Justia Corporate Compliance Opinion Summaries

Articles Posted in Bankruptcy
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While Appvion was in financial distress, 2012-2016, the defendants allegedly fraudulently inflated stock valuations to enrich the directors and officers, whose pay was tied to the valuations of its ERISA-covered Employee Stock Ownership Plan (ESOP). They allegedly carried out this scheme with knowing aid from the ESOP trustee, Argent, and its independent appraiser, Stout. Appvion directors allegedly provided unlawful dividends to its parent company by forgiving intercompany notes. Appvion filed for bankruptcy protection. Appvion’s bankruptcy creditors were given authority to pursue certain corporation-law claims on behalf of Appvion to recover losses from the defendants’ alleged wrongs against the corporation; they brought state law claims against the directors and officers for breaching their corporate fiduciary duties; alleged that Argent and Stout aided and abetted those breaches, and asserted state-law unlawful dividend claims. The defendants argued that their roles in Appvion’s ESOP valuations were governed by the Employee Retirement Income Security Act (ERISA), which preempted state corporation-law liability and that, despite their dual roles as corporate and ERISA fiduciaries, they acted exclusively under ERISA when carrying out ESOP activities, 29 U.S.C. 1002(21)(A). The district court agreed and dismissed.The Seventh Circuit reversed in part. ERISA does not preempt the claims against directors and officers. ERISA expressly contemplates parallel corporate liability against those who serve dual roles as both corporate and ERISA fiduciaries. ERISA preempts the claims against Argent and Stout. Corporation-law aiding and abetting liability against these defendants would interfere with the cornerstone of ERISA’s fiduciary duties—Section 404's exclusive benefit rule. View "Halperin v. Richards" on Justia Law

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In 2005, revelations surfaced that Body Armor—a publicly-traded company—was manufacturing its body armor, which it sold to law enforcement agencies and the U.S. military, using substandard materials. Its stock price plummeted, prompting shareholders to bring numerous actions that were consolidated into a shareholders’ class action and a derivative action on behalf of Body Armor against specified officers and directors. Since then, the matter has traveled, through bankruptcy, trial, and appellate courts throughout three U.S. jurisdictions. In its second review of the case, the Third Circuit affirmed a 2015 Bankruptcy Court for the District of Delaware order, approving a settlement entered in the Chapter 11 bankruptcy case of S.S. Body Armor I. The court reversed in part the Bankruptcy Court’s order that granted the objector fees on a contingent basis and remanded for a determination of the appropriate amount of the fee award. The court affirmed the part of that order that denied the objector’s claim to attorneys’ fees and expenses under the Bankruptcy Code and an order awarding fees to counsel in one of the underlying lawsuits. View "In re: SS Body Armor I Inc." on Justia Law

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Brooks, Debtor's CEO, was charged with financial crimes. In class action and derivative lawsuits, Debtor proposed a global settlement that indemnified Brooks for liability under the Sarbanes Oxley Act (SOX), 15 U.S.C. 7243. Cohen, Debtor’s former General Counsel and a shareholder, claimed that the indemnification was unlawful. The district court approved the settlement, Cohen, represented by CLM, appealed. The Second Circuit vacated, noting that the EDNY would determine CLM’s attorneys’ fees award. Debtor initiated Chapter 11 bankruptcy proceedings. The Bankruptcy Court confirmed Debtor’s liquidation plan, with a trustee to pursue Debtor’s interest in recouping its losses from the ongoing actions.Brooks died in prison. Because his appeal had not concluded, some of his convictions and restitution obligations were abated. Stakeholders negotiated a second global settlement agreement, under which $142 million of Brooks’ restrained assets were to be distributed to his victims; $70 million has been remitted to Debtor. The Bankruptcy Court awarded CLM fees for the SOX 304 claim; the amount would be determined if Debtor received any funds on account of the claim. CLM’s Fee Appeal remains pending at the district court.CLM requested a $25 million reserve for payment of its fees. The Bankruptcy Court ordered Debtor to set aside $5 million. CLM’s Fee Reserve Appeal remains pending. CLM then moved, unsuccessfully, for a stay of Second Settlement Agreement distributions. In its Stay Denial Appeal, CLM’s motion requesting a stay of distributions was denied. The Third Circuit affirmed. The $5 million reserve is sufficient. A $5 million attorneys’ fees award for 1,502.2 hours of legal work totaling $549,472.61 of documented fees would yield an hourly rate of $3,328.45 and a lodestar multiplier of over nine. In common fund cases where attorneys’ fees are calculated using the lodestar method, multiples from one to four are the norm. View "SS Body Armor I, Inc. v. Carter Ledyard & Milburn, LLP" on Justia Law

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Lester and William Lee created LIA in 1974 as a public company. William’s sons (Lester's nephews) later joined the business. LIA subsequently bought out the public shareholders, leaving Lester owning 516 shares; William owned 484. William created the Trust to hold his shares. The nephews served as trustees. Lester encountered difficulties with another company he owned, Maxim. He proposed that Maxim merge with LIA; William rejected this idea. Lester told the nephews, “I will screw you at every opportunity,” and made other threats, then, as majority shareholder, approved a merger of LIA and another company. The Trust asserted its rights under Indiana’s Dissenters’ Rights Statute. Lester gutted LIA to prevent the Trust from collecting the value of its LIA shares. He bought property from LIA on terms favorable to him and realized substantial profits. LIA subsidiaries were transferred for little or no consideration to Lester’s immediate family. Lester also perpetrated a collusive lawsuit, resulting in an agreed judgment that all LIA assets should be transferred to him and his companies. Lester did not disclose these actions to the nephews. In 2008, the Jennings Circuit Court conducted an appraisal in the dissenters’ rights action. Between the trial and the judgment, Lester dissolved LIA. The court entered a $7,522,879.73 judgment for the Trust. In 2012, Lester petitioned for Chapter 7 bankruptcy. The Trust initiated a successful adversary proceeding to pierce LIA’s corporate veil and hold Lester personally liable for the judgment. The Seventh Circuit affirmed, noting the facts were undisputed. View "William R. Lee Irrevocable Trust v. Lee" on Justia Law

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The Company was organized as a limited liability company in 2007; its sole managing member was another LLC, whose sole members were the Ngs, who controlled and managed the Company. Defendant was one of the Company’s lawyers. The Company’s stated purpose was to serve as an investment company making secured loans to real estate developers. The Managers actually created the Company to perpetrate “a fraudulent scheme” by which the Company transferred the money invested in it to another entity the Managers controlled. Defendant knew that the Managers intended to and did use the Company for this fraudulent purpose and, working with the Managers, helped the Company conceal the nature of its asset transfers. The Company was eventually rendered insolvent and its investors filed an involuntary bankruptcy petition. The bankruptcy trustee filed suit against Defendant, alleging tort claims based on Defendant’s involvement in the Company’s fraud. Defendant argued that the claims are barred by the in pari delicto doctrine. The court of appeal affirmed dismissal, finding that the in pari delicto applies to the trustee and rejecting an argument that the doctrine should not bar her claims because the wrongful acts of the Managers should not be imputed to the Company. View "Uecker v. Zentil" on Justia Law

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Plaintiff Jeffrey Weinman was the Chapter 7 Trustee for Adam Aircraft Industries (“AAI”). Defendant Joseph Walker was an officer of AAI and served as its president and as a member of its Board of Directors. Throughout his employment, Walker had neither a written employment contract nor a severance agreement with AAI. In February 2007, the Board decided it wanted to replace Walker as both president and as a board member. Since AAI did not want Walker’s termination to disrupt its ongoing negotiations for debt financing, AAI suggested that Walker could voluntarily “resign” in lieu of termination and could also continue to support the company publicly. Subsequently, Walker agreed, and the parties executed a Memorandum of Understanding (“MOU”) outlining the terms of Walker’s separation, and they also embodied these terms in two Separation Agreements and Releases. About a year after terminating Walker, AAI declared bankruptcy. It then sued in bankruptcy court to avoid further transfers to Walker, to recover some transfers previously made to Walker, and to disallow Walker’s claim on AAI’s bankruptcy. The bankruptcy court denied AAI’s claims. The Bankruptcy Appellate Panel (“BAP”) affirmed this ruling in its entirety. AAI appealed part of the ruling, arguing that its obligations and transfers to Walker were avoidable under the Code on two alternative bases. Finding no reversible error, the Tenth Circuit affirmed the BAP's decision. View "Weinman v. Walker" on Justia Law

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Carhart and Halaska own CHI. CHI terminated its sales agent, MRO, which filed a federal suit for breach of contract. Carhart bought MRO’s claim for $150,000 and became the plaintiff in a suit against a company of which he was a half owner. Halaska then sued Carhart in Wisconsin state court for breach of fiduciary duties to CHI and Halaska by becoming the plaintiff and by writing checks on CHI bank accounts without approval, depositing payments owed CHI into Carhart’s own account, and withholding accounting and other financial information from Halaska. A receiver was appointed, informed the federal court that CHI had no assets out of which to pay a lawyer, and consented to entry of a $242,000 default judgment (the amount sought by Carhart), giving Carhart a potential profit of $92,000 on his purchase of MRO’s claim. In Carhart’s suit to execute that judgment, CHI’s only asset was its Wisconsin suit against Carhart. The court ordered the sale of CHI’s lawsuit at public auction; Carhart, the only bidder, bought it for $10,000, ending all possibility that CHI could proceed against him for his alleged plundering of the company. The Seventh Circuit reversed. Auctioning off the lawsuit placed Carhart ahead of CHI’s other creditors. Carhart was not a purchaser in good faith. No valid interest is impaired by rescinding the sale, enabling CHI to prosecute its suit against Carhart. View "Carhart v. Carhart-Halaska Int'l, LLC" on Justia Law

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Petters purported to purchase and resell electronics. His operations were a Ponzi scheme. In 2005, Petters purchased Polaroid and become Chairman of Polaroid’s board of directors. Polaroid continued to engage in legitimate business. Petters took several million dollars from Polaroid. In 2007-2008, Petters’s companies, including Polaroid, experienced major financial difficulty. Ritchie made short term loans of more than $150 million, with annual interest rates of 80 to 362.1%. Polaroid was not a signatory, although some proceeds were used to repay a Polaroid debt. When the loans were past due, Ritchie demanded collateral. Petters executed a Trademark Security Agreement (TSA) giving Ritchie liens on Polaroid trademarks. Polaroid’s CEO objected to the TSA as impeding Polaroid’s ability to raise needed capital. The TSA did allow Polaroid to grant first-priority trademark liens to secure $75 million in working capital. After the FBI raid, which resulted in Petters’s convictions for mail fraud, wire fraud, and money laundering, and sentence of 50 years in prison, Ritchie accelerated all of the loans. Polaroid filed for bankruptcy and challenged the TSA as an actual fraudulent transfer under federal and Minnesota bankruptcy law, citing the “Ponzi scheme presumption.” The bankruptcy court presumed Petters executed the liens with fraudulent intent, found Ritchie had not received them in good faith and for value, and granted summary judgment. The district court upheld the admission of expert testimony and application of the Ponzi scheme presumption. The Eighth Circuit affirmed. View "Ritchie Capital Mgmt., LLC v. Stoebner" on Justia Law

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Irwin, a holding company, entered bankruptcy when its two subsidiary banks failed. The FDIC closed both in 2009. Their asset portfolios were dominated by mortgage loans, whose value plunged in 2007-2008. Irwin’s trustee in bankruptcy sued its directors and officers (Managers). The FDIC intervened because whatever Irwin collects will be unavailable to satisfy FDIC claims. Under 12 U.S.C. 821(d)(2)(A)(i), when taking over a bank, the FDIC acquires “all rights, titles, powers, and privileges of the insured depository institution, and of any stockholder, member, accountholder, depositor, officer, or director of such institution with respect to the institution and the assets of the institution.” The claims assert that the Managers violated fiduciary duties to Irwin by not implementing additional financial controls; allowing the banks to specialize in kinds of mortgages that were especially hard-hit; allowing Irwin to pay dividends (or repurchase stock) so that it was short of capital; “capitulating” to the FDIC and so that Irwin contributed millions of dollars in new capital to the banks. The district judge concluded that all claims belong to the FDIC and dismissed. The Seventh Circuit affirmed in part, but vacated with respect to claims that concern only what the Managers did at Irwin: supporting the financial distributions, informing Irwin about the banks’ loan portfolios, and causing Irwin to invest more money in the banks after they had failed. View "Levin v. Miller" on Justia Law

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Starr, AIG's former principal shareholder, filed suit against the FRBNY for breach of fiduciary duty in its rescue of AIG during the fall 2008 financial crisis. The district court dismissed Starr's claims and Starr appealed. The suit challenged the extraordinary measures taken by FRBNY to rescue AIG from bankruptcy at the height of the direst financial crisis in modern times. In light of the direct conflict these measures created between the private duties imposed by Delaware fiduciary duty law and the public duties imposed by FRBNY's governing statutes and regulations, the court held that, in this suit, state fiduciary duty law was preempted by federal common law. Accordingly, the court affirmed the judgment of the district court. View "Starr Int'l Co. v. Federal Reserve Bank of New York" on Justia Law