Recent Developments in Third Circuit Bankruptcy Law

The bankruptcy court held that the fee increase applies to debtors that filed and confirmed Chapter 11 plans prior to the increase. In reaching its decision, the court reasoned that the fee increase could not be considered "retroactive" because it only applies prospectively to quarterly fees incurred after Jan. 1, 2018. The court further noted that even retroactive statutory amendments have been held not to violate due process simply because they upset settled expectations. Further, according to the court, the imposition of increased quarterly fees is not retroactive because it does not attach new legal consequences to completed transactions, but is more akin to expenses or taxes arising post-confirmation.

The court also found that, even if the 2017 amendment were retroactive as to Exide, it would not necessarily constitute a Due Process Clause violation. This is because retroactive application of a federal statute is not unconstitutional if there is a legitimate legislative purpose that is furthered by rational means. As to the legislative purpose, the court noted Congress' intent in adopting the U.S. Trustee fee schedule, which was designed to be self-funded by users of the bankruptcy system rather than borne by taxpayers. Congress enacted the 2017 amendment for the legitimate legislative purpose of addressing reduced fee collections due to declining bankruptcy filings in prior years. The lack of fee collections was projected to create a large budget shortfall for the U.S. Trustee program, and Congress acted with the legitimate purpose of combating that shortfall. As to the rational means analysis, the court found that application of the fee increase to large Chapter 11 cases was rationally related to the statute's purpose of preserving the U.S. Trustee's self-funded status, because larger cases are more taxing on the U.S. Trustee system, as well as to offset the costs of 18 new bankruptcy judgeships created by the 2017 amendment.

The court also rejected Exide's argument that the increased quarterly fee is an excessive user fee and is therefore an impermissible taking in violation of the Fifth Amendment. It noted that, under the 2017 amendment, the user fee for debtors making $1 million or more in disbursements is the lesser of 1% of disbursements or $250,000. The opinion noted that the U.S. Supreme Court had upheld a 1.5% ad valorem fee as not so clearly excessive as to be a taking.

Finally, the court rejected Exide's argument that the increased fee violated the U.S. Constitution's Bankruptcy Clause due to non-uniform application. In particular, Exide argued, the new quarterly fees are not applicable to Bankruptcy Administrator districts (North Carolina and Alabama) for cases filed prior to October 2018. The court found that the increased fees are nevertheless uniform because they apply with the same force in all U.S. Trustee districts and were enacted in response to a problem confined to U.S. Trustee districts.

The U.S. Trustee fee increase controversy is now the subject of pending appeals in several federal appeals courts, with a number of lower court decisions coming down in favor of debtors.  Exide filed an appeal of the bankruptcy court's decision on January 17, 2020.

In re Venoco

The U.S. District Court for the District of Delaware recently affirmed a Delaware Bankruptcy Court decision holding that sovereign immunity under the U.S. Constitution's Eleventh Amendment did not bar the complaint of a liquidating trustee against state defendants for failure to pay use and occupancy fees. In re Venoco, Case No. 17-10828 (D. Del. Jan. 3, 2020).

Venoco was an oil and gas company that operated the Platform Holly drilling rig off the coast of Santa Barbara, CA. After a ruptured pipeline and the California Land Commission's refusal to allow Venoco to pursue alternative means to extract and process oil, Venoco filed for bankruptcy and relinquished its interests in the oil field and Platform Holly. Under a reimbursement agreement with Venoco, the Land Commission then became responsible for decommissioning the platform and plugging the abandoned wells. When the agreement expired, California and the Lands Commission asserted their police powers to remain on the facility without paying for it.

The liquidating trustee of Venoco's bankruptcy estate brought a lawsuit against the California state defendants, alleging "inverse condemnation" claims under the Takings Clause of the California and U.S. Constitution for the state's use of the oil field in which the bankruptcy estate allegedly had an interest.

The district court rejected the state defendants' assertion that they were entitled to sovereign immunity under the Eleventh Amendment. It cited Central Virginia Community College v. Katz, 546 U.S. 356 (2006), in which the Supreme Court held that states, in ratifying the Bankruptcy Clause of the Constitution, acquiesced in a subordination of whatever sovereign immunity they might otherwise have in proceedings that effectuate the bankruptcy courts' in rem jurisdiction. The court found that the liquidating trustee's inverse condemnation claims effectuated the bankruptcy court's in rem jurisdiction because those claims directly affected the administration and distribution of the estates.

The court also rejected the state defendants' argument that the California Tort Claims Act provides them with additional protection from liability beyond that provided by the U.S. Constitution because the state defendants waived that argument by failing to raise it in bankruptcy court.

The state defendants appealed on Jan. 7, 2020, and filed a motion to stay the litigation pending their appeal. The liquidating trustee objected to the stay motion, arguing that the notice of appeal divested the district court of jurisdiction. The district court ruled that it had jurisdiction to hear the stay motion because the relief sought was akin to an injunction that preserves the status quo and that its consideration of the motion would not create confusion or inefficiency. As to the merits of the appeal, however, the district court found that a stay is required where there is a non-frivolous assertion of Eleventh Amendment immunity, as the right to be free of litigation is compromised when a district court proceeds while an appeal is pending. The court therefore stayed the litigation pending resolution of the appeal.

In re Newark Watershed Conservation and Development Corp.

The U.S. Bankruptcy Court for the District of New Jersey recently approved a roughly $6 million settlement agreement between the defunct Newark Watershed Conservation and Development Corporation (NWCDC) and a former law firm and two of its ex-attorneys who represented the NWCDC prior to its demise. In re Newark Watershed Conservation and Development Corp., Case No. 15-10019 (Bankr. D.N.J. Dec. 27, 2019).

In March 2013, after several investigations into the NWCDC's operations, the NWCDC board held an emergency meeting and voted to dissolve the corporation. The City of Newark and the board then sought the appointment of provisional trustees, who were appointed in June 2013.  The provisional trustees worked with Newark's mayor and city council to determine a course of action for pursuing claims on behalf of the NWCDC. Ultimately, in January 2015, the NWCDC filed Chapter 11, with the provisional trustees and an interim director managing its affairs.

In June 2016, the NWCDC sued its prior law firm and the two attorneys, alleging that they had enabled corruption at the organization by failing to provide oversight of the agency. This lack of oversight allegedly enabled "on-going unlawful and wasteful and unauthorized conduct of management." The former executive director of the agency received a 102-month prison sentence after pleading guilty to her involvement in a $1 million kickback scheme, and other individuals also pleaded guilty to federal criminal charges.

Following three rounds of mediation with retired Chief U.S. District Judge Jose Linares, the parties reached a settlement. The defendants and their professional liability insurers agreed to pay $6 million in full satisfaction of the NWCDC's claims against them and an additional amount related to discovery sanctions.

Settlements in bankruptcy must be approved by the court under Rule 9019 of the Federal Rules of Bankruptcy Procedure and are subject to the standard set forth by the Third Circuit in Myers v. Martin (In re Martin), No. 95-1581 (Third Cir. May 7, 1996), which requires the court to evaluate: the probability of success; the likely difficulties in collection; the complexity of the litigation; the attendant expense, inconvenience and delay; and the paramount interests of creditors.

In approving the settlement, the bankruptcy court found that it was "a reasonable and prudent exercise of business judgment by the Provisional Trustees of the NWCDC" that "is in the best interests of creditors and the NWCDC Bankruptcy Estate."

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Rachel Ehrlich Albanese is a restructuring partner in the New York office of DLA Piper. Gregory Martin Juell is an associate at the firm, focusing his practice in the area of restructuring.