverships and Bankruptcies Collide: An Overview1 Co-authored by: Sharon M. Beausoleil-Mayer and Kimberly J. Carter

At a cursory level, section 543 of the United States

Bankruptcy Code seems to send a “clear” message to a receiver. When a bankruptcy case is filed, the receiver is required to deliver any property in their possession to the trustee and file a final accounting. Yet, even within section 543, a receiver may retain the debtor’s property under certain circumstances. Moreover, under section 305, a bankruptcy court may abstain from hearing a debtor’s bankruptcy case if the best interests of the creditors and the debtor would be served by allowing the receivership to continue.

This article explores three questions: 1. Is the receiver required to turn over immediately the assets subject to the receivership under section 543? 2. Does the receiver have standing to contest the bankruptcy filing? 3. Is a bankruptcy case or a receivership more likely to be the surviving proceeding under section 305? This article is not about the power of a receiver, but about the interaction of receiverships and bankruptcy cases within the framework of the Bankruptcy Code. continued on p. 3

BANRUPTCY LITIGATION is published four times (annually) by the ABA Section of Litigation, 321 N. Clark Street, Chicago, IL 60610. This issue is Vol. 13, No. 3, Summer 2007. The views expressed within do not reflect the views of the American Bar Association, the Section of Litigation or the Bankruptcy and Insolvency Committee. ©2007 American Bar Association.

BANKRUPTCY LITIGATION

Editorial Board Co-Chairs Kathleen B. Burke Jones Day Cleveland, OH ● (216) 589-3939 [email protected] John R. Burns, III Baker & Daniels Fort Wayne, IN ● (260) 424-8000 [email protected]

Issue Editors Sharon Beausoleil-Mayer Fulbright & Jaworski L.L.P. Houston, TX ● (713) 651-5381 [email protected] Robert J. Haupt Haupt Brooks Vandruff Clear, PLLC Oklahoma City, OK ● (405) 231-4600 [email protected] Andrew P. Lederman Sonnenschein Nath & Rosenthal New York, NY ● (212) 768-6886 [email protected] Aram Ordubegian Weinstein, Weiss & Ordubegian, LLP Los Angeles, CA ● (310) 203-9393 x176 [email protected]

Editor-in-Chief Mark A. Platt Fulbright & Jaworski L.L.P. Dallas, TX ● (214) 855-7172 [email protected]

Column Editor Mark A. Werling Baker & Daniels Fort Wayne, IN ● (260) 424-8000 [email protected] BANKRUPTCY LITIGATION is published four times annually by the ABA Section of Litigation, 321 N. Clark Street, Chicago, IL 60610. The views expressed within do not reflect the views of the American Bar Association, the Section of Litigation or the Bankruptcy and Insolvency Committee. © 2008 American Bar Association. All rights reserved. For permission to reprint, contact ABA Copyrights & Contracts, 321 N. Clark Street, Chicago, IL 60610; fax: (312) 988-6030; email: [email protected]. Address corrections should be sent to the American Bar Association, c/o Service Center, 321 N. Clark Street, Chicago, IL 60610.

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When Receiverships and Bankruptcies Collide By: Sharon M. Beausoleil-Mayer and Kimberly J. Carter This discussion provides an overview of the issues a bankruptcy practitioner may face — a guide to those who have not yet had the pleasure of dealing with a receivership and a bankruptcy case. This article also provides practice pointers to bankruptcy practitioners about the interplay between the relevant code sections and the rights (or lack thereof) of the various parties within the Bankruptcy Code’s framework. As with most bankruptcy matters, the answers are not as easy or forthcoming as they might seem, or should be, within the framework of a Code-based law. The answers are counterintuitive, as we like to inform our non-bankruptcy friends. In response, our non-bankruptcy friends may point out that bankruptcy court may not be the winning forum when these two worlds collide.

A. Receivers and Receiverships The powers of a receiver may be derived from federal statutes,2 state statutes3 and/or court rules. See 65 AM. JUR. 2D Receivers § 129 (2001); see also In re Newport Offshore Ltd., 219 B.R. 341, 346–350 (Bankr. D.R.I. 1998) (discussing Rhode Island’s receivership statutes). Also, a receiver’s powers may be further delineated in the actual order appointing the receiver and any subsequent court orders. See In re Newport Offshore Ltd., 219 B.R. at 346–350 (discussing court orders such as injunctions that typically accompany receiverships). How detailed the federal statutes, state statutes, and/or court rules are regarding the powers of a receiver is dependent on each case. The receiver is an agent or officer of the appointing court. Once a receiver is appointed over the corporate debtor, the receiver obtains the

property of the corporate debtor (“Receivership Property”) in custodia legis.4 The receiver’s jurisdiction over the title, right, or interest in the Receivership Property comes from the appointing court. See 65 AM. JUR. 2D Receivers § 107 (2001). Though it may depend on whether a receiver takes “title” to the Receivership Property under applicable law, a receiver does obtain custody, control and/or possession of the Receivership Property. In other words, the corporate debtor “loses the power to transfer or otherwise act with regard to the” Receivership Property. Id. § 108 (footnotes omitted).

B. The Bankruptcy Case

“Receiver”5 is not a defined term under the United States Bankruptcy Code (“Bankruptcy Code”). However, “custodian” is defined,6 and includes a receiver or trustee appointed under nonbankruptcy law (e.g., a federal court-appointed receiver or a state court-appointed receiver). Does the existence of a receivership prevent a corporate debtor7 from filing a voluntary8 petition or its creditors from filing an involuntary9 petition for bankruptcy relief? Does it depend on whether there is a state court-appointed receiver or a federal court-appointed receiver?

1. State Receivership

In 1929, the United States Supreme Court decided a case concerning a receiver appointed under an Arkansas statute. The Supreme Court in International Shoe Co. v. Pinkus, 278 U.S. 261, 264, 49 S. Ct. 108, 110 (1929), held that a state court receivership could not prevent a corporate continued on p. 4 Bankruptcy Litigation ● Summer 2008

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When Receiverships and Bankruptcies Collide (Continued from p. 3)

debtor from seeking relief under the Bankruptcy Act. This case continues to be cited for the same basic proposition about the interaction between state court receiverships and federal bankruptcy law: “a corporation may not be precluded by state law from availing itself of federal bankruptcy law.” See Cash Currency Exchange, Inc. v. Shine (In re Cash Currency Exchange, Inc.), 762 F.2d 542, 544 (7th Cir. 1985). The Seventh Circuit, relying on International Shoe, held in Cash Currency Exchange that the existence of administrative receiverships did not prevent thirty-three cash currency exchanges from filing voluntary petitions. Id. at 552–53. The Seventh Circuit explained that “Title 11 suspends the operation of state insolvency laws except as to those classes of persons specifically excluded from being debtors under the Code.” Id. at 552. Because the currency exchange corporations were eligible to be debtors under section 109 of the Bankruptcy Code, the appointment of the state court receiver did not prevent these companies from seeking bankruptcy relief.10

petition “by the issuance of a federal blanket receivership injunction.” The district court had appointed a receiver and had, in the order appointing the receiver (the “Stay Order”), stayed (1) all entities from prosecuting actions against the Independent Energy Corporation (“IEC”) and (2) all proceedings for the purpose of interfering with the property of IEC. Id. at 520.

2. Federal Receivership

Certain creditors requested the right to file an involuntary petition against the debtor, but wanted to clarify the district court’s IEC Stay Order. The district court allowed the filing provided that the creditors did not prosecute the bankruptcy case “until th[e] court had had an opportunity to decide whether the blanket receivership injunction stayed” the creditors from pursuing bankruptcy proceedings in the first place. See id.

In Jordan v. Independent Energy Corp., 446 F. Supp. 516, 518 (N.D. Tex. 1978), the district court had to determine when a federal district court could prevent the filing of a bankruptcy

The district court held that a blanket receivership injunction did not meet the prerequisites for a preliminary injunction because (1) both debtors and creditors would be irreparably harmed by the denial of access to their rights under the Bankruptcy Act and (2) an order restricting access to the bankruptcy courts would not be in the public interest. Id. Consequently, the district court lifted the blanket receivership injunction and transferred the case to the bankruptcy court. Id. at 529–30.

International Shoe Company and Cash Currency Exchange dealt with state court receiverships. May a federal court receivership prevent the corporate debtor from filing a voluntary petition or its creditors from filing an involuntary petition?

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When Receiverships and Bankruptcies Collide By: Sharon M. Beausoleil-Mayer and Kimberly J. Carter

The Second Circuit, however, reached a different conclusion in United States v. Royal Business Funds Corp., 724 F.2d 12, 13 (2d Cir. 1983).11 What sets this case apart from the Jordan decision? The case involved a company called Royal Business Funds (“Royal”) and the Small Business Administration (“SBA”). As in the Jordan case, the district court entered an order (“Royal Stay Order”) staying “all other legal actions involving Royal, and enjoin[ing] Royal, its officers and directors and others from taking any action to the detriment of the SBA.” However, Royal and the SBA also entered into a stipulation, agreeing that the SBA would be appointed as a receiver over Royal. Id. The district court held that, pursuant to the Royal Stay Order, Royal could not file for bankruptcy without prior court approval. Id. at 880. The district court emphasized that it would be “highly inequitable to allow Royal to settle the SBA’s substantial . . . claims against it by agreeing to the appointment of a receiver, and then unilaterally to circumvent the settlement . . . .” Id. (emphasis added). The majority shareholders appealed the decision. See United States v. Royal Bus. Funds Corp., 724 F.2d 12, 13 (2d Cir. 1983). The Second Circuit affirmed but did not adopt all of the district court’s reasoning, focusing instead on whether Royal had an absolute right to file a bankruptcy petition, even if it was subject to a federal receivership. See id. at 15–16. The Second Circuit emphasized that Royal had agreed to the appointment of the federal receiver and, consequently, to receiving $3.5 million in additional capital from the SBA. See id. at 14–15. The Second Circuit held that Royal’s right to file a Chapter 11 petition without the district court’s

consent was limited by the consensual receivership and subsequent provision of fresh capital by the SBA. Id. at 16. The Second Circuit stated that “a debtor subject to a federal receivership has no absolute right to file a bankruptcy petition and federal courts have disallowed petitions where a liquidation under a receiver is substantially under way.” Id. (citations omitted).12 The Second Circuit (along with the two cases cited for support in the Eighth Circuit and the Ninth Circuits) did not focus on the eligibility of the companies to be debtors under the Bankruptcy Code, but, rather, which proceeding—bankruptcy or receivership—should survive. As discussed below in connection with abstention, the analysis undertaken by each circuit court involved the same factors a bankruptcy court would have considered in determining whether to decline jurisdiction under section 305 of the Bankruptcy Code. continued on p. 6

Because the existence of a receivership does not close the door on filing a voluntary or involuntary bankruptcy case, the next step is to determine which proceeding will survive: the receivership or the bankruptcy case.

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C. The Custodian’s Requirements: Turnover Versus Abstention Because the existence of a receivership does not close the door on filing a voluntary or involuntary bankruptcy case, the next step is to determine which proceeding will survive: the receivership or the bankruptcy case. The Bankruptcy Code provides the framework for the court to determine which proceeding should survive, including whether there should be a hybrid proceeding, allowing the receiver to retain possession of Receivership Property during the pendency of the bankruptcy case. At the same time, there is a tension within the Bankruptcy Code regarding the timing of the receiver’s turn over of the Receivership Property versus the ability of the receiver to not only maintain possession of the Receivership Property but oppose the bankruptcy filing.

The receiver has three choices: (i) cooperate with the trustee and turn over the Receivership Property; (ii) file a motion to be excused under section 543; or (iii) file a motion for abstention under section 305.

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Sections 305 and 543 of the Bankruptcy Code play key roles. See id. §§ 305, 543. The receiver has three choices: (i) cooperate with the trustee and turn over the Receivership Property; (ii) file a motion to be excused under section 543; or (iii) file a motion for abstention under section 305.13 Section 54314 of the Bankruptcy Code is a section of contradictions. See id. § 543. Section 543 seems to allow a receiver to maintain the status quo with regards to the Receivership Property and then, at the same time, requires a receiver to take immediate action with regards to the very same Receivership Property. See id.

1. Knowledge of the Bankruptcy Case

Under section 543(a),15 a receiver with knowledge of the bankruptcy case “may” not take any actions with respect to the Receivership Property. See id. § 543(a). This seems to tell the receiver to maintain the status quo. This is consistent with the imposition of the automatic stay under section 362. Section 543(a) then seems to provide a safe harbor for the receiver, allowing the receiver to take action “as is necessary to preserve such” Receivership Property. See id. This is not necessarily consistent with the automatic stay, since it implies that there is no need to obtain relief from the automatic stay, even if the debtor and receiver are at odds with each other over the Receivership Property. But, as we all know, sections of the Bankruptcy Code cannot be read alone.16 In the very next subsection (section 543(b)),17 the receiver’s

When Receiverships and Bankruptcies Collide By: Sharon M. Beausoleil-Mayer and Kimberly J. Carter

one court has concluded that the same standards that apply to whether an estate professional’s fees and expenses are reasonable will also apply to a custodian’s compensation. See In re Sevitski, 161 B.R. 847 (N.D. Okla. 1993) (finding that the receiver’s compensation was excessive).21 At the same time, the bankruptcy court may surcharge the receiver

maintenance of the status quo is short-lived. See id. § 543(b). The receiver is ordered to turn over the Receivership Property to the debtor, not when requested by the debtor, but “on the date that such [receiver] acquires knowledge” of the bankruptcy case. Id. After the receiver turns over the Receivership Property, the receiver is required to file a final accounting and submit the report to the United States trustee.18 Id. Once the receiver turns over Receivership Property to the debtor, they are referred to as the “superceded custodian.”

2. Payment Of The Custodian’s Fees

Pursuant to section 543(c),19 the superceded custodian may be compensated for the “payment of reasonable compensation for services rendered and costs and expenses incurred by such custodian” for the turnover of the Receivership Property. Id. §543 (c)(2); see also In re Posadas Assocs., 127 B.R. 278, 281 n.10 (Bankr. D.N.M. 1991). Pursuant to section 503, the superceded custodian’s compensation may be allowed as an administrative expense claim.20 11 U.S.C. § 503 (2008). At least

for any improper or excessive disbursement, other than a disbursement that has been made in accordance with applicable law or that has been approved, after notice and a hearing, by a court of competent jurisdiction before the commencement of the case under this title. 11 U.S.C. § 543(c)(3) (2008).22 In an unpublished opinion, the bankruptcy court in In re Statepark Building Group, Ltd., NO. 04-33916HDH-11, 2005 Bankr. LEXIS 1248 (N.D. Tex. June 29, 2005) held that a receiver who voluntarily placed the debtor in bankruptcy was not a superceded custodian and would not be entitled to his prepetition expenses as an allowed administration expense claim. The court explained that the receiver’s voluntary act nullifies the need to protect the receiver from the acts of the debtor or creditors to supersede the state court’s determination. If the receiver elects to file a bankruptcy petition, the court would have no occasion to allow the receiver to retain control of the property under § 543(d) as the receiver would have voluntarily decided to

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continued on p. 8 transfer the debtor's property to the bankruptcy estate. There would be no public policy reason to protect a receiver regarding his expenses under § 503 when the receiver chooses voluntarily to submit to a bankruptcy process. Id. at *10–11. However, section 543(d) does not address the compensation for an excused custodian.

3. The Excused Custodian

Generally, bankruptcy courts view section 543 (d)23 as a modified abstention section. The focus is not whether the bankruptcy court should refrain from exercising jurisdiction over the bankruptcy case, but whether the receiver should maintain possession, custody, or control of the Receivership Property. The debtor’s interests are not a part of the court’s consideration under section 543(d)(1). See 11 U.S.C. § 543(d) (2008). Rather, the court only looks to whether the receiver’s continued possession, custody, or control of the Receivership Property would better serve the interests of the creditors and, if solvent, the equity security holders. See id. If the receiver is excused under section 543(d), the receiver becomes the “Excused Custodian” and is not required to comply with sections 543(a) through (c) of the Bankruptcy Code. Id. In In re Uno Broadcasting, Inc., 167 B.R. 189, 200–01 (Bankr. D. Ariz. 1994), the bankruptcy

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court granted the motion to excuse compliance with section 543. The bankruptcy court concluded that the receiver should retain possession of the Receivership Property. Id. The bankruptcy court pointed out that the receiver had: (i) “been proceeding expeditiously and professionally to manage the affairs of the Debtor”; (ii) “begun to deal with seriously delinquent obligations to the Internal Revenue Service”; (iii) “reorganized management”; (iv) “implemented accounting controls”; (v) “contacted and dealt with numerous vendors”; and (vi) “taken certain personnel actions.” Id. at 200. The bankruptcy court also emphasized that the debtor’s shareholder was currently in prison, and his wife, though holding his power of attorney, had no broadcasting experience. Id. at 200–01. The bankruptcy court was not persuaded with the suggestion by the debtor that the wife could bring in a consultant to operate the debtor. See id. at 201. Because the debtor’s approach would cause another change in management, the bankruptcy court viewed the debtor’s suggestions as unhelpful and characterized the plan as not a serious alternative to the current receiver. See id.

When Receiverships and Bankruptcies Collide By: Sharon M. Beausoleil-Mayer and Kimberly J. Carter

… courts trying to avoid duplication of efforts have chartered new courses with the receiver becoming the new chapter 11 trustee ...

Once the bankruptcy court decided to excuse the receiver from compliance under section 543, the bankruptcy court pointed out that section 543 does not provide any guidelines as to the status of the excused custodian and his professionals, including compensation. Id. The bankruptcy court remarked that: The Receiver is now the functional equivalent of a trustee, although having not been appointed as such. Once turnover is excused, it defies logic to treat the Debtor as the “debtor-in-possession,” since the receiver is in possession. Another option is to treat the receiver as an examiner with expanded powers and to set out the terms and conditions of those powers under a separate order. The exact status of the receiver, except as already established herein, will be left to another day. Id.

The bankruptcy court ordered the receiver and his professionals to comply with section 327 and Rules 2014 and 2016 in the interim. Id. Though the bankruptcy court excused the receiver from compliance with section 543(a) through (c), the bankruptcy court did not view the receiver’s role as a limited role in the bankruptcy case. In footnote 14,24 the bankruptcy court indicated that it expected to see a motion to appoint a chapter 11 trustee in the bankruptcy case, i.e., changing the receiver’s role from working along side the debtor or subsequent trustee to becoming the chapter 11 trustee in charge of the matter. Id. at 202 & n.14. But see In re Plantation Inn Partners, 142 B.R. 561 (Bankr. S.D. Ga. 1992) (holding that excusing the receiver under section 543 did not mean that the receiver should be vested with all the powers and duties of a debtor-in-possession).25

First Question:

Is The Receiver Required To Turn Over Immediately The Assets Subject To The Receivership Under Section 543? It depends. Section 543 allows maintenance of the status quo on the one hand and immediate turn over of the Receivership Property on the other hand. See 11 U.S.C. § 543 (2008). To clarify the receiver’s position in the bankruptcy case and to avoid the mixed signals between section 543(a) and section 543(b), the receiver might file an emergency motion, requesting that the receiver be excused from compliance from sections 543(a) through (c). Such a motion would prevent the receiver from being the subject of a show cause order brought Bankruptcy Litigation ● Summer 2008

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sua sponte by the court or being subject to a turnover action by the debtor. continued on p. 10 Bankruptcy courts have considered the following factors to determine whether a receiver should be excused under section 543(d)(1): (i) Is there sufficient income to fund a successful reorganization; (ii) Will the debtor use the Receivership Property for the benefit of creditors; (iii) Has there been mismanagement; (iv) Have there been avoidance issues raised with respect to the Receivership Property retained by the receiver; and (v) What is the impact of the automatic stay on the receivership? In some cases, courts trying to avoid duplication of efforts have chartered new courses with the receiver becoming the new chapter 11 trustee— promoting efficiency and economy of administration and (consequently) maintaining cases in bankruptcy court.26 For these hybrid cases, they address the practical needs of a case, but highlight the gaps within the Bankruptcy Code framework. These hybrid cases work if no party-in -interest complains, but it may not be enough justification to maintain the hybrid case.

Practice Pointers:

File an emergency motion under section 543(d), requesting that the court allow the receiver to be excused from compliance with the turnover requirements of section 543(a) through (c).

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Request clarification from the bankruptcy court regarding: (i) standing of the receiver to contest the matters in the bankruptcy court, including right to bring an abstention motion under section 305 and (ii) compensation for the receiver and their professionals.

D. Abstention: Should The Bankruptcy Court Abstain?

Section 305 of the Bankruptcy Code provides that the bankruptcy court may refrain from exercising its jurisdiction over a bankruptcy case if the “interests of creditors and debtor would be better served by such dismissal.”27

1. Standing of the Receiver

Under section 1109(b), the Bankruptcy Code provides that a party-in-interest “may raise and may appear and be heard on any issues in a case under this chapter.” Id. §1109(b). Does this include the receiver? In In re Ofty Corp., 44 B.R. 479 (Bankr. D. Del. 1984), the bankruptcy court was faced with

When Receiverships and Bankruptcies Collide By: Sharon M. Beausoleil-Mayer and Kimberly J. Carter

whether the receiver of Ofty Corporation had standing to file an abstention motion. Ofty Corporation argued that the receiver was not a real party-in-interest, citing to sections 1104, 1109 and 1112(b). Id. at 481. The bankruptcy court disagreed, citing Moore’s Federal Practice that “[a] n entity may be real party in interest and have standing in one respect while he may lack standing for another purpose.” Id. (quoting J. Moore, Moore’s Federal Practice, 17.07, p. 17-65 (2d ed. 1984)). The bankruptcy court then explained that the Ofty Receiver was appointed because the “majority shareholders were found to have exercised bad faith in the management of Ofty Corporation to the detriment of the minority shareholder, Miss Brooke” and “[t]he filing of the petition stayed his ability to carry out his duties as Receiver and puts back in control of Ofty the same individuals who the District Court Judge determined were mismanaging the corporation.” Id. at 481–82.

Once the abstention motion is filed, the bankruptcy court considers both the creditors and the debtor’s interests.

The bankruptcy court concluded that “[w]here the petition has been filed to allegedly end run Judge Penn’s liquidation order, the Receiver has a sufficient interest to qualify him as a real party in interest with standing for purposes of this proceeding.” Id. at 482. Though the bankruptcy court held that the Ofty Receiver was a real party-in-interest, the bankruptcy court also listed a second reason why the Ofty Receiver motion survived—another party-in-interest had joined in the Ofty Receiver’s abstention motion. Id. This joinder had saved the abstention motion because “[j]oinder of a real party in interest has the same effect as if the motion had been made in the name of the real party in interest.” Id. It is unclear from the Ofty court whether the abstention motion would have failed had the true party-in-interest not joined the Ofty Receiver’s abstention motion.

Second Question:

Does The Receiver Have Standing To Contest The Bankruptcy Filing? It depends. Under section 543, the receiver has standing to file a motion to be excused from the turn over requirements. It may depend on applicable law and/or court orders regarding the ability of the receiver to appear as to other matters in the bankruptcy case. The receiver may request that they be allowed to appear and file pleadings on certain matters within a bankruptcy case.

Practice Pointers:

For the receiver, request clarification of the standing position in the motion excusing compliance with section 543. Bankruptcy Litigation ● Summer 2008

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If receiver files an abstention motion under section 305, request that the party who filed the original pleadings for the appointment of the receiver join in the abstention motion or file a similar motion. continued on p. 12 Once the abstention motion is filed, the bankruptcy court considers both the creditors and the debtor’s interests. This is a change from section 543(d), which only focuses on the interests of the creditors and, if solvent, the equity security holders. The Senate Report28 describes the purpose of section 305 as promoting out-of-court workouts, and not allowing a few “recalcitrant creditors” to cause heartburn for the greater good of creditors. S. REP. NO. 95-989, at 35-36 (1978). However, section 305 also has been used to allow a receivership to stay in place as the surviving proceeding versus a bankruptcy case.

2. Factors For Abstention Motion

Bankruptcy courts have focused on the following considerations: efficiency and economy of administration when evaluating the best interests of the creditors and the debtor. See In re R. V. Seating, Inc., 8 B.R. 663, 665 (Bankr. S.D. Fla. 1981) (citing In re Sun World Broadcasters, Inc., 5 B.R. 719 (Bankr. M.D. Fla. 1980)). If a receivership has been in place for a while, i.e., a year, many courts do not see the value in ending a receivership for the sake of allowing a bankruptcy case to proceed forward. The analysis is fact specific. In In re Michael S. Starbuck, Inc., 14 B.R. 134, 135 (Bankr. S.D.N.Y. 1981), involuntary petitions were 12

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filed by Richard Sills, Janet Sills, John Humphry and Elizabeth Humphry against Michael S. Starbuck, Inc. (“MSI”), and Michael S. Starbuck, Inc., and Associates (“MSIA,” collectively the “MSIA Cases”). About a year prior to the involuntary petitions, MSI and MSIA were ordered into receivership pursuant to a complaint filed in the district court for the Southern District of New York by the Securities and Exchange Commission (“SEC”). Steven Glusband (“Starbuck Receiver”) was appointed as receiver by the District Court for both MSI and MSIA. For over one year prior to the involuntary petitions, the Starbuck Receiver had: (i) taken possession of and sold the securities; (ii) used the proceeds to resolve accounting issues; (iii) assisted the state attorney general’s office in investigations; (iv) hired professionals; (v) commenced a lawsuit to recover damages; and (vi) advised the investors of his progress throughout the year. Id. The Starbuck Receiver filed an abstention motion pursuant to section 305 of the Bankruptcy Code.29 See id. The bankruptcy court pointed out that the goal of liquidation under the Bankruptcy Act (“equitable distribution of the insolvent’s assets”) was the same goal of chapter 7 under the Bankruptcy Code. Id. Accordingly, the bankruptcy court concluded that

When Receiverships and Bankruptcies Collide By: Sharon M. Beausoleil-Mayer and Kimberly J. Carter

… where the circumstances indicate that persons have willfully misconducted a corporate enterprise, bankruptcy courts may refuse to permit them to use the bankruptcy system ...

there is no need to invoke the machinery of the bankruptcy process if there is an alternative means of achieving the equitable distribution of assets. The bankruptcy court may abstain if it is in the best interests of the creditors and the debtor that it do so. Id. In the MSIA Cases, the bankruptcy court stated that that primary considerations were efficiency and economy of administration when evaluating the best interests of the creditors and the debtor. See id. Under the circumstances of the MSIA Cases, the bankruptcy court abstained and dismissed the petitions. Id. The bankruptcy court pointed out that: Many services, already rendered in the administration of the receivership

estate, would have to be repeated at additional expense to the estate. No advantage would accrue to the creditors if this matter were to proceed in the bankruptcy court. Rather, their best interests will be served by the continued administration of the equity receivership. Id. In the MSIA Cases, the bankruptcy court focused on efficiency and economy of administration, including avoiding a duplication of efforts. Other bankruptcy courts have declined to exercise jurisdiction when one party has attempted to use the bankruptcy court “to create a more favorable situation.” In the Ofty case, the bankruptcy court pointed out that the Third Circuit Court of Appeals has held that where the circumstances indicate that persons have willfully misconducted a corporate enterprise, bankruptcy courts may refuse to permit them to use the bankruptcy system to create a situation more favorable to their interests than the receivership already established. In re Ofty Corp., 44 B.R. at 482 (quoting In re Distillers Factors Corp., 187 F.2d 685, 689 (3d Cir. 1951) and citing Zeitinger v. Hargadine-McEittrick Dry Goods Co., 244 F. 719 (8th Cir. 1917)). In the Ofty case, the bankruptcy court focused on the following additional factors: (i) the type of bankruptcy case filed—a chapter 11, (ii) the initiative of the bankruptcy proceeding—by the Ofty shareholders, and (iii) the influence of management—the same management that caused the appointment of a receiver in the first place was Bankruptcy Litigation ● Summer 2008

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When Receiverships and Bankruptcies Collide (Continued from p. 13)

posed to take over as the debtor-in-possession. See id. Because the Ofty Corporation’s assets “greatly exceed its liabilities,” the bankruptcy court pointed out that “the sole purpose of the filing was to circumvent the effect of the District Court order entered to resolve years of dispute which the parties could not resolve among themselves.” Id. continued on p. 14 Another reason why a bankruptcy court may decline to exercise jurisdiction may rest on whether one party is attempting to “circumvent the Bankruptcy Code by doing indirectly what cannot be done directly.” In re First Fin. Enter., Inc., 99 B.R. 751, 755 (Bankr. W.D. Tex. 1989). In First Financial, the corporate debtor was a holding company of several multi-tiered subsidiaries. Id. at 752. One of the subsidiaries was in receivership (First Service Life Insurance Company (“FSLIC”)) and another subsidiary was in conservatorship (Knickerbocker Life Insurance Company (“KLIC”)). Id. The corporate debtor proposed that all the creditors of the subsidiaries would be listed as part of the corporate debtor’s bankruptcy estate as

well as all the assets of the subsidiaries to fund a plan of reorganization.30 Id. at 753. The corporate debtor and its shareholder would not contribute property or funds to the proposed plan. Id. The bankruptcy court pointed out that “[i]t would be an understatement to say that the parties were well-acquainted with one another before this Chapter 11 case was filed.” The bankruptcy court summarized the parties’ position. The receiver argued that “the Debtor is attempting to preempt the state insurance regulatory scheme by the filing of this Chapter 11 case of the parent corporation.” The receiver then argued that “FSLIC and KLIC are not eligible to be Chapter 11 debtors, and therefore, the filing of this case is an indirect attempt to place the life insurance companies into a Chapter 11 reorganization case.” Id. In response, the corporate debtor argued that the corporate debtor was eligible to be a debtor under section 109 and: the Bankruptcy Court should take jurisdiction of the assets and liabilities of the FSLIC receivership, the KLIC conservatorship and the other subsidiaries in order to promote judicial and administrative economy, avoid inconsistent results, and conserve resources which would be expended in fighting numerous lengthy and time-consuming battles in various judicial and administrative proceedings. Id. at 754. The court, seeing through to the real purpose of the corporate debtor’s chapter 11 filing—stopping

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When Receiverships and Bankruptcies Collide By: Sharon M. Beausoleil-Mayer and Kimberly J. Carter court in In re Uno Broadcasting denied the abstention motion brought by the receiver and the secured creditor. In re Uno Broadcasting Corp., 167 B.R. at 198. The bankruptcy court based its decision on the following factors: (i) the receivership was initiated by the secured creditor; (ii) the receiver had not proposed a “distribution or priority scheme” for the unsecured creditors or equity security holders; and (iii) the receivership’s purpose was to liquidate the assets of the debtor to pay the judgment obtained by the secured creditor at the expense of the unsecured creditors. Id. at 199.

Third Question:

Is A Bankruptcy Case Or A Receivership More Likely To Be The Surviving Proceeding Under Section 305? the receivership and conservatorship actions and obtaining the assets of these companies—held Abstention is proper . . . where considerations of comity with state and federal administrative proceedings would dictate that the Bankruptcy Court stay its hand in order to prevent undue interference or entanglement with state or federal administrative and regulatory schemes. Abstention would also be proper . . . in a case in which an attempt is made to circumvent the Bankruptcy Code by doing indirectly what cannot be done directly, such as the administration in a Chapter 11 case of an ineligible Chapter 11 entity, or the use of a Chapter 11 case purely as a litigation strategy. Id. (internal citations and footnote omitted). While the courts in First Financial, Ofty, and MSIA declined to exercise jurisdiction, the bankruptcy

It depends on the facts of the bankruptcy case and the receivership. The primary considerations of the bankruptcy court are efficiency and economy of administration. Other factors considered by bankruptcy courts include, but are not limited to: (i) (ii) (iii) (iv) (v) (vi) (vii)

the entity that initiated the receivership; the length of receivership; actions of the debtor and influence of management; creation of a distribution scheme for unsecured creditors; involvement of unsecured creditors in the receivership; type of bankruptcy case filed; existence of avoidance actions; and

Bankruptcy Litigation ● Summer 2008

15

When Receiverships and Bankruptcies Collide (Continued from p. 15) (viii) use of bankruptcy proceeding as a litigation strategy including to obtain a more favorable forum.

Practice Pointers:

File abstention motion early in the bankruptcy case. Request that the party that obtained the receiver’s appointment in state court or federal court join in the receiver’s motion or file a similar motion. continued on p. 16

Conclusion

Two worlds about to collide—each governed by separate laws and orders yet working (usually) towards the same end—bankruptcies and receiverships. A corporate debtor may have the right to file for bankruptcy relief, but the right to maintain a bankruptcy case over a receivership proceeding is not necessarily a clear cut decision. In each case, the bankruptcy court must undertake a fact specific inquiry to determine if it is in the best interests of the creditors and the debtor under section 305 and or in the best interests of the creditors and, if solvent, the equity security holders in a modified abstention analysis under section 543(d). And, in some cases, courts, trying to avoid duplication of efforts, have chartered new courses with the receiver becoming the new chapter 11 trustee—promoting efficiency and economy of administration and (consequently) maintaining cases in bankruptcy court. This article has provided an overview of the issues that face the bankruptcy practitioner today and of the relevant code sections within the Bankruptcy Code’s framework when bankruptcies and receiverships collide. As this article has demonstrated, parties must be proactive in bankruptcy court and understand the interplay of the relevant code sections 16

ABA Section of Litigation

Sharon M. Beausoleil-Mayer is an Issue Editor of Bankruptcy Litigation and a Senior Associate in the Houston, Texas office of Fulbright & Jaworski L.L.P.

Kimberly J. Carter is an Associate in the Houston, Texas office of Fulbright & Jaworski L.L.P.

When Receiverships and Bankruptcies Collide End notes

within the Bankruptcy Code’s framework. As with most bankruptcy matters, the answers are not easy or simple—the considerations involve what is in the best interests of the creditors, and sometimes the debtor. When these two worlds collide, whether from a state court receivership or a federal court receivership, the Bankruptcy Code provides the framework for the bankruptcy court to determine which proceeding survives, even though the surviving proceeding may not be a bankruptcy case at the end of the day.

When Receiverships — End Notes 1

2

This article is a shorter version of the original article presented by Sharon M. Beausoleil-Mayer and coauthored by Sharon M. Beausoleil-Mayer and Kimberly J. Carter at the State Bar of Texas, 26th Annual Advanced Business Bankruptcy Course on May 1, 2008 in Austin, Texas. See generally 28 U.S.C. § 754 (2008) (entitled “Receivers of property in different districts”); see also 28 U.S.C. § 1692 (2008) (entitled “Process and orders affecting property in different districts”); 15 U.S.C. § 687c (2008) (entitled “Injunctions and other orders” under the Small Business Investment Act which provides authority for appointment of a receiver or trustee).

3

See generally TEX. BUS. CORP. ACT ANN. arts. 7.04 to 7.08 (Vernon 2003).

4

“In custodia legis” means “in the custody of the law.” BLACK’S LAW DICTIONARY 768 (6th 1990).

5

6

Though section 105(a) of the United States Bankruptcy Code provides that the bankruptcy court “may issue any order, process or judgment that is necessary or appropriate to carry out the provisions of this title,” 11 U.S.C. § 105 (a) (2008), Congress specifically prohibited bankruptcy courts from appointing receivers in bankruptcy cases, 11 U.S.C. §105(b) (2008). “Custodian” means:

(A) receiver or trustee of any of the property of the debtor, appointed in a case or proceeding not under this title; (B) assignee under a general assignment for the benefit of the debtor's creditors; or (C) trustee, receiver, or agent under applicable law, or under a contract, that is appointed or authorized to take charge of property of the debtor for the purpose of enforcing a lien against such property, or for the purpose of general administration of such property for the benefit of the debtor's creditors. 11 U.S.C. § 101(11) (2008). 7

Under the Bankruptcy Code, a “person” includes an “individual, partnership, and corporation.” 11 U.S.C. §101(41) (2008). Section 109 provides that only a person or a municipality may be a debtor. Section 109 provides (a) Notwithstanding any other provision of this section, only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title.

11 U.S.C. §109(a) (2008). 8

11 U.S.C. §301 (a) A voluntary case under a chapter of this title is commenced by the filing with the bankruptcy court of a petition under such chapter by an entity that may be a debtor under such chapter.

11 U.S.C. § 301 (2008). 9

11 U.S.C. §303 (a) An involuntary case may be commenced only under chapter 7 or 11 of this title, and only against a person, except a farmer, family farmer, or a corporation that is not a moneyed, business, or commercial corporation, that may be a debtor under the chapter under which such case is commenced.

11 U.S.C. § 303 (2008).

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17

When Receiverships and Bankruptcies Collide End notes continued from p. 17

10

A corollary issue is whether a state court may authorize a state court appointed receiver to file a voluntary petition. In In Re Milestone Education Institute, Inc., 167 B.R. 716 (Bankr. D. Mass. 1994), the bankruptcy court faced a case of first impression regarding whether a state court appointed receiver had the authority to file a bankruptcy petition on behalf of the corporate debtor. The only authority that the court could find that granted the receiver the power to file for bankruptcy was the power granted to the Receiver by the state court. See id. at 723. “Federal preemption compels the conclusion that the receivership must yield in all aspects” so that the debtor’s assets could be administered in accordance with the Bankruptcy Code. Id. at 723.

custodian, except such action as is necessary to preserve such property. 11 U.S.C. § 543(a) (2008). 16

See United Savings Ass’n v. Timbers of Inwood Forest, 484 U.S. 365, 371, 108 S.Ct. 626, 630 (1988).

17

Section 543(b) provides: (b) A custodian shall— (1) deliver to the trustee any property of the debtor held by or transferred to such custodian, or proceeds, product, offspring, rents, or profits of such property, that is in such custodian's possession, custody, or control on the date that such custodian acquires knowledge of the commencement of the case; and

End notes continued on p. 18 11

See also United States v. Vulpis, 961 F.2d 368 (2d 1992).

12

In support of its ruling, the Second Circuit relied on two cases from the Eighth and Ninth Circuits decided in the 1970s. See Sec. & Exch. Comm’n v. Bartlett, 422 F.2d 475, 479 (8th Cir. 1970) (deciding the case by “determin[ing] that the interests of the creditors and others are best served by the receiver liquidating the defendant corporations”); Sec. & Exch. Comm’n v. Lincoln Thrift Ass’n, 577 F.2d 600, 604 (9th Cir. 1978) (holding that its “decision [wa]s to a large extent controlled” by the fact that the receivership proceedings “were in an advanced stage”).

13

14

15

There may be a standing issue with regards to the abstention motion. See Abstention discussion in Section D of this article. See generally 11 U.S.C. § 543 (2008) (entitled “Turnover of property by a custodian”). Section 543(a) provides that: (a) A custodian with knowledge of the commencement of a case under this title concerning the debtor may not make any disbursement from, or take any action in the administration of, property of the debtor, proceeds, product, offspring, rents, or profits of such property, or property of the estate, in the possession, custody, or control of such

(2) file an accounting of any property of the debtor, or proceeds, product, offspring, rents, or profits of such property, that, at any time, came into the possession, custody, or control of such custodian. 11 U.S.C. § 543(b) (2008). 18

Rule 6002 provides that : (a) Accounting Required Any custodian required by the Code to deliver property in the custodian’s possession or control to the trustee shall promptly file and transmit to the United States trustee a report and account with respect to the property of the estate and the administration thereof. (b) Examination of Administration On the filing and transmittal of the report and account required by subdivision (a) of this rule and after an examination has been made into the superseded administration, after notice and a hearing, the court shall determine the propriety of the administration, including the reasonableness of all disbursements.

FED. R. BANKR. P. 6002. 18

ABA Section of Litigation

When Receiverships and Bankruptcies Collide End notes 19

experience in that area. In re Sevitski, 161 B.R. 847, 849 (Bankr. N.D. Okla. 1993) Also, after one year in the receivership, the receiverships “remained in a chaotic state.” Id. at 852 (internal quotation omitted).

Section 543(c)provides that: (c) The court, after notice and a hearing, shall — (1) protect all entities to which a custodian has become obligated with respect to such property or proceeds, product, offspring, rents, or profits of such property;

22

See also 11 U.S.C. § 726 (2008).

23

Section 543(d) provides that:

(2) provide for the payment of reasonable compensation for services rendered and costs and expenses incurred by such custodian; and

(d) After notice bankruptcy court —

(b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including —

11 U.S.C. § 543(d) (2008). 24

....

....

11 U.S.C. § 503(b) (2008). 21

Though most of the property involved oil and gas wells located in Oklahoma, the receiver had no

In footnote 14, the bankruptcy court indicated to the parties the types of motions that could be filed in the bankruptcy case after the bankruptcy court excused the receiver from compliance under section 543: Such motions could include a motion to appoint the Receiver as Trustee, to appoint the Receiver as examiner with expanded powers, a motion to leave the Receiver in place pursuant to the existing District Court Order, or any similar motions.

3) the actual, necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this subsection, incurred by — E) a custodian superseded under section 543 of this title, and compensation for the services of such custodian.

the

(2) shall excuse compliance with subsections (a) and (b)(1) of this section if the custodian is an assignee for the benefit of the debtor's creditors that was appointed or took possession more than 120 days before the date of the filing of the petition, unless compliance with such subsections is necessary to prevent fraud or injustice.

11 U.S.C. § 543(c) (2008). Section 503(b) provides that:

hearing,

(1) may excuse compliance with subsection (a), (b), or (c) of this section if the interests of creditors and, if the debtor is not insolvent, of equity security holders would be better served by permitting a custodian to continue in possession, custody, or control of such property, and

(3) surcharge such custodian, other than an assignee for the benefit of the debtor’s creditors that was appointed or took possession more than 120 days before the date of the filing of the petition, for any improper or excessive disbursement, other than a disbursement that has been made in accordance with applicable law or that has been approved, after notice and a hearing, by a court of competent jurisdiction before the commencement of the case under this title.

20

and

In re Uno Broadcasting Corp., 167 B.R. 189, 202 n.14 (Bankr. D. Ariz. 1994). 25

The bankruptcy court explained that the there was mismanagement at the corporate debtor and the creditors had asked for this type of relief.

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19

When Receiverships and Bankruptcies Collide End notes concluded

In re Plantation Inn Partners, 142 B.R. 561, 564 (Bankr. S.D. Ga. 1992). However, the court explained that it would not grant the receiver this type of power because to permit the Receiver to indefinitely remain in possession and to vest him permanently with all the duties and powers of a debtor-in-possession goes far beyond the limited relief envisioned by Section 543. To do so would circumvent the prohibition of Section 105(b) against the appointment of receivers in lieu of a debtor-inpossession or trustee. Clearly the Code contemplates that the long-term administration of a Chapter 11 case will be managed by a trustee or debtor-in-possession, not a hybrid created by judicial fiat. Id at 564. End notes continued on p. 20 26

See generally In re Uno Broadcasting Corp., 167 B.R. 189 (Bankr. D. Ariz. 1994).

27

11 U.S.C. § 305(a) (2008). Section 305 provides: (a) The court, after notice and a hearing, may dismiss a case under this title, or may suspend all proceedings in a case under this title, at any time if — (1) the interests of creditors and the debtor would be better served by such dismissal or suspension.

O8

ABA ANNUAL MEETING August 7—10, 2008 The Jumeirah Essex House New York, NY

The ABA Section of Litigation invites you to explore the professional learning and networking opportunities at the 2008 ABA Annual Meeting in New York City. Experience top caliber CLE programming presented by the ABA Section of Litigation on a diverse selection of subjects. For young lawyers and experienced litigators alike, this is the CLE event to attend this summer. We look forward to seeing you at the 2008 ABA Annual Meeting.*

The bankruptcy court’s order is not reviewable by appeal. 11 U.S.C. § 305(c) (2008). 28

From Senate Report No. 95-989 regarding section 305: This section recognizes that there are cases in which it would be appropriate for the court to decline jurisdiction. . . . The court may dismiss or suspend under the first paragraph, for example, if an arrangement is being worked out by creditors and the debtor out of court, there is no prejudice to the results of creditors in that arrangement, and an involuntary case has been commenced by a few recalcitrant creditors to provide a basis for future threats

20

ABA Section of Litigation

* Excerpts from Welcome Letter by Judith A. Miller, Chair, ABA Section of Litigation.

For more information, please visit: http://www.abanet.org/annual/2008/home.html

Judge’s Column

BASIC LITIGATION POINTERS

By: Douglas O. Tice, Jr., U.S. Bankruptcy Judge for the Eastern District of Virginia

ankruptcy litigation do’s and don’ts is a frequent topic of law journal articles, CLE seminars, and bar meetings. Although the subject can be overdone, I have always found such presentations worthwhile and usually entertaining. Typically, it is the attorneys who need to hear these programs who are not present. Likewise, these same attorneys probably will not be reading the present article. So, I may be preaching to the choir here with this summary compendium of litigation tips collected during my twenty years on the bench. I do not claim originality, and readers who have an interest in the subject will probably have previously seen most of my examples. Some of them may seem ridiculously simplistic. Yet, I have seen lawyers stumble over nearly all of them and not just lawyers new to the bar. Probably in most bankruptcy courts, as in the courts of the Eastern and Western Districts of Virginia, the number of lawyers appearing regularly at court hearings is relatively limited. A Richmond newspaper reporter once referred to this situation as the “clubby atmosphere” of our

AND COURTROOM ETIQUETTE FOR BANKRUPTCY LAWYERS

bankruptcy bar. As a result of this closeness, the presiding judges quickly become acquainted with bankruptcy lawyers and learn which ones do dependable work. An attorney’s demeanor and performance before the court establishes his or her credibility (or lack thereof) and may have a substantial impact on a client’s case. At a minimum, an attorney must develop and display a desire to be an effective advocate. It is urgent from the first appearance before a judge that an attorney demonstrate his or her knowledge of the law and other elements of professional competence. This may be done in a number of ways, some of which are mere common sense. There is a common saying that trial work is preparation, preparation, preparation. Preparation may be divided into several areas of courtroom practice, and each area provides lawyers differing opportunities to demonstrate their essential characteristics and ultimate worth as practitioners.

Bankruptcy Litigation ● Summer 2008

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Basic Litigation Pointers and Courtroom Etiquette Continued from p. 21

continued on p. 22

BASIC ATTITUDE Under the category of attitude, I consider the most fundamental rules of demeanor for lawyers appearing in any court. For an obvious example, arrive in court (i.e., in the courtroom) on time. If you are unavoidably delayed, telephone the judge’s chambers or other court staff and leave word of your anticipated arrival. Once there, do not leave the courtroom when your case is likely to be called. In my court, the latter happens almost on a regular basis. Bring your current calendar information to court so that you may schedule future hearings without fear of a conflict in dates. Dress appropriately and advise your clients and witnesses to do the same. It was a painful experience both for me and the attorney that I once admonished for appearing in court wearing an out-of-place neck tie. (The story later came back to me, apocryphally, that I had scolded him for wearing a “SpongeBob SquarePants” necktie.) In another case, an attorney attempted to disguise the absence of a tie with a crew neck sweater. Be courteous not only to the judge but to opposing counsel, parties, and witnesses. Be particularly courteous to court personnel, who can be of great assistance to your bankruptcy practice. The judge usually learns which attorneys are discourteous, and it does not enhance their stature. Also, be careful what you say after the court has left the bench. Not only may the court reporter and court staff remain in court but the microphone

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transmitting to chambers remains on. A true story: A few years ago, following the conclusion of a relief from stay hearing, I was inclined to deny the motion but decided to give creditor’s counsel an opportunity to persuade me otherwise by submitting a sketch order granting relief. After adjournment, that counsel made a comment in the courtroom to the effect that the judge expected him to do the judge’s work. When I was told of this, I immediately reviewed my notes and the pleadings and prepared an order denying the motion. Be aware you are in a court of record. It is important to avoid unnecessary talking (or mumbling) on the record. If you do not know the answer to a question by the judge and need to speak to your client or associate, ask the judge’s permission. Put another way, while standing at

Judge’s Column By: Douglas O. Tice, Jr., U.S. Bankruptcy Judge for the Eastern District of Virginia

Learn to listen ... Pay attention to opposing counsel and to witnesses. Pay particular attention to the judge’s comments or questions as they may alert you to how you are doing and suggest other directions. They may also suggest it is time to sit down.

the lectern do not turn away from the judge and talk to someone else without permission. Make your presentations with confidence. If you do, the judge may have confidence in you. On a motions docket, when your case is called, address the court and present your motion. If your court requires use of a lectern, go directly to the lectern. Do not wait for the judge to ask why you are there. Always distinctly state your name (a common failing) and the name of your client for the record. If you are new to the court and have an unusual surname, it will be helpful to spell your name for

the court reporter. And, to take a page from my father’s book, stand up straight, and take your hands out of your pockets.

PREPARATION: BEFORE GOING TO COURT It is essential that lawyers prepare themselves for trial work just as they must learn the law. Preparation for court appearances starts at least as early as law school and requires an appreciation for the nature of trial work, including proper demeanor. Also, because courtroom practice involves appearing in public, attorneys must train themselves in the rudiments of public speaking. Some come by this naturally; others have to work at it. When you begin practice, seek out the best trial lawyers and observe their work in court. Consult learned books and articles on trying cases. Many of these are available, including an inexpensive new bankruptcy litigation manual recently issued by the American Bankruptcy Institute. Learn to listen. Pay attention to opposing counsel and to witnesses. Pay particular attention to the judge’s comments or questions as they may alert you to how you are doing and suggest other directions. They may also suggest it is time to sit down. Bankruptcy practice includes all forms of appearances before the bankruptcy court. It requires extensive knowledge of the Bankruptcy Code and Federal Rules of Bankruptcy Procedure.

Bankruptcy Litigation ● Summer 2008

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Basic Litigation Pointers and Courtroom Etiquette Continued from p. 23

Also, you must know the local rules of practice in your court. Many consumer bankruptcy lawyers who practice before me never litigate substantial matters. If you continued on p. 24 are not comfortable with this part of the practice, be sure and seek assistance when a creditor brings a dischargeability proceeding or similar serious matter against your client. Know the local practice customs and any quirks or peculiarities of the judge. If you are appearing in a court for the first time, ask other attorneys about the judge’s preferences and procedures. Prior to any trial or evidentiary hearing consult opposing counsel and attempt to stipulate facts that are not in dispute. It goes without saying that you should attempt to resolve disputes by agreement and avoid the necessity of a hearing or trial. Promptly advise the court when a settlement has been reached. Do not file motions for expedited hearings unless absolutely necessary. Advise court staff of the motion so that the judge may promptly rule and, when appropriate, schedule a hearing. Familiarize yourself with and comply with the court’s pretrial order, particularly as to filing deadlines for witness and exhibit lists and pre-trial motions. File proper number of copies of pre-marked exhibits. Promptly review opposing counsel’s list of exhibits and timely file any objections; failure to object will constitute a waiver of objections to exhibits. If you cannot

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fully comply with the pretrial order deadlines, file a motion to amend well before trial. Know the law that governs your case and have a written game plan that lays out in detail the evidence required to prove the case. Plan your exhibits and witness examination accordingly. In any substantial trial, consider preparing a trial notebook containing pleadings, exhibits, witness examinations, etc. In my court, we expect attorneys to provide at least three copies of each exhibit to the court. If there are more than a few exhibits, tab and place them in a binder. In appropriate cases submit a brief or trial memorandum prior to trial. Prepare your witnesses for trials or depositions so that they know the questions you will ask. Coach them on how to answer questions truthfully, with short and simple answers; tell them to speak up so they can be heard by the court and reporter. Warn witnesses about objections. Caution them not to become advocates on the stand as it can reduce their credibility. Know the Federal Rules of Evidence, particularly those that may be implicated in your matter. Know which questions are proper. The hearsay rule and its many exceptions are particularly important. If there are serious evidentiary issues that may be raised with respect to evidence important to your case (or if you are aware that opposing counsel

Judge’s Column By: Douglas O. Tice, Jr., U.S. Bankruptcy Judge for the Eastern District of Virginia

intends to use such evidence important to the opponent’s case), consider filing a motion in limine in advance of trial so that the court may rule on admissibility prior to trial. In preparing for trial, assume that opposing counsel may be smarter and working harder than you. Prepare your case accordingly.

LITIGATION - TRYING A CASE For opening statements at trial, I prefer for attorneys to give a simple summary of their case and the result they seek. The opening should not be a recital of the evidence. However, some judges may prefer more extensive and substantive openings. Here is where the attorney must learn the judge’s preferences. Follow correct procedure to introduce exhibits that are not marked beforehand. (a. mark for identification; b. hand copy to opposing counsel; c. show to witness; d. ask witness to identify; e. offer in evidence.) Have a list of all your exhibits. If they have not been admitted at the beginning of the trial, don’t forget to offer them in evidence at the appropriate time, and be certain that the court makes a ruling on their admissibility. Do not lead your witnesses on direct examination. Even if the other party fails to object, continually leading may unfavorably impress the judge. In an ABI panel presentation several years ago, one of the judge panelists said she was less inclined to allow

leading questions by lawyers who were not well prepared. She stated also that leading questions tend to reduce the credibility of the witness. On cross examination treat adverse witnesses respectfully, and always ask leading questions. It has often been said that a lawyer should never ask a question to which he or she does not know the answer. This is generally a good rule to follow although it must be considered in the context of your case. Also, carefully consider whether to cross examine at all. It is certainly not required and should usually be avoided unless you have something to gain. I have seen cross examination so poorly done that I found it necessary to caution the lawyer that the questions were reinforcing the position of the other party. In making objections to opposing counsel’s examination of witnesses or introduction of exhibits, you must stand and state the evidentiary basis for an objection with “reasonable specificity.” If you fail to state a reasonable basis, you may not be able to raise the judge’s overruling your objection as error on appeal. Promptly object to the other side’s questions; an objection does little good if the witness has already answered. Prior to trial, instruct your witnesses not to answer so quickly on cross examination that you do not have an opportunity to object. In general, object to admission of exhibits only where exclusion is of some Bankruptcy Litigation ● Summer 2008

25

Basic Litigation Pointers and Courtroom Etiquette Continued from p. 25

importance. Frequent and inconsequential objections can be a distraction to the court and do not help your case. During examination, if you wish to refer a witness to a particular place in an exhibit or elsewhere in the record, know exactly where it is located. If you need to approach a witness, request the court’s permission. continued on p. 26 Do not spend too much time attempting to prove something through a witness when the evidence you want is included in an admitted exhibit. You can argue your case from the exhibit. I have an aversion to listening to witnesses read from documents in evidence unless there is an important reason to do so. Maintain a poker face during trial and argument. Do not overreact, make faces, or shake your head at answers of witnesses, argument of opposing counsel, or, particularly, the rulings of the court. Instruct your client and witnesses to do the same. Rolling eyes, shaking or nodding heads do not help - they annoy the judge. To be more emphatic, as I once read in a top-ten list of litigation do’s and don’ts, “no audible moaning if the judge rules against you.”

POST-TRIAL PRACTICE Be prepared to make oral closing argument. Here is where your trial game plan comes in handy. Summarize for the court the specific facts (and evidence) that support your position in the case. Argue the relevant law so as to show why the court should rule in your client’s favor. Hand up to the

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ABA Section of Litigation

judge copies of pertinent case decisions or applicable state statutes. After lengthy trials or hearings, consider requesting the court’s permission to submit a written brief or proposed findings of facts and conclusions of law. Promptly file post-trial briefs or other papers requested by the court. If you cannot meet the court’s deadline, file a motion for extension. Timely file notices of appeal. Consider the necessity for requesting stay pending appeal.

Hon. Douglas Tice has been Chief Judge of the Eastern District of Virginia since 1999. He was appointed to the bankruptcy bench for the Richmond Division in September 1987 and reappointed in 2001.

Bankruptcy Litigation . . .

Message From the Chairs

By: Kathleen B. Burke and John R. Burns, III

A

s we look forward to the ABA Annual Meeting in New York in August, our Committee has much to be proud of and much to look forward to. Our membership has grown substantially this year and our newsletter and website have been updated and improved. We want to invite you to join us in New York for three exciting Committee events. On Thursday, August 7, we will have a Committee dinner at 7:30 p.m. at Fiorini. The price per person is $75 (not including cocktails, beverages, wines, tax, and gratuity). We thank Camisha Simmons of Weil, Gotshal in New York for planning this event. Please let Camisha know if you'd like to attend at [email protected]. On Friday, August 8, at 7:30 a.m., we will have a Committee breakfast meeting at The Essex House, the Litigation Section's headquarters hotel. On Saturday, August 9, at 3:45 p.m. we will be presenting a CLE program at The Hilton, the main ABA meeting site. The title of the program is "The Restructuring of America." It will feature leading legal, financial and labor experts who will discuss the issues involved in the restructuring of pension and healthcare plans, including in chapter 11. Andy Kramer of Jones Day, dubbed the "King of VEBAs" by The American Lawyer, will moderate the program. Jones Day and Baker & Daniels will co-sponsor a reception following the program. Following the ABA Annual Meeting, our Committee will have a new co-chair. David R. Weinstein of Weinstein, Weiss & Ordubegian LLP in Los Angeles will join John Burns as Committee Co-Chair as Kathy Burke finishes her term and moves on to the Federal Practice Task Force. John and David will immediately begin planning our 2008-2009 activities. This is your Committee and we need your participation and suggestions. If you would like to assist with any of the subcommittees, the newsletter, webpage, or programs, please let us know.

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