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S. Todd Brown Archives

A Lot Happens in 15 Years

Take the case of former prosecutor and judge Bobby DeLaughter. Fifteen years ago, he successfully prosecuted Byron de la Beckwith in what is arguably one of the most important criminal cases in Mississippi history. Today, he was sentenced to 18 months for lying to the FBI in one the seemingly endless corruption investigations involving Dickie Scruggs. (see prior coverage here and here).

Schwab v. Reilly Overview

I have thrown together a few thoughts about the Schwab v. Reilly case, which will be argued before the Supreme Court tomorrow, over at PrawfsBlawg. This case could have significant ramifications for how consumer debtors claim exemptions in bankruptcy and how courts protect creditor interests in consumer bankruptcy cases in the future.

Will Number 25 Be The Charm?

As reported at law.com, the long-running Congoleum "pre-pack" asbestos bankruptcy has been given new life by U.S. District Court Judge Joel Pisano. To date, this opinion has received little attention in the media, but it is a fairly significant development in a case that has involved the removal of the debtor's pre-petition counsel who orchestrated the bankruptcy due to conflicts of interest, two dozen plan formulations, alleged "payoffs" to the lead plaintiffs' counsel, a scathing state court opinion that concluded the bankruptcy was arranged in bad faith, and numerous other examples of the potential for misconduct and abusive practices in asbestos bankruptcies. For more background, please see my recent article concerning asbestos bankruptcies, which has an extensive discussion of the history of the case.

Back in February, Bankruptcy Judge Ferguson made good on her promise to either dismiss or convert this Chapter 11 case if the current version of the plan still failed to address all of the concerns she has expressed for the last few YEARS about the structure and inequities of the plan. This was no hasty decision, and all of the parties in interest were on notice of her intentions for months before her decision. Still, Judge Ferguson made it clear that her decision to dismiss the case was more to force the parties to address these issues in the higher courts than anything else.

In an opinion issued Monday, Judge Pisano affirmed Judge Ferguson's order with respect to (a) recognizing the right of insurers to object to confirmation (noting that this was the 8th time that the plan proponents raised this issue and agreeing with the seven previous decisions that insurers have standing) and (b) denying plan confirmation. Neither of these points is terribly clear in the law.com summary, but they are extremely significant. Of course, the fact that the plan in its current form is unconfirmable requires the plan proponents to go back and make some adjustments. More importantly, by once again acknowledging insurer standing and the independent obligation of the court to ensure that the plan complies with bankruptcy law in a fairly strong fashion, Judge Pisano appears to be nudging the parties to stop hanging their hopes on litigation tactics and instead address the substantive concerns raised by the court. Moreover, the court expressly directed briefing on the issues that doomed the latest plan in advance of the confirmation hearing on the next version of the plan.

The emphasis of the law.com article is clearly on Judge Pisano's decision to reverse the bankruptcy court's order to dismiss the case and withdraw the reference from the bankruptcy court. As noted previously, the former is not much of a surprise. With respect to the latter, although not a terribly common procedural move, the district court's decision to withdraw the reference from the bankruptcy court and assume authority over the remaining proceedings is sensible. Judge Ferguson has done an admirable job of overseeing the case for roughly five years now, but her repeated admonitions to the plan proponents have been consistently met with, at best, superficial modifications to the plan, even as administrative expenses in the case hover around the $100 million mark. Due to the design of Section 524(g) and constitutional concerns, the bankruptcy court can only make recommendations concerning some key elements of the plan anyway. And by deciding the issues that have consistently doomed Congoleum's reorganization plans on its own, the district court may be in a better position to press the parties to make meaningful steps toward proposing a confirmable plan.

Systemic Indifference

At the Huffington Post, Karen Weise has collected a series of criticisms of mortgage company collection practices. The concern is a legitimate one for bankruptcy purists: whether by design or "systemic indifference", the methods used by some mortgage companies and servicers to track and calculate the debts they are owed often lead to the filing of unwarranted or inflated claims. In one case, for example, bankruptcy Judge Marilyn Shea-Stonum blasted the mortgage company's "reckless" system that appeared to be "designed to allow each actor in the process to act with indifference to the truth, and to rely solely on the limited information made available at each step. ... [The errors in this case] evidence Countrywide's disregard for diligence and accuracy."

This problem, however, is not limited to mortgage companies and service providers. In my former life as a corporate debtor attorney, I was frequently stunned by the cavalier attitudes that some organizations appear to have with respect to maintaining accurate debt collection records. They would usually take whatever figure their records spit out and file a claim; the debtors would go to their own records and often come back with very different numbers. True, we usually managed to reconstruct everything to reach numbers we were all comfortable with, but at a fairly high cost. If time and money are not huge obstacles, the bankruptcy process allows the adversarial truth-seeking process to run its course. In many bankruptcies, however, time and money are not in sufficient supply to make this possible. Thus, it should come as no surprise that some creditors may be willing to roll the dice by filing unwarranted or inflated claims. The transparency of the bankruptcy process, together with properly functioning judicial and trustee oversight, allow us to identify patterns such as these and take corrective action.

Of all of the horrific claiming practices that I saw in private practice, none were more pervasive and egregious than in asbestos personal injury claim filing. Some issues - filing new claims years or even decades after the statute of limitations had run, alleging wholly inconsistent work histories from one case to the next, etc. - may be just poor record keeping or a "reckless" system intended to provide those involved with deniability. Unlike other claims, however, asbestos claims are typically allowed without the filing of a proof of claim or other documentation that will open them to system-wide review. After a bankruptcy trust is established by a confirmed plan, access to claims filed is even less likely due to confidentiality restrictions. The net result - it is virtually impossible to conduct an extensive review of trust claiming and administration practices.

Courts and officials are right to criticize "systemic indifference" that leads to abusive filing practices. At the same time, however, some judges and trustees offices are at least as guilty of "systemic indifference" to the signs of fraud and abuse in asbestos bankruptcies; placing far too much emphasis on the false efficiencies of looking the other way and obstructing efforts to evaluate system-wide recklessness. And until these processes become at least as transparent as other claim processes in bankruptcy, we can hardly expect advocates to become more vigilant in their claim filings.

Chrysler and Sales Free and Clear

As readers may recall, the Second Circuit affirmed the sale of Chrysler's assets to Fiat last month "for the reasons stated in the opinions of Bankruptcy Judge Gonzalez," and promised that a detailed opinion would follow. That opinion is available here.

For the sake of brevity, I will focus today on two of the issues addressed by the panel. First, the panel concluded that the sale was not a "sub rosa plan" but a legitimate use of Section 363 of the Bankruptcy Code to sell assets promptly (so as to maximize their realized value):

With its revenues sinking, its factories dark, and its massive debts growing, Chrysler fit the paradigm of the melting ice cube. Going concern value was being reduced each passing day that it produced no cars, yet was obliged to pay rents, overhead, and salaries. Consistent with an underlying purpose of the Bankruptcy Code--maximizing the value of the bankrupt estate--it was no abuse of discretion to determine that the Sale prevented further, unnecessary losses.

With respect to the complaint that the structure of the deal effectively elevated unsecured creditors (particularly the union) above secured creditors, the panel relied on Judge Gonzalez's conclusion that "all the equity stakes in New Chrysler were entirely attributable to new value--including governmental loans, new technology, and new management--which were not assets of the debtor's estate." Put another way, all of the bankruptcy estate's interest in the assets sold are reflected in the price received for those assets, and all of that money is going to secured creditors. It could be argued that the sale price received is lower than it would have been but for the benefits to accrue to the union under the deal (i.e., if the new company was not saddled with those obligations, would the estate have been able to get more cash from the purchaser?), but that is a very difficult path to carve out effectively given the going-forward benefits from the deal (for example, the reworked union agreement with the no strike clause).

Second, the panel addressed the various arguments that the Chrysler assets could not be sold free and clear of successor liability for various personal injury type claims. Here, the panel adopted a fairly broad reading of the "interests" that can be cleansed in a Section 363 sale, reasoning that this interpretation is more consistent with the purpose of this section and the priority scheme of the Bankruptcy Code.

The panel refused to weigh in on the question of whether a Section 363 sale can cleanse future claims (such as those that might arise from asbestos exposure). This not only makes sense in the abstract; it is the right approach for future claimants. As we have seen in the 524(g) context (which requires setting aside funds to pay current and future asbestos claims, among other things), future claimants' interests are often sacrificed by those currently asserting asbestos claims against bankruptcy estates. Now that courts have started taking a harder line against these schemes, it is easy to see how the 363 sale approach might be viewed as a possible end-run around 524(g)'s limitations on front-loading recoveries. Until the "free and clear" sale's applicability to future claimants is clarified, however, such an end-run remains, at best, extremely risky for most asbestos defendants.

That tactic? Actually requiring each claimant to assert a specific claim against each named defendant. The result? More than half a million claims have been resolved in just four months.

W.R. Grace Chapter 11

At one point, the Grace chapter 11 appeared to be more of a trial of the asbestos litigation industry than a bankruptcy case. Halfway through the hearing on these issues, however, the asbestos committee (whose previous estimates of long-term trust liability reached as high as the $7 billion range), agreed to a deal providing only $3 billion of funding. Grace has received praise for the settlement and for the hard-line approach that led to it. Still, as Kirk Hartley notes, significant objections to the reorganization plan built around the settlement remain.

One of the most frustrating things about studying the intersection of bankruptcy and asbestos personal injury is the lack of transparency concerning the asbestos claims filed against the debtor and, ultimately, the asbestos trusts established by asbestos bankruptcy plans.

This is particularly troubling in recent years because lawyers and firms that submit claims to the trusts have increasingly argued that the trust distribution procedures, whose terms are generally left to the discretion of leading plaintiffs' tort lawyers, are nonetheless excluding valid claims and/or requiring more information that the tort system. In other words, these highly-sophisticated players in the tort bar could not maximize payouts and minimize time to payment when left almost entirely to their own devices.

As ridiculous as this may sound on its face, the representations may "ring true" when framed in the proper venue or manner - plaintiffs' bar presentations about "pitfalls" to avoid, selective representation of facts about claims that were denied, etc. - but that does not make them so. Adverse parties that obtain access to this information are bound by strict confidentiality orders concerning the information they may disclose, so they may not be able to fight this particular P.R. battle even when they know the facts are being misrepresented. And the information available publicly is, at best, sparse. In short, the evidence framing these debates is mostly anecdotal and inevitably far from complete - self-serving representations about the "true" state of affairs, largely unhelpful macro disclosures concerning operations, and "common sense" assessments of how trust distribution procedures seem to work.

If we are going to continue to rely upon privately-designed and administered trusts to address the asbestos injury and litigation crises, we need sufficient information made available for PUBLIC discussion. The parties that design these trust procedures again and again are in the best position to ensure that this happens. It's one thing to be forced to rely on anecdotal evidence because that's all that is available; it's another when that's all you choose to make available. Indeed, as we saw in the asbestos injury conspiracy, it speaks volumes about the reliability of the "evidence" deemed suitable for public consumption.

As a former Mississippian with several friends and relatives still residing in the state, I have taken a tremendous interest in the scandals that have brought down Dickie Scruggs, Paul Minor, Ed Peters, and several other big names in Mississippi legal circles in recent years. So forgive me if I revisit my earlier post about Judge Bobby DeLaughter's guilty plea with a nod to today's follow-up at Y'all Politics concerning the plea agreement and factual basis in that case.

Under the plea agreement, DeLaughter agreed to plead guilty to "obstructing, influencing and impeding a federal corruption investigation and grand jury proceeding[.]" The United States agreed to dismiss the remaining charges following sentencing, and the parties agreed that DeLaughter's sentence should be 18 months imprisonment.

The Factual Basis is an interesting read. In addition to a clear statement of the facts in support of the obstruction charge, the summary of the testimony to come from Ed Peters (who was paid $1 million by Scruggs to influence DeLaughter) and Timothy Balducci (the go-between in the bribery scandal that brought down Scruggs) suggests DeLaughter had good reason to lie to the FBI about the secret communications flowing back and forth between DeLaughter and Scruggs. According to the government, these communications gave the Scruggs team the opportunity to address DeLaughter's reservations about some issues and, in at least one case, to avoid a critical misstep once they learned that DeLaughter was going to rule in their favor.

Although Scruggs and some Scruggs apologists have, at times, attempted to downplay the various scandals as "mere" Mississippi-style "earwigging" - basically, having someone with influence with a presiding judge use that influence to lobby the judge to rule in your favor - the bribery case that ended Scruggs' career and the DeLaughter case demonstrate that earwigging can be an ethical slippery slope. In the first, Judge Lackey properly understood the wink-and-a-nod attempt to obtain financial influence over him for what it was - a bribe - and quickly led to the downfall of Scruggs and several others. In the latter, the improper contacts were apparently so extreme and prejudicial that DeLaughter would go to great lengths to avoid their disclosure, even committing a federal crime in the process. Even if DeLaughter had reasonable, legal explanations for his actions in the case, the old adage "it's not the crime but the coverup" still seems applicable.

Not So Fast, Mrs. Madoff

As reported by Ashby Jones at the WSJ Law Blog, the trustee for the consolidated cases of Bernie Madoff and his investment firm commenced an adversary seeking more than $44 million from Ruth Madoff earlier today. This action does not surprise me as much as it seems to surprise Mr. Jones; to the contrary, it makes a lot of sense.

First, regardless of whatever deal Ruth Madoff has with prosecutors, this action is being brought under entirely different authority (primarily, federal bankruptcy and state fraudulent transfer laws). Her deal with prosecutors recognizes this much and does not purport to interfere with this sort of suit by the trustee.

Second, this is an important aspect of the trustee's duties to the creditors of Mr. Madoff and his firm. By this suit, the trustee should be able to (a) get whatever assets Mrs. Madoff may have at her disposal that should be turned over to the estates and (b) prevent Mrs. Madoff from obtaining any recovery on her proof of claims in those cases unless she turns over the full amount she may owe the bankruptcy estates. This is not only an important technical function of bankruptcy law (marshaling assets for distribution to creditors); in such a high profile case, it serves an equally important role in maintaining public confidence in the bankruptcy system. Indeed, Bernie Madoff's victims and many in the general public are angry enough that she gets to keep $2.5 million; imagine the furor if she could also dilute the victims' recovery as a creditor without being forced to pay back anything she owes the estates first.



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.