Category Archives: Legal Updates

Judge Carey (Bankr. D. Del.) Applies Grossman’s “Exposure” Test and “Fair Contemplation” Test to Environmental Claims

By Erin R. Fay and Sophie E. Macon

It is settled law in the Third Circuit that a claim generally “arises” when a party is exposed pre-confirmation to a product or conduct giving rise to an injury that underlies a “right to payment” under the Bankruptcy Code. See Wright v. Corning, 679 F.3d 101 (3d Cir. 2012); Jeld-Wen, Inc. v. Van Brunt (In re Grossman’s), 607 F.3d 114, 125 (3d. Cir. 2010). The Third Circuit noted in Grossman’s, however, that it was not deciding when an environmental cleanup claim might arise where conflicting statutory frameworks exist. In West Salem Storage, LLC v. Exide Techs. (In re Exide Techs.), the Judge Carey of the Delaware Bankruptcy Court was faced with determining whether just such environmental cleanup claims arose before or after confirmation of a chapter 11 plan (that would discharge such claims). The Court held that whether it applied Grossman’s “exposure” test or the Ninth Circuit’s “fair contemplation” test, the environmental claims were discharged through the confirmed plan.

By way of background, West Salem purchased certain contaminated industrial property in 2011 that Exide Technologies had previously owned. In 1999, state regulators had restricted the property to industrial-only uses due to discovery of lead contamination in the property’s soil. From 2011-2017, West Salem leased the property to tenants for commercial and recreational uses. In February 2017, regulators discovered “high levels” of lead inside a structure on the property and closed the building.

Exide filed its second chapter 11 petition in March 2013 and its plan was confirmed in March 2015. West Salem was not listed as creditor in the bankruptcy filings and was not provided actual notice of the filing or plan. After incurring significant cleanup costs and other damages, West Salem filed an adversary proceeding seeking a declaratory judgment that Exide’s confirmed plan had not discharged West Salem’s claims.

Exide argued that, under the Grossman’s “exposure” test, West Salem’s claim arose either (a) prior to 2002, when the contaminating “conduct” occurred, or (b) in 2011, when West Salem purchased the property. West Salem argued that Grossman’s does not apply to environmental claims and that the Court should apply the Ninth Circuit’s “fair contemplation” test to its environmental claims. See California Dept. of Health Servs. v. Jensen (In re Jensen) to. 995 F.2d 925 (9th Cir. 1993). Under such test, future “response and natural resources damages” arising from pre-petition conduct are “claims” only if such costs “can be fairly contemplated by the parties at the time of the debtors’ bankruptcy.” Parties are deemed to “fairly contemplate” potential liability “when there are sufficient indicia of future costs based on prepetition conduct.”

West Salem further argued that, prior to discovery of the interior contamination in 2017, there was not “sufficient indicia” of future liability such that it should have “fairly contemplated” the costs associated with the interior lead contamination. The Court disagreed, holding that the deed restrictions imposed by state regulators on the property met the fair contemplation test. The Court also found that under the Grossman’s “exposure” test, West Salem’s claim arose in 2011 when it took title to the property and was put on notice about the lead pollution.

In addition, the Court held that West Salem was an unknown creditor because it was not listed in Exide’s books and records (instead Exide’s books and records listed a successor in the chain of title to whom the debtor sold the property) and that Exide had no obligation to undertake a title search or to send a notice to the property address. As an unknown creditor, West Salem was provided adequate notice through publication. For all these reasons, the Court granted Exide’s motion to dismiss West Salem’s complaint.

A copy of the Court’s opinion is available here.

Delaware Court of Chancery Updates New Filing Deadlines

On September 7, 2018, the Court of Chancery ordered that Rule 171(b) be amended to provide that the time for filing briefs is to be governed by newly-added Rule 79.2. Effective September 14, 2018, Rule 79.2 states:

Except for the initial pleadings governed by Rule 7(a) and notices of appeal, all electronic transmissions of documents (including, but not limited to, motions, briefs, appendices and discovery responses) in non-expedited cases must be filed and/or served by 5:00 p.m. Eastern Time in order to be considered timely filed and/or served that day. All electronic transmissions of documents in expedited cases must be filed and/or served before midnight Eastern Time in order to be considered timely filed and/or served that day, unless otherwise agreed to by the parties and so ordered by the Court. For purposes of meeting the filing and/or service deadline set forth herein, expedited cases shall mean any case that is set for expedited treatment by an order of the Court.

The changes ensure that the Court of Chancery Rules conform to the new filing deadlines issued by the Delaware Supreme Court on July 18, 2018 as part of an initiative to improve work life balance for Delaware’s legal professionals. The Court of Chancery Rules can be found here.

 

 

Delaware Supreme Court Prioritizes Work-Life Balance

On July 18, 2018, the Supreme Court of the State of Delaware issued an order adopting recommendations from a report on improving work life balance for Delaware legal professionals. Based on analysis regarding the negative impact of late filing deadlines on the Delaware legal community, the Supreme Court ordered state courts to amend their rules and/or electronic filing policies. Effective September 14, 2018, all electronic filings in non-expedited matters, except for initial pleadings and notices of appeal, must be completed by 5:00 p.m. Eastern. The deadlines for initial pleadings, notices of appeal, and electronic filings in expedited matters are unchanged and must be completed before midnight Eastern except for expedited matters in which the court orders or the parties agree to a different deadline.

The Supreme Court also ordered state trial courts to consider adopting policies disfavoring:

  • Filing due dates on Monday or the day after a holiday in non-expedited matters.
  • The issuance of non-expedited opinions addressing dispositive motions or post-trial relief after 4:00 p.m. as a general matter and after noon on Fridays.
  • The scheduling of oral arguments and trials in August, except in expedited matters or where there is an important reason for proceeding at that time.

The Trial Courts are to consider the remaining recommendations in the report and to adopt practices to improve both the quality of professional practice and the quality of life for Delaware legal professionals. The Trial Courts are to report on their considerations and progress by March 15, 2019.

On August 22, 2018, the Supreme Court amended Supreme Court Rule 10.2 to conform to the July 18 order. Effective September 14, 2018, Rule 10.2(6)(a) is stricken and replaced with:

Except for notices of appeal, all electronic filings in non-expedited cases must be completed by 5:00 p.m. Eastern Time in order to be considered timely filed that day. All notices of appeal and electronic filings in expedited cases must be completed before midnight Eastern Time in order to be considered timely filed that day.

The report supporting the change, Shaping Delaware’s Competitive Edge: A report to the Delaware Judiciary on Improving the Quality of Lawyering in Delaware, was prepared by several members of the Delaware Bar and includes contributions from Stephen B. Brauerman, a director and co-chair of Bayard’s litigation group.

A copy of the order, the order announcement, and the supporting report can be found here.

Judge Silverstein Holds that Adversary Proceeding is Essentially a Proof of Claim Objection that Should Proceed in Bankruptcy Court

On May 21,2018, Judge Laurie Silverstein of the Delaware Bankruptcy Court issued an order and opinion holding that a post-confirmation complaint by a successor to a debtor was, at its heart, an objection to a proof of claim and denying a motion to dismiss the complaint or, in the alternative, to abstain from hearing  or otherwise transfer the proceeding to a court in New York.  See Penson Technologies LLC v. Schonfeld Group Holdings LLC, Adv. No. 16-51522(LSS).

A copy of the opinion can be found here.

Millennium Lab Holdings II, LLC—Judge Silverstein Holds that the Bankruptcy Court has Constitutional Authority to Approve Nonconsensual Third Party Releases

By Gregory J. Flasser

 

On October 3, 2017, Judge Laurie S. Silverstein of the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) issued an opinion in In re Millennium Lab Holdings II, LLC, et al., No. 15-12284-LSS, 2017 WL 4417562 (Bankr. D. Del. Oct. 3, 2017) holding that the Bankruptcy Court has constitutional adjudicatory authority to approve nonconsensual third-party releases of, a creditor’s direct non-bankruptcy common law fraud and RICO claims against TA Associates Management, L.P., T.A. Millennium, Inc., Millennium Lab Holdings, Inc., James Slattery, and Howard J. Appel (collectively, the “Non-Debtor Equity Holders”).  The matter was remanded from the United States District Court for the District of Delaware (the “District Court”) following an appeal of the Bankruptcy Court’s order confirming a plan of reorganization for then-debtors Millennium Lab Holdings II, LLC and certain of its affiliates (collectively, the “Debtors”).

I.  Case Background and Plan Confirmation

On November 10, 2015, the Debtors filed voluntary chapter 11 bankruptcy petitions with a prepackaged plan of reorganization (the “Plan”) and disclosure statement.  The Plan was the result of multiple settlements, including a term sheet with the United States and certain individual states, and a restructuring support agreement with both an ad hoc group of bondholders and the Non-Debtor Equity Holders.  The Plan provided for a global resolution of claims related to the Debtors’ April 2014 $1.825 billion senior secured credit facility, the proceeds of which funded a $1.3 million dividend to the Debtors’ equity holders, provided for working capital, and paid off certain debt.  As part of the lender group, Voya, also known as the Opt-Out Lenders, funded $106.3 million of the loan.  Pursuant to the Plan, Voya and the other lenders would receive allowed claims under section 502 of the Bankruptcy Code, and pro rata shares of: (i) a new $600 million term loan; (ii) 100% of the beneficial ownership interests of the reorganized Debtors; and (iii) any recoveries from a trust created under the Plan to pursue the Debtors’ retained causes of actions.

Prior to the confirmation hearing, Voya filed objections to the confirmation of the Plan.  Voya did not object to the overall compromise of the Plan, but rather to the inclusion of releases of claims that creditors, including Voya, might assert against the Non-Debtor Equity Holders.  Specifically, Voya argued: (i) the Bankruptcy Court did not have subject matter jurisdiction to grant nonconsensual third-party releases; (ii) the third party releases were impermissible; (iii) the Plan must permit parties to opt-out of the releases; and (iv) the releases did not meet the standard set forth in Gillman v. Continental Airlines (In re Continental Airlines), 203 F.3d 203 (3d Cir. 2000).  In an effort to solidify its claims, Voya filed a complaint in the District Court against the Non-Debtor Equity Holders asserting RICO and common law fraud claims.

On December 14, 2015, Judge Silverstein entered an order confirming the Plan, and Voya filed its Notice of Appeal together with an emergency motion requesting certification of a direct appeal to the Third Circuit and a motion for stay pending appeal.

II.  Appeal to the District Court

On March 20, 2017, the District Court remanded the case for further proceedings.  In its Memorandum Opinion, the District Court explained:

It is unclear to what extent the Bankruptcy Court had the opportunity to consider what is now the main issue on appeal—the Bankruptcy Court’s authority post- Stern to enter a final order discharging [Voya’s] non-bankruptcy claims against non-debtors without [Voya’s] consent—given the lack of time and attention the parties ascribed to this issue in their briefing and arguments below.

Opt-Out Lenders v. Millennium Lab Holdings II, LLC (In re Millennium Lab Holdings II, LLC), No. 16-110-LPS, 2017 WL 1032992, at *14 (D. Del. Mar. 20, 2017).  As a result, the District Court remanded the case to the Bankruptcy Court to (i) consider whether, or clarify the ruling that the Bankruptcy Court had constitutional adjudicatory authority to approve the nonconsensual release of Voya’s direct non-bankruptcy common law fraud and RICO claims against the Non-Debtor Equity Holders, and if not, (ii) submit proposed findings of fact and conclusions of law, or, alternatively, to strike the nonconsensual release of Voya’s claims from the confirmation order.

III.  Holding on Remand

a. The Bankruptcy Court has Statutory and Constitutional Authority to Enter a Final Judgment on Confirmation of Plan

Voya argued on remand, that in analyzing its constitutional adjudicatory authority to enter a final order confirming a plan containing nonconsensual third-party releases, the Bankruptcy Court should either ignore or consider irrelevant that it is presiding over confirmation of a plan, consider the operative proceeding before the Bankruptcy Court for Stern purposes to be the RICO lawsuit, apply Stern to the RICO lawsuit, and hold that Stern prevents the Bankruptcy Court from entering a final order on confirmation because the RICO lawsuit does not stem from the bankruptcy itself.

In her analysis, Judge Silverstein held that the Bankruptcy Court has statutory authority to enter a final judgment on confirmation of a plan because “Confirmation of plans” is an enumerated core proceeding under 28 U.S.C. § 157(b).  From there the question turns to the Bankruptcy Court’s constitutional adjudicatory authority to enter a final judgment on plan confirmation.

In Stern v. Marshall, 131 S. Ct. 2594 (2011), the Supreme Court announced that the disjunctive test to determine whether a bankruptcy judge can enter a final order on a trustee’s counterclaim is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.  On that point, Judge Silverstein held that the operative proceeding before her for constitutional analysis is confirmation of a plan, and therefore, Stern is inapplicable because confirmation of a plan is not a state law claim of any type and third party releases do not exist without regard to the bankruptcy proceeding.  Moreover, Judge Silverstein noted that in confirming a plan—even one with releases—the judge is applying a federal standard and does not rule on the merits of the state law claims being released.  In fact—and as Judge Silverstein already indicated at the confirmation hearing—nonconsensual third-party releases are permissible in plans of reorganization in the Third Circuit if they meet the Continental standard of fairness and necessity to the reorganization.

Although the analysis seemingly could have ended there, Judge Silverstein went one step further to state that even if she were to apply the Stern disjunctive test to the Debtors’ Plan, she would find that the Bankruptcy Court had constitutional adjudicatory authority.  First, she stated that confirmation of a plan “stem(s) from the bankruptcy case,” and therefore, the Bankruptcy Court could enter a final order confirming the Debtors’ Plan.  Second, she reiterated her prior findings that the releases were integral to confirmation and thus integral to the restructuring of the debtor-creditor relationship, so the releases would be “necessarily resolved in the confirmation process” or “necessarily resolved in the process of restructuring the debtor-creditor relationship.”

b.  Stern Does Not Prevent a Bankruptcy Judge from Entering Final Orders in Statutorily Core Proceedings that may have a Preclusive Effect on a Third Party Lawsuit

Voya also argued that it is unconstitutional for a bankruptcy judge to enter a final order in any context if that final order might affect a lawsuit filed by a creditor against a third party.  Judge Silverstein, disagreed, finding that the Third Circuit has determined that Stern does not prevent a bankruptcy judge from entering final orders in statutorily core proceedings notwithstanding the potential collateral impact the order may have on state law claims.  For example, in In re Lazy Days’ RV Center Inc., 724 F.3d 418 (3d Cir. 2013), rather than focusing on the state law claims, the Third Circuit focused on the operative proceeding in front of the bankruptcy judge—a motion to reopen the bankruptcy case and a request for a declaration of rights under a section of the bankruptcy code.  There, the Third Circuit noted, “although this proceeding may have been provoked by state court actions and surely impacts them, the proceeding in the Bankruptcy Court was founded upon a quintessentially federal claim . . . .”  Lazy Days, 724 F.3d at 424.  Similarly, In Linear Electric Co., Inc., 852 F.3d 313 (3d Cir. 2017), the Third Circuit held that Stern did not prevent a bankruptcy judge from entering a final order “discharging” construction liens filed by a non-debtor supplier against real property owned by a non-debtor.  Applying the rationale from Linear and Lazy Days, Judge Silverstein held that the Stern line of cases is inapplicable in the context of a plan confirmation order.

c.  Voya Forfeited and Waived Any Constitutional Adjudicatory Authority Objections and the Right to a Hearing on the Merits of its RICO Claims

Judge Silverstein concluded her opinion by stating that even if she was wrong and the Bankruptcy Court did not have constitutional adjudicatory authority to enter a final confirmation order, Voya forfeited and waived the right to contest the Bankruptcy Court’s authority.  In particular, Voya did not include the statement found in Local Rule 9013-1(h) in it is initial confirmation objection, and therefore, Voya waived the right to contest the Bankruptcy Court’s authority.  Furthermore, Voya forfeited its right to contest the Bankruptcy Court’s authority by not actually making a constitutional adjudicatory authority argument in its confirmation objection, supplemental objection, or during oral argument.

Similarly, Judge Silverstein determined that Voya waived its right to a hearing on the merits of its RICO claims in the context of confirmation by consciously choosing not to avail itself of that opportunity.  Indeed, Judge Silverstein noted that Voya made clear it was not putting the merits of the RICO lawsuit at issue at the confirmation hearing and even passed on the Debtors’ suggestion that it had to do so.

Moreover, on remand, Voya argued that the merits of the RICO claims were not in front of the Bankruptcy Court, and therefore, Voya should not, and could not, put on evidence regarding its RICO claims.  Despite this argument, Voya also maintained that the grant of releases in the confirmation order was an actual adjudication of its claims in the RICO lawsuit.  Simply put, Judge Silverstein held that Voya cannot have it both ways.  If the entry of the confirmation order was an actual adjudication of Voya’s claims, then it was incumbent upon Voya to submit evidence on the merits of its RICO claims at the confirmation hearing.  Accordingly, Voya waived its right to a hearing on the merits of its RICO lawsuit in connection with confirmation of the Plan.

IV.  Appeal to the District Court

Judge Silverstein closed her opinion by stating “I trust this Opinion will aid the district court on appeal.” As Judge Silverstein anticipated, Voya appealed the opinion to the District Court on October 16, 2017.

A copy of the opinion can be found here

Court of Chancery Amends Briefing Requirements and Letter Policy Effective August 1, 2017

By Sara E. Bussiere

The Court of Chancery recently adopted a substantive change to its policy concerning the submission of letters.  While the Court of Chancery previously allowed parties to request substantive relief by letter, effective August 1, 2017, letters may only be used to address logistical and scheduling issues.  All substantive requests for relief must be made by motion.  As set forth below, the Court also limited the length of non-dispositive motions in an effort to streamline the litigation process and manage the Court’s workload.

Effective August 1, 2017, Court of Chancery Rule 171(f), governing the length of briefs, will be amended as follows:

Court of Chancery Rule 171(f)(1), governing the type-volume limitation, will require the following word limits for the following brief submissions.

  • Dispositive motions [Rule 12 (defenses and objections), Rule 23 (class actions), Rule 23.1 (derivative actions by shareholders), and Rule 56 (summary judgment)]:
    • Opening/Answering Brief: 14,000
    • Reply Brief: 8,000
  • Other motions:
    • Opening/Answering Brief: 3,000
    • Reply Brief: 2,000
  • Letters: 1,000 words

In addition, Court of Chancery Rule 171(f)(2), which requires a certificate of compliance verifying compliance with Rule 171(f)(1), will no longer require the filing of a separate certificate.  Under the amended rule, each document submitted pursuant to Rule 171(f)(1) shall include in the signature block the phrase “Words: [# of words in the document].”  Pursuant to amended Rule 171(f)(2), “[u]se of that phrase constitutes a certification by the signatory of the document, whether counsel or an unrepresented party, that the document complies with the typeface requirement and the type-volume limitation.”

A copy of the Order amending Rule 171 (f) can be found here.

Superior Court Amends Briefing Requirements Effective July 15, 2017

By Sara E. Bussiere

Effective July 15, 2017, Superior Court Civil Rules of Procedure 107(b) and (h), which govern the typeface and type-volume requirements for briefs, will be amended.  Rule 107(b) will require that all briefs, including footnotes, be in 14-point type in Times New Roman font.  In addition, the page count previously set forth in Rule 107(h) has been replaced with a word count (see summary below for specific requirements).  Amended Rule 107(h) will also require a Certificate of Compliance With Typeface and Type-Volume Limitations, as set forth in Form 48.  Finally, Rule 107(j), a new rule, will permit the inclusion of an appendix of documents or testimony from the factual record in support of a party’s position, so long as those materials are not duplicative of materials previously provided by another party.

A copy of the Order amending the aforementioned Rules can be found here.

Below please find a summary of the key brief requirements following the July 15, 2017 amendments, with changes underlined for emphasis:

Typeface Requirements (Rule 107(b)):

  • Double spaced
  • Times New Roman
  • 14-point font
  • 2 spaces between sentences
  • Footnotes: single spaced, 14 point font, 2 spaces between sentences

 

Form (Rule 107(d)):

  • Cover must contain:
    • case caption
    • case number
    • names and addresses of counsel
  • 5 X 11 in. paper, bound left margin
  • Citations:
    • Reported cases: The Bluebook: A Uniform System of Citation
    • Unreported cases: any of the three alternatives:
      • LEXIS – Fox v. Fox, 1998 LEXIS 179 (Del. Supr.)
      • WESTLAW – Fox v. Fox, 1998 WL 280361 (Del. Supr.)
      • DELAWARE – Fox v. Fox, Del. Supr., No. 510, 1997, Berger, J. (May 14, 1998)

 

Contents (Rule 171(e)):

  • Table of contents or index
  • Table of citations arranged alphabetically
  • In the first brief of each party, a statement of the case, including a statement of the nature of the proceedings and a concise chronological statement, in narrative form, of all relevant facts with page references to the transcript of testimony, if any, and to any pleadings and exhibits
  • Statement of the questions involved
  • Argument, divided into sections under appropriate headings, one section to be devoted to each of the questions involved

 

Length of Briefs (Rule 107(h)):

  • Type-volume limitation (exclusive of cover page, tables of contents and authorities, and appendix):
    • Opening/Answering: 8,000
    • Reply: 5,500
  • Certificate of Compliance Required
    • Certify brief complies with typeface requirement of Rule 107(b) and typeface requirement of Rule 107(h)(1)
    • Must state number of words in the brief (may be counted by Microsoft Word)
    • Form 48

 

 

 

Violin Memory Inc.’s Chapter 11 Bankruptcy Case Confirmed by Delaware Judge

On April 18, 2017, Judge Laurie S. Silverstein entered an order confirming Violin Memory, Inc.’s (the “Debtor”) plan of reorganization (the “Plan”).  The Debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code on December 14, 2016.  Headquartered in Santa Clara, California, the Debtor is a developer and supplier of differentiated flash-based storage systems that service the high-speed applications and complex network infrastructures of sophisticated worldwide enterprises.

The Plan confirmation follows a deal based on a plan support agreement (the “PSA”) that was approved by the Court on February 8, 2017.   Pursuant to the PSA, the Debtor was sold for $23 million to VM Bidco LLC, an affiliate of Quantum Partners LP (“QP”).  The sale price consists of (i) an $8 million debtor-in-possession financing which will convert into an exit facility, and (ii) $15 million in cash for recoveries under the Plan in which QP will receive all equity interests in the reorganized Debtor.  The Plan, which was accepted by more than 96% of the unsecured creditors, will provide an estimated 7.5%-8.5% recovery to unsecured creditors.

The Plan confirmation is a great outcome especially when considering the fact that the Debtor filed for chapter 11 after it failed to sell its assets out of court and to secure a stalking horse bidder or debtor-in-possession financing.

To see the confirmation order for the case, please click here.

Delaware Bankruptcy Court Confirms Plan and Sale of Verengo, Inc.

On April 24, 2017, Chief Judge Brendan L. Shannon of the United States Bankruptcy Court for the District of Delaware entered an order approving the Second Amended Combined Disclosure Statement and Chapter 11 Plan of Reorganization for Verengo, Inc. (“Verengo”) Proposed by the Debtor and Debtor in Possession (the “Plan”), through which a sale of Verengo’s assets to Crius Solar Fulfillment, LLC was effectuated.  The Plan went effective on May 15, 2017.

Verengo, by and through its bankruptcy counsel, Bayard, P.A. (“Bayard”), filed a voluntary petition under Chapter 11 of the Bankruptcy Code on September 23, 2016.  The Debtor is a leader in the solar industry and one of the largest solar providers in Southern California.  Specifically, the Debtor’s business focuses on installing solar photovoltaic systems on existing homes and new construction projects.

Bayard attorneys Scott Cousins, Evan Miller, Erin Fay, GianClaudio Finizio, Marla Norton, and Greg Flasser served as counsel to Verengo throughout its bankruptcy case.  Bayard remains counsel to the post-effective Distribution Trust created under the Plan.

For confirmation order with plan, click here.

Steve Brauerman Comments on Supreme Court TC Heartland Decision in Law 360

Stephen Brauerman, head of Bayard’s litigation group, is quoted extensively in an article appearing in Law 360, entitled “Delaware Primed for IP Case Bump Despite Bench Vacancies,” regarding the implications of last week’s U.S. Supreme Court decision in TC Heartland LLC v. Kraft Foods Group Brands LLC for the Delaware District Court.  Brauerman, who also heads the Delaware Chapter of the Federal Bar Association, appears regularly in intellectual property cases pending in the United States District Court for Delaware.  The Court is likely to see an influx of intellectual property cases as a result of the decision, which limits where patent owners can file infringement cases.   In the Law 360 article, he is quoted as stating “I don’t think there’s any question whether Delaware can handle the [additional caseload].”  He added, “the district court has always been a hotbed for patent cases…. Delaware prides itself on being the venue to decide very complicated business disputes.”

 

Law 360 is an online legal publication by the Portfolio Media, Inc. located in New York City.  The full article can be read here. For a more in-depth review of the TC Heartland decision, please see http://www.bayardlaw.com/legal-updates/united-states-supreme-court-clarifies-patent-venue-tc-heartland-llc-reversal.

United States Supreme Court Clarifies Patent Venue in TC Heartland LLC Reversal

By: Stephen B. Brauerman, Sara E. Bussiere, Megan McGovern

 

In TC Heartland LLC v. Kraft Foods Group Brands LLC, No. 16-341, 581 U.S. _____ (2017), the United States Supreme Court interpreted the patent venue statute, 28 U.S.C. § 1400(b), and held that “a domestic corporation ‘resides’ only in its State of incorporation for purposes of the patent venue statute.”  As a result, a patent holder may only file an action for patent infringement in an alleged infringer’s state of incorporation or in a venue where the alleged infringer committed an act of infringement and has an established place of business.  The primary impact of this decision is that plaintiff-friendly districts, like the Eastern District of Texas, where few accused infringers are incorporated or conduct business, are no longer eligible venues for patent infringement actions.

In TC Heartland, the Supreme Court considered whether recent amendments to 28 U.S.C. § 1391, the general venue statute, which states that a corporation resides “in any judicial district in which such defendant is subject to the court’s personal jurisdiction with respect to the civil action in question[,]” changed the meaning of “resides” in § 1400(b).  28 U.S. C. §§ 1391(a), (c).  As discussed below, the Court held that it does not.

Kraft Food Group Brands LLC (“Respondent”), a Delaware corporation with its principal place of business in Illinois, filed a patent infringement suit in the United States District Court for the District of Delaware against TC Heartland LLC (“Petitioner”), an Indiana corporation with its principal place of business in Indiana.  Petitioner moved to transfer venue to the District Court for the Southern District of Indiana.  Citing Fourco Glass Co. v. Transmirra Products Corp., Petitioner argued venue was improper in Delaware because it did not “reside” in Delaware and did not have a “regular and established place of business” in Delaware under 28 U.S.C. § 1400(b).  Section 1400(b) provides that “[a]ny civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.” 28 U.S.C. § 1400(b).

The District Court rejected Petitioner’s argument on the basis, inter alia, that § 1391(c) defines “resides,” as determined by the Federal Circuit in VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574 (Fed. Cir. 1990).  See Kraft Foods Group Brands LLC v. TC Heartland, LLC, 2015 WL 5613160 (D. Del. Sept. 24, 2015), adopting Report and Recommendation, 2015 WL 4778828 (D. Del. Aug. 13, 2015).  Because Petitioner resided in Delaware pursuant to § 1391(c), it also resided in Delaware for purposes of § 1400(b).  The Federal Circuit denied a petition for a writ of mandamus on the same basis.  In re TC Heartland LLC, 821 F.3d 1338 (Fed. Cir. 2016).

The Supreme Court reversed.  In analyzing the inter-play between §1400(b) and § 1391, the Court reviewed the legislative history of both statutes.  At the outset, the Court noted that when Congress enacted a patent-specific venue statute, it “placed patent infringement cases in a class by themselves, outside the scope of the general venue legislation.”  The Court further observed that the original patent-specific venue statute permitted suit in the district in which the defendant was an “inhabitant” or in which the defendant committed acts of infringement and has a regular and established place of business.  A corporation was understood to “inhabit” only the state in which it was incorporated.

In 1948, Congress enacted § 1391, a general venue statute, which defined “residence” for corporate defendants as any district in which the corporation is incorporated or licensed to do business or is doing business.  In 1957, the U.S. Supreme Court held in Fourco Glass Co. v. Transmirra Products Corp. that § 1400(b) “is the sole and exclusive provision controlling venue in patent infringement actions, and . . . is not to be supplemented by . . . §1391(c)” despite the fact that § 1391 embraced “all actions.”  353 U.S. 222, 226 (1957).  After the Court’s ruling in Fourco, Congress amended §1391.  The revised statute applied “[f]or purposes of venue under this chapter.”  Accordingly, the Federal Circuit in VE Holding Corp. v. Johnson Gas Appliance Co. concluded that the provision “clearly applies” to § 1400(b) and redefined the meaning of “resides” in that section.  917 F.2d at 1578.  In 2011, Congress adopted the current version of § 1391, which provides that “[e]xcept as otherwise provided by law,” “this section shall govern the venue of all civil actions brought in district courts of the United States.”  In denying the Petition for Writ of Mandamus, the Federal Circuit reaffirmed its more than 20-year old decision in VE Holding Corp. and applied the definition of “resides” set forth in § 1391(c) to § 1400(b).  In re TC Heartland LLC, 821 F.3d 1338.

The Supreme Court concluded in an 8-0 decision[1] that §  1391(c) does not define “resides” in § 1400(b).  In doing so, the Court reinstated the standard it announced 60 years ago in Fourco: “a domestic corporation ‘resides’ only in its State of incorporation for purposes of the patent venue statute.”  The Supreme Court held: “When Congress intends to effect a change of that kind, it ordinarily provides a relatively clear indication of its intent in the text of the amended provision. . . . The current version of §1391 does not contain any indication that Congress intended to alter the meaning of §1400(b) as interpreted in Fourco.”

The Supreme Court’s TC Heartland decision promises to effect substantial changes to where patent infringement actions get litigated.  The historically plaintiff-friendly Eastern District of Texas will become easier to avoid absent consent and more suits will likely go to the District of Delaware (where many companies are formed) and to California, where many technology companies maintain substantial operations.

 

 

[1] Justice Gorsuch did not participate in the decision.

Judge Gross Decides that Creditor Committee’s Derivative Standing to Sue on Behalf of Debtors Does Not Entitle it to Debtors’ Attorney-Client Communications Without Showing Insolvency

By Charlene D. Davis

On May 8, 2017,  Judge Kevin Gross of the United States Bankruptcy Court for the District of Delaware (the “Court”), issued an opinion and order denying in part and granting in part  a motion by the unsecured creditors committee (the “Committee”) to compel production of documents that  Debtor Haggen, Inc., et al. (the “Debtors”) and Defendants Comvest Group Holdings, LLC et al. (the “Comvest Defendants”) withheld on the basis of attorney client and work product privilege. Official Committee of Unsecured Creditors of HH Liquidation, LLC, et al. v. Comvest Group Holdings, LLC, et al., Adv. No. 16-51204(KG) (In re HH Liquidation, LLC et al.,  Case no. 15-11874 (KG).  Noting that the decision “is not an easy one”, the Court declined to compel production of documents claimed to be protected by that attorney client privilege (without prejudice) but required production of  documents claimed to be protected by the work product privilege.

The Debtors filed voluntary petitions with the Court on September 8, 2015 (the “Petition Date”); approximately 7 months after acquiring146 supermarkets from Albertson’s.  At the time of the acquisitions, the Comvest Defendants owned an 80% interest in the Debtors.   Following the Petition Date, the U.S. Trustee appointed the Committee and on January 14 and April 29, 2016, the Committee, the Debtors and the Defendants (as hereinafter defined) entered into stipulations, approved by the Court, granting the Committee derivative standing to bring an adversary proceeding against the Defendants, but reserving rights to assert privilege.

On September 7, 2016, the Committee filed a complaint and objection to claims naming the Comvest Defendants, non-debtor affiliates of the Debtors and officers and directors of the Debtors as defendants (the “Defendants”).   In the Complaint, the Committee alleged that certain actions of the Defendants following the Albertson store acquisitions, led to the Debtors voluntary bankruptcy petitions.    The Committee’s requested production of documents; to which the Defendants and the Debtors objected, withholding production of, approximately 1900 and 1000 documents, respectively.  The objections were based on assertions of attorney client and work product privilege.   The Debtor’s privilege objections were premised on the joint representation of the Debtors and the Comvest Defendants by the  law firm of Akerman, LLP.

The Committee moved to compel production of the documents.  The Debtors and Defendants opposed the motion.   The Court denied the motion with regard to attorney-client privileged documents, concluding that the Committee was not entitled to the documents because (1) unlike a chapter 7 trustee (see Commodities Futures Trading Comm’n v. Weintraub, 471 U.S. 343 (1985) the Committee does not have fiduciary duties to the estate, even when suing derivatively on behalf of the Debtors and 2) although the Committee had established cause to invade the privilege, Third Circuit precedent (see Teleglobe Communications  v. BCE, Inc. (In re: Teleglobe Communications Corp.), 493 F3d 345 (2007)) also requires a showing that the Debtor was insolvent at the time of the privileged communications/product.  The Court observed that the Committee had failed to establish the Debtors’ insolvency at the relevant times but noted that it might do so later in the proceeding.  In granting the motion with regard to work product privileged documents, the Court concluded that the documents were not produced in anticipation of litigation.  Thus they were not shielded from production by work product privilege.

 

A copy of the Court’s opinion is available here.

Judge Walrath Applies Pleading Standards for Dismissal for Failure to State a Claim to Avoid a Preference to Grant in Part and Deny in Part a Motion to Dismiss

By Charlene D. Davis

On April 7, 2017,  Judge Mary F. Walrath of the United States Bankruptcy Court for the District of Delaware, (the Court”)  issued and opinion and order denying in part and granting in part a motion to dismiss an action in which a liquidating trustee (the “Liquidating Trustee”) sought to avoid and recover alleged preferential transfer to an insider.   Gavin Solmonese v. Visagar M. Shyamsundar, et al., (In re: Amcad Holdings LLC, et al.) Adv. Pro.  No.  15-51979.  In rendering its decision the Court essentially dismissed claims related to all transfer alleged in an amended complaint , but permitted the Trustee an opportunity to amend the amended complaint with respect to 19 of the transfers.

On December 17, 2015, the Plaintiff sued a number of former managers and officers of Amcad Holdings LLC, et al. (the “Debtors”), including Visagar M. Shyamsunder (the “Defendant”) for alleged breaches of fiduciary duties and avoidance of alleged preferential transfers to insiders (the “Action”).   Thereafter on June 14, 2016,, the Court dismissed the Action because  it lacked related to jurisdiction over the fiduciary claims and because the preference claims were inadequately pled.  The Court subsequently authorized the Liquidating Trustee to file an amended complaint with respect to the preference claims.

On October 12, 2016, the Liquidating Trustee filed an amended complaint (the “Amended Complaint”) seeking to avoid and recover $651,496.50 as preferential transfers to the Defendant and entities in which he was the majority owner.  On November 23, 2016, the Defendant moved to dismiss the Amended Complaint on the basis that it failed to state a claim on which relief could be granted because 1) it did not adequately identify the antecedent debt; 2) it did not adequately plead facts in support of the Debtors insolvency at the time of the transfers; and 3) it pled claims that were barred by the Court’s order permitting amendment of the original Action.

Applying the pleading standards applicable to Rule 12(b)(6) motions to dismiss preference actions, the Court found that five of the alleged transfers did not identify an antecedent debt and granted to the motion to dismiss them with prejudice.  Applying those same standards, the Court found that the Amended Complaint failed to plead any facts in support of the Debtors’ insolvency at the time of the transfers and since the transfers all occurred outside the 90 day period for the presumption of insolvency, granted the motion to dismiss all avoidance claims.   The Court proceeded to find that the claims for recovery of preferential transfers, that the Defendant argued were barred, were permissible but without merit where the avoidance claims had been dismissed.    Finally the Court considered the Defendant’s request the dismissal be with prejudice, deciding to grant the Liquidating Trustee leave to further amend the Amended Complaint with respect to 19 of the alleged preferential transfers.

A copy of the Court’s opinion is available here.

Judge Carey Dismisses One and Declines to Hear a Second Request by the Debtors to Determine Tax Liability

By Charlene D. Davis

On April 10, 2017, Judge Kevin J. Carey issued an Opinion and entered an Order (i) denying the Debtors’ Motion Requesting Determination of Tax Liability (the “Motion”) with respect to a 2015 tax assessment and (ii) abstaining from determining  liability with respect to a 2016 tax assessment.  In re: Ryckman Creek Resources, LLC, et al.  Case No. 16-10292 (KJC).   Applying Section 505(a)(2)(C) of the Bankruptcy Code, the Court determined that because Debtors had not timely appealed the 2015 assessment under state law, the request for a reevaluation of that claim was untimely.   Applying the factors applicable to discretionary abstention for matters subject to Section 505(A)(1), the Court found they weighed in favor of refraining from hearing the dispute over the 2016 assessment.

The Debtors filed voluntary petitions under Chapter 11 of the Bankruptcy Code on February 2, 2016.  They operate an industrial facility for underground storage of natural gas in Wyoming.   They continue to operate their business as debtors-in-possession.   In the Motion, the Debtors contended that Uinta County, Wyoming (the “County”) improperly valued the Debtor’s real property resulting in an unjust tax burden in 2015 and 2016.  The Debtors did not appeal the 2015 assessment to the County Board of Equalization but did appeal the 2016 assessment.

In deciding whether to hear the dispute about the 2015 assessment, the Court  applied Section 505(a)(2)(C) to easily determined it should not.   Section 505(a)(2)(C) reads, in pertinent part, “[t]he court may not so determine–…the amount or legality of any amount arising in connection with an ad valorem tax on real or personal property of the estate. If the applicable period for contesting or redetermining  that amount under applicable nonbankruptcy law has expired.”  Although the Debtors and County relied on different  Wyoming statutes for the applicable period to contest the assessment, the Court found that the deadlines under either of them had expired and dismissed the Motion as it related to the 2015 assessment

In deciding whether to hear the dispute about the 2016 assessment, the Court found that it had jurisdiction but applying the factors considered for discretionary abstention declined to exercise it.    The Court noted that courts that abstain in section 505 matters generally do so if deciding the claim would require “a fact intensive review of the value of the property and the amount of taxes in question” or if the decision “could affect uniformity of assessment of…taxes imposed on other taxpayers.” The Court also applied 6 factors utilized to determine whether to abstain under 505 and concluded that they weighed in favor of abstention, particularly where the Court would be called upon to undertake a factually intensive review of the value of the property.

A copy of the Court’s opinion is available here.