A Question of Time, Specifically, Time to File Notice of an Appeal

Deadlines are critical. And when it comes to appellate-filing deadlines, the Supreme Court recently clarified they come in two flavors.

  • Rigid statutory deadlines are “jurisdictional” and cannot be forfeited or waived.
  • Their more flexible cousins, deadlines set by court rules, are mere “claim-processing rules” that can be forfeit or waived.

Hamer v. Neighborhood Housing

Specifically, Rule 4 of the Federal Rules of Appellate Procedure requires that a notice of appeal be filed within 30 days. In Hamer v. Neighborhood Housing, counsel obtained a two month extension from the district court. But when the plaintiff filed its notice of appeal, the Seventh Circuit questioned its timeliness.

The appellees seized on the opportunity, now arguing that the appeal was late. Relying on Bowles v. Russell, 551 U.S. 205 (2007), the Seventh Circuit agreed. It concluded that, although the appellant had relied on the extension order, the deadline under Rule 4 was “mandatory.” Thus, the extension impermissibly deprived the Court of Appeals of jurisdiction.

But the Supreme Court disagreed, stating that:

If a time prescription governing the transfer of adjudicatory authority from one Article III court to another appears in a statute, the limitation is jurisdictional . . . otherwise, the time specification fits within the claim-processing category [and is subject to forfeiture or waiver].

The statute corresponding to Rule 4, 28 U.S.C. § 2107, does not limit the length of an extension. The Supreme Court therefore concluded that the district court could extend the filing deadline.

What happens next is up in the air. The Supreme Court remanded the case. So it now falls to the lower court to decide whether the timeliness objections were forfeited or waived if not properly raised.


Hamer v. Neighborhood Housing Services of Chicago, Case No. 16-658.

Good News for Committees… Standard Carve Out Provisions Do Not Limit Fee Awards

Over and over again the same story plays out.  A case files.  A lender carves-out a small amount from its collateral to fund Committee professionals and an investigation of the lender’s position.  That amount is inadequate, and the Committee blows past the carve-out amount.

That’s just what happened in Molycorp, where the DIP financing agreement contained a typical $250,000 carve-out provision for the Committee’s investigation of claims.

 After an extensive discovery process resulting in asserted claims, mediation, and a global settlement, the court confirmed a consensual plan and the Committee’s counsel requested payment of $8.5 million in fees.

The lender objected, arguing that the $250,000 carve-out was an absolute cap on fee payments.  The Committee responded that while the carve-out may have limited its fees in an administratively insolvent case, it was irrelevant in a case with a confirmed chapter 11 plan.  The Delaware court agreed.

The court explained that “[t]he carve-out is . . . an agreement by the secured creditor to subordinate its liens and claims to certain allowed administrative expenses, permitting such professionals’ fees to come first in terms of payment from the estate’s assets. . . .  [W]hen there are insufficient unencumbered assets to pay professionals’ fees and no plan has been confirmed, professionals’ only recourse is the carve-out.”

Here, however, a plan was confirmed. In that context, Bankruptcy Code section 1129(a)(9)(A) requires that allowed administrative claims be paid in cash (or as otherwise agreed) on the plan’s effective date.  And nothing in the carve-out language suggested that the fee cap would prohibit the allowance of administrative fees upon plan confirmation.

“If the secured parties desire confirmation, the administration claims must be paid in full in cash at confirmation even it if means invading their collateral.”

A World of Caution….

 The court contrasted the carve-out at issue with one in a DIP financing order entered in another case that stated: “[n]otwithstanding anything to the contrary therein, and absent further Order of the Court, (i) in no event during the course of the Chapter 11 Cases will actual payments in respect of the aggregate fees and expenses of all professional persons retained pursuant to an Order of the Court by the Creditor’s Committee exceed $450,000 in the aggregate (the ‘Creditors’ Committee Expense Cap’) … (iii) any and all claims (A) incurred by the Creditor’s Committee in excess of the Creditor’s Committee Expense Cap or (B) incurred by any professional persons or any party on account of professional fees and expenses that exceed the applicable amounts set forth in the Budget shall not constitute an allowed administrative expense claim for purposes of section 1129(a)(9)(A) of the Bankruptcy Code.”  At the same time, the court offered “no opinion as to whether it would approve a DIP order containing [such] provisions” had it been presented ….

See In re Molycorp, Inc., 562 B.R. 67 (Bankr. D. Del. 2017).


The Perils of Using a Client Trust Account as an Informal Escrow

An escrow agreement provides protection when you want to be certain the other side will fulfill its obligations before moving forward.  People also often take shortcuts, instead placing funds into a client trust account held by one party’s counsel to be disbursed at the agreed-upon time.  Since attorneys are subject to ethics rules and serve as fiduciaries, this can be a pragmatic, less expensive alternative to a formal escrow.

But what happens when attorneys go rogue?

You may find yourself relegated to the status of an unsecured creditor with little protection.

Cosmetics Plus: A Cautionary Tale

In a recent New York case, a debtor reached a $350,000 settlement with its insurance company and placed the funds into the client trust account held by its counsel, the Dreier law firm. It so happened that the trust account also contained the proceeds of Mark Dreier’s fraud scheme.  The comingled funds totaled over $3 million at the time of the transfer, but the account balance later fell to zero before increasing to $48 million. The judge ultimately dismissed the debtor’s case and directed distribution of all cash on hand.

About two month later, before the funds were disbursed under the settlement agreement, Drier was arrested for fraud. The debtor’s new counsel quickly succeeded in having the settlement funds sent from the Dreier trust account to its trust account about two weeks before Drier landed in his own bankruptcy case.

Drier’s bankruptcy trustee then demanded the return of the $350,000 as a preferential transfer.  The insurer countered by filing secured proofs of claim in Dreier’s case asserting an interest in the returned settlement proceeds.

The New York district court ruled in favor of the trustee, holding that creditors of the original debtor were not entitled to priority claims against Drier’s estate based on the fact that the Drier had been required to hold those funds in trust, because Drier had, in fact, commingled those funds with his own and dissipated them before attempting repayment.  The transfer of the funds to the original estate was an avoidable preference, and its creditors were entitled to only general unsecured claims against Drier.  Among the arguments considered by the Court:

  1. The creditors argued that the wired funds were not property of Drier’s estate because they were required to be held in escrow for the original debtor, creating an express trust in the creditors’ favor.  The Court rejected this argument, finding that the dissipation of all funds in the account between the receipt of the settlement proceeds and the wire to the debtor’s estate made it impossible to trace creditor funds, thus defeating the preference defense.
  2. The creditors contended that the wired funds were not on account of an antecedent debt because the Dreier firm held the settlement proceeds in a fiduciary capacity.  A debt created while acting in a fiduciary capacity, they asserted, is a “special,” non-dischargeable debt.  The court rejected this argument as well, noting that a “special” debt is still a debt.
  3.  The creditors asserted that original court order requiring the Dreier firm to disburse the settlement funds gave their claims “priority” in Dreier’s bankruptcy.  The Court shot down that argument as well, noting that the bankruptcy court order did not create a security or other interest in the transferred assets.
  4. Finally, the creditors asserted that what happened to them was simply unfair, and that a constructive trust should be imposed to prevent exploitation of the bankruptcy system.  The Court’s answer?  Life is unfair.

 “While it is undisputed that Dreier breached its fiduciary duty and did grievous injury, imposing a constructive trust on its remaining assets does nothing to punish Dreier or address any arguable abuse by Dreier of the bankruptcy system. . . . Equity is not served by disadvantaging one set of victims in order to restore another, where the only source of assets is a limited common pool.”

Cosmetics Plus Group Ltd. v. Gowan (In re Dreier), 2016 WL 3920358 (S.D.N.Y. July 15, 2016)

Got Interest? You May Not Be Able to Protect It from Preference Exposure Under Section 546(e)


“Settlement payments,” e.g., the transfer of cash or securities to complete a securities transaction, are given safe harbor and protected from disgorgement as preferences under the Bankruptcy Code.


Establishing Intent: Steve Bartman, Lyondell, and Actual Fraudulent Transfer Law


You are probably familiar with the Bankruptcy Code’s fraudulent transfer provisions, which allow a trustee to recover cash or assets that a debtor transferred away with actual intent to hinder, delay, or defraud its creditors. This can be a powerful tool in the hands of a trustee or creditors’ committee. See 11 U.S.C. Sec. 548(a)(1)(A).

But you may not have spent a lot of time thinking about how to prove intent when the debtor is a company. A company is a legal fiction; by itself, it can’t intend anything. And companies are typically made up of a lot of different people, including board members, officers, and employees. When it comes to fraudulent transfer litigation, who knew what, and who intended what, can be critical to creditor recoveries.

A recent decision by the New York district court provides a good example of how this works and how it can impact you.

In re Lyondell Chem. Co

Roughly one year before Lyondell Chemical Company (a Delaware corporation) collapsed into bankruptcy, its former shareholders had received $6.3 billion in distributions through a LBO. This included $100 million paid to its CEO through various stocks and options. The trustee alleged that Lyondell’s CEO had intended to defraud the company’s creditors by stripping it of assets to enrich himself and other shareholders, and that he accomplished this by knowingly presenting false financial projections to the company’s board of directors when the board considered approval of the LBO. The trustee asserted that the financials were inflated, unreasonable, and unachievable, and that consequently the LBO left the company inadequately capitalized and put creditors at great risk of a bankruptcy that could wipe out their claims.

The trustee’s lawsuit to avoid and recover these payments as actual fraudulent transfers hinged on whose intent would be imputed to the debtor. Would it be the scheming CEO? Or the duped board members?

Round One: The Bankruptcy Court Looks at the Board’s Intent

The bankruptcy court held that it was the intent of the board of directors that matters, and so it dismissed the trustee’s claim. Why? Under Delaware law, a corporation’s board of directors must approve a LBO. The court therefore felt that it was the intent of the company’s board, or a “critical mass” of the board members, which was essential to determining whether the company intended to defraud anyone.

Round Two: The District Court Imputes the CEO’s Intent to the Debtor

The New York district court disagreed and found that it was the CEO’s intent that mattered. Why? Because Delaware courts adhere to the “general rule of imputation.”

This means that Delaware corporations are held responsible for the acts and knowledge of their officers and directors acting within the scope of their authority… even when they act fraudulently.  (The rule may seem harsh, but it is designed to incentivize corporations to create strong information systems and controls).

Similarly, when an employee acts within the scope of employment or has a duty to disclose information to his employer, the law assumes that the employer was aware of that information… even if the employee failed to disclose it.

Based on these two legal principles, the district court found that the CEO’s knowledge and intent could be imputed to Lyondell even though the CEO did not control the board and it was the board, not the CEO, that approved the LBO and the resuling shareholder payments.

The court went on to find that there were enough facts to create a strong inference that the CEO acted with actual intent to hinder, delay, and defraud Lyondell’s creditors.  Because that intent could be imputed to the debtor, the court held that the trustee’s complaint would survive a motion to dismiss and that the litigation could continue.

Hey… What about Steve Bartman?

The district court also examined what “actual intent” means. The trustee had argued that debtors are presumed to intend the “natural consequences” of their actions, and that he would not need to prove the debtor actually wanted to, or believed it would, cause harm. The trustee lost this argument, and he could therefore have won the battle while ultimately loosing the war. The district court  held that the standard for finding “actual intent” to defraud is higher, and that the trustee would need to prove more. He would need to establish as an additional element, actual intent and an awareness of the consequences, not just an awareness of the facts from which the consequences would arise.

What does that mean, exactly? Let’s say you’re Steve Bartman. You’re sitting at Wrigley Field drinking a beer and watching the Cubs play. You reach to catch a foul ball. A natural consequence of reaching for that ball is that you could disrupt the game. But to establish that you actually intended to cause the Cubs to lose requires more. Chicagoans would have to prove that you weren’t just foolish, but you actually intended to cost the Cubs the National League pennant.

So the trustee was arguing that he would only need to show that, by inflating financials and paying out huge sums to himself and other shareholders, a natrual consequence would be the creditors would be hindered, delayed, or defrauded in their recoveries.  He may not have cared on whit about what happened to those creditors one way or another, as long as his actions, as a natural cosequence, hindered them.  The district court held that the trustee would need to prove more. He would need to prove that the CEO actually thought about the creditors and intended to harm them or was conscious that he was harming them.  (Legal geeks, you can curl up with the Yale Law Journal’s Intent to Defraud, published in 1915, to delve into these nuances.)

Weisfelner v. Hofmann (In re Lyondell Chem. Co.), 2016 WL 4030937 (S.D.N.Y. July 27, 2016) (motion for reconsideration denied).