Attorney Josh Burnett will be sitting for the Consumer Bankruptcy Exam later this year or in Q1 of 2027.  ABC certification ensures that attorneys have advanced knowledge and expertise with complex business bankruptcy proceedings, restructuring strategies, creditor negotiations, asset liquidation and other related legal matters.  Amann is expected to become officially certified soon. 

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As of the Petition Date, the Debtors owned and operated the largest private physician-owned for-profit healthcare network in the United States. Headquartered in Dallas, Texas, the Debtors’ operations on the Petition Date included 31 hospitals across eight states, approximately 400 facility locations, 4,500 primary and specialty care physicians, 3,600 staffed beds, and a company-wide workforce of nearly 30,000 employees that provide care to more than two million patients annually.

Amann Burnett has successfully defended a so-called Preference Target Letter by explaining that its client has valid defenses (ordinary course, contemporaneous exchange for new value, subsequent value) defenses.  The Trustee has “gone away”, hopefully for good as the applicable statute of limitations is fast approaching.  A “preference” is defined by Section 547 of Title 11 of the United States Code (the “Bankruptcy Code”).

The case includes the following list of debtors:

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Click on the link above to read the Memorandum Decision.  Amann Burnett, PLLC specializes in Bankruptcy Litigation and Chapter 11 matters for creditors and debtors.

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The United States Court of Appeals for the First Circuit previously reviewed the case and certified a question to the Massachusetts Supreme Judicial Court (SJC) regarding whether the three-prong test for independent contractor status applies to franchise relationships. The SJC concluded that the test does apply but requires a case-specific examination of whether the individual performs any service for the alleged employer. The First Circuit then certified a second question to the SJC, asking whether the plaintiffs perform any service for 7-Eleven under the Massachusetts independent contractor statute, given their contractual obligations and the franchise fee structure.

The Massachusetts Supreme Judicial Court held that the plaintiffs do not perform any service for 7-Eleven within the meaning of the independent contractor statute. The court reasoned that the franchisees operate their stores independently and chose to use the 7-Eleven brand for its market benefits. The court emphasized that the franchisees’ compliance with 7-Eleven’s standards is necessary to maintain the brand’s integrity and does not indicate an employment relationship. Therefore, the court answered the certified question in the negative, concluding that the plaintiffs are not employees of 7-Eleven under the Massachusetts independent contractor statute.

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NBC Boston – To Catch a Contractor

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If the Supreme Court decides in Purdue that bankruptcy courts can issue nondebtor, nonconsensual, third-party releases, and if the district court approves the report and recommendation by Bankruptcy Judge John P. Mastando, III, Subchapter V will have a new, dramatic purpose:  Procuring multimillion-dollar releases for the owners of small businesses when the businesses themselves have little other debt.

The corporate debtor was a notable Broadway producer.   An individual was the sole owner and president of the corporate debtor.

An investor claimed it had not received its share of the income from a pair of productions.   So, the investor initiated an arbitration against the corporate debtor and the owner.  The arbitrator gave the investor an award of $2.9 million against the debtor and the owner, jointly and severally. The district confirmed the award, which was automatically stayed for thirty (30) days.

On the 29th day, the debtor corporation filed a chapter 11 petition under Subchapter V.   The debtor filed an adversary proceeding and persuaded Judge Mastando to enter a preliminary injunction preventing the investor from enforcing the arbitration award against the owner.

The Plan

     The debtor filed a chapter 11 plan to discharge the debtor’s debt owing to the investor and give the owner a release from liability on the $2.9 million arbitration award.   In return, the plan called for the owner to supply $600,000 toward payments under the plan.

The plan called for paying about $275,000 in secured and priority claims in full on confirmation.  The unsecured investor with its $2.9 million claim was in a class of by itself and would receive a portion of the cash from the owner, plus a share of the debtor’s disposable income over the life of the five-year plan.

Unsecured creditors with about $300,000 in claims would receive a pro rata share of the debtor’s disposable income for the duration of the plan.  The owner would receive no distribution but would retain ownership.

The plan required the owner to continue working for the debtor while spending half of his time on the debtor’s affairs. In return, the debtor would be paid an annual salary of $210,000.

The unsecured class voted in favor of the plan, but the investor class voted against the plan, requiring Judge Mastando to consider confirmation as a cramdown under Section 1191(b).

In his November 22 opinion, Judge Mastando found jurisdiction to confirm the plan over objections by the investor and the U.S. Trustee.  However, he read the Second Circuit’s decision in In re Purdue Pharma LP, 69 F.4th 45 (2d Cir. May 30, 2023), cert. granted sub nom. Harrington v. Purdue Pharma L.P., No. (23A87), 2023 WL 5116031 (U.S. Aug. 10, 2023), as requiring him to issue a report and recommendation to the district court regarding confirmation of the plan. (Note: Purdue will be argued in the Supreme Court on December 4.)

Because the arbitration award was a joint several liability of the debtor and the owner, Judge Mastando concluded that the plan would be a release of the investor’s “direct” claims against the owner.

The Objections

     Objecting to confirmation, the U.S. Trustee called the plan “abusive” and said it was not a “rare or unusual” case to warrant confirmation under Second Circuit authority. Judge Mastando quoted the U.S. Trustee as characterizing the release in favor of the owner as forcing “‘an involuntary settlement upon [the owner’s] primary creditor.’”

In objecting to confirmation, the investor contended that the plan would give the owner a “multimillion dollar gain” while causing the investor a “large financial loss.”  To the owner’s way of thinking, a 37% recovery was not “fair payment.”

Judge Mastando Confirms the Plan

      Judge Mastando began his analysis of contested confirmation by quoting the Second Circuit in Purdue as “consistently” holding “that bankruptcy courts may approve non-consensual third-party releases of direct claims against a non-debtor so long as the release ‘plays an important part in the debtor’s reorganization plan.’ See Purdue, 69 F.4th 45, 75–77 (2d Cir. 2023).” In his 65-page opinion, he proceeded to analyze the seven requisites in Purdue for confirmation of a plan with nonconsensual, nondebtor releases of direct claims.

Among the more pivotal Purdue tests applicable to the case before him, Judge Mastando dealt with them as follows:

Necessity for Successful Reorganization

While a plan “might” be confirmed without the releases, Judge Mastando said that success of the debtor’s business was “almost entirely dependent” on the owner’s continued participation that would be “severely” endangered were the investor to enforce the arbitration award against the owner.

The Owner’s ‘Substantial’ Contribution

Judge Mastando found that the owner’s cash contribution and his commitment to work for the debtor after confirmation were “substantial.”

‘Overwhelming’ Support from the Affected Class

Judge Mastando conceded that the investor class’s opposition meant that support from the class was “indisputably not ‘overwhelming.’”

“Nevertheless,” Judge Mastando said that the investor’s objection “has little weight as to the propriety of a non-consensual third-party release here,” based on two findings. First, he said that Subchapter V “itself contemplates the confirmation of a plan without the consent of any creditor.”

Second, Judge Mastando apparently substituted his judgment for the investor’s by saying “that the Plan is the best possible means of enabling [the investor’s] recovery.”

‘Fair’ Payment for Enjoined Claims

Judge Mastando found “that the Plan would provide all creditors with more than they would be able to collect from either the Debtor or [the owner] in any other situation.” Finding that the plan would eliminate the cost and uncertainty were the investor to attempt collecting the award from the owner, he found “that the Plan provides for fair and equitable payment of the Released Claims.”

Equitable Considerations

Judge Mastando found that “equity” supports confirmation of the plan with its non-debtor releases, in part because the owner and other creditors “will receive more under the Plan than in a chapter 7 proceeding, or in the event [the owner] filed for bankruptcy himself.”

Judge Mastando rejected the U.S. Trustee’s contention that the case did not present “exceptional circumstances.” He also disagreed with the investor’s contention based on the idea that it was not a “high-profile” mass tort case where “the vast majority” supported the plan.

Judge Mastando nonetheless found the case to be “unique” and “exceptional” because the investor was “apparently willing to . . . derail a Plan that would purportedly optimize its own recovery (and the recovery of every other creditor) in order to either drive the Debtor into Chapter 7 or drive the Debtor’s principal into bankruptcy himself.” [Emphasis in original.]

Provided that the debtor makes a minor modification in the plan, Judge Mastando overruled objections to the plan while reporting and recommending that the district court confirm the plan.

Observations from American Bankruptcy Institute’s Editor, William Rochelle

• Will the district court consider Judge Mastando’s recommendation before the Supreme Court rules on Purdue?
• Even if the Supreme Court affirms Purdue and finds authority for bankruptcy courts to issue nondebtor releases, the district court must still consider whether Subchapter V has a peculiar attribute allowing the imposition of nondebtor releases despite overwhelming opposition from the affected class.

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20-3257-cv (L), In re Nine West LBO Sec. Litig.

August Term 2021(Argued:  March 10, 2022

Decided:  November 27, 2023)

Docket Nos. 20-3257-cv (L), 20-3290-cv, 20-3315-cv, 20-3326-cv, 20-3327-cv, 20-3334-cv, 20-3335-cv, 20-3941-cv, 20-3952-cv, 20-3959-cv, 20-3961-cv, 20-3964-cv, 20-3969-cv, 20-3980-cv, 20-3981-cv, 20-3992-cv, 20-3998-cv.

Plaintiffs-appellants Marc Kirschner, as the Litigation Trustee for the Nine West Litigation Trust representing unsecured creditors and Wilmington Savings Fund, FSB, as successor Indenture Trustee for various notes issued by Nine West (together, the “Trustees”), brought seventeen (17) actions in different states against Jones Group’s former directors and officers for unjust enrichment and against its former public shareholders for fraudulent conveyance.   Both the public shareholders and the directors and officers moved to dismiss the claims against them, arguing that payments made to them in connection with the merger are shielded by the Bankruptcy Code’s Section 546(e) safe harbor.   The district court granted both motions to dismiss, holding that the payments were shielded by the safe harbor.  In re Tribune Co. Fraudulent Conv. Litig. (Tribune II), 946 F.3d 66, 72 (2d Cir. 2019), cert. denied sub nom. Deutsche Bank Tr. Co. Americas v. Robert R. McCormick Found., 141 S. Ct. 2552 (2021

Plaintiffs appealed.

Section 546(e) of Chapter 11 of the Bankruptcy Code precludes avoidance of “settlement payment[s] . . . made by or to (or for the benefit of) a . . . financial institution, . . . or . . . transfer[s] made by or to (or for the benefit of) a . . . financial institution . . . in connection with a securities contract . . . .”  11 U.S.C. § 546(e).   The Code defines “financial institution” to include not only banks but also a customer of a bank “when [the bank] is acting as agent or custodian for a customer . . . in connection with a securities contract.”  Id.§ 101(22)(A).

The two leading cases interpreting the safe harbor provision are Merit Management, 138 S. Ct. 883 (2018) and Tribune II, 946 F.3d 66 (2d Cir. 2019).   The Supreme Court held in Merit Management, 138 S. Ct. at 892 and we recognized in Tribune II, 946 F.3d at 77, that § 546(e) does “not protect transfers in which financial institutions served as mere conduits.”  In Tribune II, however, we concluded that an agency relationship provided an “alternative basis for finding that the payments [were] covered.”  946 F.3d at 77; see also11 U.S.C. § 101(22)(A).   511 U.S.C. § 741(7) defines the term “securities contract” broadly.

Section 546(e) has been uniformly recognized as an affirmative defense, though not yet by this Court.   We have, however, held that safe harbors in other statutory schemes are affirmative defenses.  Accordingly, we hold today that 11 U.S.C. § 546(e) is an affirmative defense.

Plaintiffs are under no obligation to plead facts supporting or negating an affirmative defense in the complaint.  See, e.g., Picard v. Citibank N.A. (In re Bernard L. Madoff Inv. Sec. LLC), 12 F.4th 171, 195 (2d Cir. 2021) (first citing Fed. R. Civ. P. 8(c); and then citing Perry v. Merit Sys. Prot. Bd., 137 S. Ct. 1975, 1987 n.9 (2017) (“An affirmative defense to a plaintiff’s claim for relief is not something the plaintiff must anticipate and negate in her pleading.” (cleaned up))), cert. denied sub nom.  Citibank, N.A. v. Picard, 142 S. Ct. 1209 (2022).

The Second Circuit affirmed in part, vacated in part and remanded.  The court explained that Congress enacted Section 546(e) safe harbor to promote finality and certainty for investors by limiting the circumstances under which securities transactions could be unwound by, for example, a successful fraudulent conveyance action.   The court wrote that to further expand the scope of Section 546(e) and Section 101(22)(A) and immunize transactions in which a bank took only purely ministerial action, made no payments and had no discretion would not further Congress’s purpose.   Accordingly, the court vacated the district court’s judgment to the extent it dismissed the Payroll Transfer claims.

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