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Recent Third Circuit Opinions Round-up

By Justin R. Alberto

In re SCH Corp., 2014 WL 2724606 (3d Cir. June 17, 2014)

The Third Circuit vacated and remanded the Delaware District Court’s dismissal of class action claimants’ (the “Plaintiffs”) appeal of the Bankruptcy Court’s denial of the Plaintiffs’ motion to dismiss the debtors’ bankruptcy cases as bad faith filings. The debtors filed chapter 11 petitions in early 2009 and consummated a plan later that year pursuant to which the businesses were sold to a subsidiary of the debtors’ largest secured creditor. Post-confirmation, the Plaintiffs moved to dismiss the debtors’ cases alleging that the debtors’ responsible officer acted in bad faith by transferring the business and insulating the new company from liability. The Bankruptcy Court denied the motion and the District Court dismissed the appeal as equitably moot, finding that the plan had been substantially consummated despite admitting reversal would not result in great difficulty or inequity. Reiterating the factors addressed in its recent Semcrude decision, the Third Circuit found the District Court’s dismissal to be inappropriate because it failed to address the other forms of relief sought by the Plaintiffs, including removal of the debtors’ responsible officer and sanctions against the buyer.

In re Makowka, 2014 WL 2566084 (3d Cir. June 9, 2014)

The Third Circuit vacated and remanded the Middle District of Pennsylvania’s affirmation of the Bankruptcy Court’s decision that a homeowners’ association (the “Association”) held a valid statutory lien on a chapter 13 debtor’s residence pursuant to Pennsylvania state law. In her chapter 13 proceedings, the debtor sought to avoid pursuant to section 522(f) a portion of the Association’s claim relating to a lien that the Association had enforced by obtaining a debt judgment outside of the statutory period. The Bankruptcy Court denied the debtor’s motion and held that the Association properly preserved its statutory lien when it prosecuted the debt action even though it failed to foreclose on the lien within the statutory period. The District Court agreed. The Third Circuit, however, reversed. While noting the decision turns on questions of state law and that the Pennsylvania Supreme Court has not yet addressed the issue, the Third Circuit found that the court would more likely than not find the Association failed to properly enforce its statutory lien when it pursued an action in debt in lieu of a timely foreclosure proceeding.

In re G-1 Holdings, 2014 WL 2724129 (3d Cir. June 17, 2014)

The Third Circuit vacated and remanded the Bankruptcy Court’s grant of summary judgment that barred two breach of contract claims. The debtors were members of the Center for Claims Resolution (the “Center”), an entity designed to administer asbestos-related claims brought against its members. After the debtors failed to pay their contractually obligated dues, which resulted in a significant funding shortfall, the Center terminated the debtors’ membership. Pursuant to the membership agreement, the Center’s other members covered the debtors’ unpaid obligations. The members subsequently filed proofs of claim in the debtors’ bankruptcy cases, which the Bankruptcy Court disallowed because, according to the Court, the membership agreement barred members from pursuing private actions against the debtors for breach of contract. While the Third Circuit agreed on this point, it reversed the Bankruptcy Court’s decision because it found the claimants suffered additional, potentially recoverable damages by covering the shortfall caused by the debtors’ nonpayment.

In re Coastal Broadcasting Systems, Inc., 2014 WL 2808260 (3d Cir. June 23, 2014)

The Third Circuit affirmed the Delaware District Court’s order affirming the Bankruptcy Court’s confirmation of the debtor’s plan of reorganization. The appellants held subordinated debt and were parties to an inter-creditor agreement with the senior debt holder. Pursuant to the agreement, the junior debt holders assigned their repayment and voting rights to the senior holder in the event of reorganization. The junior holders objected to confirmation of the debtor’s plan of reorganization on several grounds, including improper classification of classes and feasibility. The junior holders did not discuss the implications of the vote shifting provision contained in the inter-creditor agreement until questioned by the Bankruptcy Court at the end of the confirmation hearing. The holders’ only response was that the provision applies solely to liquidations and does not cover reorganizations. In its decision, the Bankruptcy Court agreed with the junior holders that the junior holders’ claims were improperly classified, but nonetheless confirmed the plan because the vote shifting provision would have granted to the senior holder (a plan proponent) the junior holders’ voting rights. The District Court affirmed. Using New Jersey contract law to interpret the inter-creditor agreement, the Third Circuit also affirmed and held that the vote-shifting provision clearly and expressly applies in the reorganization context.

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