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The rapper Curtis James “50 Cent” Jackson III filed a voluntary chapter 11 bankruptcy petition in Connecticut bankruptcy court on Monday, July 13, 2015.  Jackson rose to prominence with songs like In Da Club and P.I.M.P. from his 2003 album Get Rich or Die Trying (also the name of his 2005 film biopic) and has starred in many film and television projects, including the Starz show Power and the upcoming movie Southpaw.

“This filing for personal bankruptcy protection permits Mr. Jackson to continue his involvement with various business interests and continue his work as an entertainer, while he pursues an orderly reorganization of his financial affairs,” Jackson’s attorneys said in a statement.

The chapter 11 filing was made the same day a jury was scheduled to determine whether Jackson is liable for punitive damages in a 2010 lawsuit filed by Lastonia Leviston.  Just days prior to the filing, the same jury awarded Leviston $5 million in compensatory damages, after she alleged that Jackson violated her privacy by posting a sex tape of her online without her permission.  Jackson’s attorneys are disputing the damages award.  As a result of the bankruptcy filing, the proceedings in the sex tape lawsuit are stayed, meaning that Leviston cannot try to enforce or collect her $5 million award, or obtain a finding from the state court jury on the amount of punitive damages, without first obtaining relief from the automatic stay in the bankruptcy case.

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The Fifth Circuit Court of Appeals recently issued a decision that should make defendants in Ponzi cases shiver in their boots.  The court said that the defendant, the Golf Channel, had to return nearly $6 million and that it could not take advantage of a commonly-invoked “reasonably equivalent value” defense.  Even though the Golf Channel had aired advertisements promoting the business, which would normally have been “reasonably equivalent value,” the Fifth Circuit held that by airing advertisements promoting the Ponzi scheme, the Golf Channel did nothing to help the Ponzi scheme’s creditors.  But how was the Golf Channel supposed to know that it was dealing with a Ponzi scheme?  For more on the case, and what it means for merchants, read on. Continue reading

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On Thursday I published a blog article entitled Will “Wellness Make Us Better?, in which I posed the question of whether or not the U.S. Supreme Court would finally rule on whether or not bankruptcy courts can, in Stern type cases, enter a final judgment with the consent of the parties.

Yesterday the Supreme Court, in a 6-3 decision authored by Justice Sotomayor, answered the question in the affirmative and provided us all a good measure of relief.  In the case of Wellness International Network, Ltd., et al. v. Shariff (“Wellness”), Richard Shariff tried to discharge a debt he owed to Wellness International Network, Ltd.  After a series of procedural rulings on discovery, the bankruptcy court eventually entered a default judgment against Shariff.  While Shariff’s appeal was pending in the District Court, the U.S. Supreme Court held in Stern v. Marshall, 131 S. Ct. 2594 (2011) that Article III forbids bankruptcy courts from entering final judgments on claims that seek only to “augment” the bankruptcy estate and would otherwise “exist without regard to any bankruptcy proceeding.”  Thereafter in Wellness, the 7th Circuit Court of Appeals held that the judgment entered by the bankruptcy court against Shariff could not stand because the bankruptcy court lacked the constitutional authority to enter a final judgment on the claim.

The Supreme Court disagreed with the 7th Circuit and, consistent with the 9th Circuit holding in Bellingham, 702 F.3d 553 (9th Cir. 2012), held that Article III permits bankruptcy judges to adjudicate Stern claims with the parties’ knowing and voluntary consent.

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The United States Supreme Court will hand down its decision in the next few weeks in the case of Wellness Int’l Network, Ltd. v. Sharif (“Wellness”), 727 F.3d 751 (7th Cir. 2013) regarding bankruptcy courts’ jurisdiction.  The jurisdictional quagmire is a major and growing virus in the bankruptcy courts, increasing exponentially the costs of bankruptcy litigation.  Hopefully the Wellness decision will eventually provide a belated prescription on bankruptcy courts’ jurisdiction, and make us all feel just peachy.

A little background:

In Stern v. Marshall (“Stern”) 131 S.Ct. 2594 (2011), the Supreme Court granted certiorari to resolve whether a bankruptcy court had authority to enter a final judgment on a debtor’s counterclaim for tortious interference.  Chief Justice Roberts held that 28 U.S.C. § 157, which gives bankruptcy judges core authority to determine counterclaims that are not necessary to the allowance of claims (so-called “Stern type claims”), unconstitutionally delegated the judicial power of the United States to non-Article III bankruptcy judges.  The Court looked at earlier decisions for its holding that only decisions regarding “public rights” can be delegated to a non-Article III judge, while decisions involving private rights “subject to suit at common law, or in equity or admiralty” require Article III jurisdiction.  The Court held that actions which “augment” the bankruptcy estate may not be within the “public rights” exception and thus a bankruptcy judge does not have the authority to make a final decision, whereas actions to determine a creditor’s right to receive “a pro rata share in the bankruptcy estate” are matters over which the bankruptcy judge does have the authority to finally decide.

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Commercial landlords should take notice. Within the last several months, one women’s clothing retailer after another has gone out of business. On Dec. 4, 2014, Philadelphia-based Deb Shops filed Chapter 11. Next came Delia’s, based in New York, which filed bankruptcy only four days later. On Jan. 9, 2015, Body Central, based in Florida, a chain with 265 stores, announced that it was closing all of its stores by way of an assignment for the benefit of creditors, an alternative to federal bankruptcy. On Jan. 15, Wet Seal, a Southern California-based company, filed its own Chapter 11. Then on Feb. 4, Cachè, another New York-based chain filed Chapter 11. In addition to these, Jones New York andKate Spade Saturday recently announced that their retail locations would be closing.

If one is an anomaly, two a coincidence and three a trend, then we should pay attention when we see so many substantial retail women’s clothing companies file bankruptcy all within a few months. There is anecdotal evidence that as millennials get older and start to assert their spending power, traditional brick-and-mortar businesses may be in for some tough times.

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The economy is humming along and bankruptcy filings are at historic lows.  http://www.prweb.com/releases/2015/01/prweb12432257.htm.   Nevertheless, a recent trend in retail may suggest that the times, they are a changing.

Radio Shack, the 95 year old national chain that for many years was the “go to” store for consumer electronics, has been in the headlines as a result of its bankruptcy filing in February.   But getting much less national mainstream publicity was the demise of at least seven clothing retailers, all of whom went out of business or filed Chapter 11 within the past 5 months.   In December it was Deb Shops and Delia’s.   In January, it was Body Central and Wet Seal.  In February, Cache filed, and in April, it was Fresh Produce, Simply Fashion and Frederick’s of Hollywood.

In total, these retailers operated out of over 6,500 stores.   That means many employees are now out of a job.   It also means that there were over 6,500 leases that either were forfeited back to the landlords or sold.  That is a significant disruption for property owners in such a short time period.   And a lot of new business for companies such as liquidators Hilco, Gordon Brothers, and others who specialize in liquidation sales for retail companies that are going out of business, not to mention the bankruptcy lawyers involved in those Chapter 11 cases.

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Editor’s note: this post originally appeared in Law360.

In a recent decision, the United States Bankruptcy Appellate Panel of the Ninth Circuit resolved what it described as an issue of “first impression” in the Ninth Circuit — whether or not the two-year statute of limitations provided by Section 546(a) of the Bankruptcy Code “. . . preempts a state-law statute of repose such as California Civil Code § 3439.09(c).”  Rund v. Bank of America NA et al. (In re EPD Investment Co. LLC), 523 B.R. 680, 682 (B.A.P. 9th Cir. 2015).

The EPD Investment decision involved the application of the California Uniform Fraudulent Transfer Act (UFTA), set forth at Civil Code §§ 3439-3439.12, which allows a creditor to recover a fraudulent transfer from the transferee under various circumstances, including “actual fraud” and “constructive fraud.”  The statute of limitations provided in the UFTA, Civil Code § 3439.09, generally provides that claims must be brought within four years from the date of the transfer or in some cases, within one year of discovery of the claim.  The BAP found that despite the terms of Civil Code § 3439.09(c), if a claim existed under the UFTA on the date of the “order for relief,” the trustee had an additional two years to file a complaint with respect to that claim by reason of Sections 544(b) and 546(a) of the Bankruptcy Code.  EPD Investment, 523 B.R. 680 at 691-692.

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Baker Botts L.L.P. et al. v. ASARCO L.L.C., currently pending before the Supreme Court of the United States, is of particular interest to bankruptcy practitioners because this decision will have far-reaching effects regarding attorney’s fees in bankruptcy.  Specifically, the Supreme Court will determine whether Section 330(a) of the Bankruptcy Code grants bankruptcy judges the discretion to award compensation for the defense of fee applications.

The dispute arose after law firm Baker Botts L.L.P. filed a fee application with the Bankruptcy Court for work related to mining company ASARCO’s bankruptcy, including the firm’s work in obtaining a fraudulent transfer judgment in excess of $6 billion.  Baker Botts’ fee application was challenged, and the firm incurred additional fees in its successful defense of the fee application.  Ultimately, the Bankruptcy Court awarded Baker Botts $113 million in fees for its work on the case, plus a $4.1 million merit enhancement, as well as $5 million in fees for its successful defense of the fee application.

However, on appeal, the Fifth Circuit held that the bankruptcy code “does not authorize compensation for the costs counsel or professionals bear to defend their fee applications.”  In re ASARCO, L.L.C., 751 F.3d 291, 299 (5th Cir.) cert. granted sub nom. Baker Botts, L.L.P. v. ASARCO, L.L.C., 135 S. Ct. 44 (2014).  This ruling created a circuit split with a decision by the Ninth Circuit in In re Smith, 317 F.3d 918 (9th Cir. 2002).  Baker Botts appealed the Fifth Circuit’s ruling to the Supreme Court, which granted certioriari earlier this year.

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Bankruptcy Judge Dennis Montali in San Francisco said last week that he will allow a direct appeal to the Ninth Circuit from one of his rulings in the bankruptcy of Howrey LLP, skipping an intermediate appeal to the U.S. District Court.  The judge relied on Jewel v. Boxer — a California state law case which holds that profit earned on unfinished business after dissolution belongs to the “old” firm, not to a newly-formed firm that completed the work.

The case is of intense interest to attorneys who move to other firms when their existing firms go out of business.  Judge Montali had allowed the Howrey trustee to sue several law firms including Jones Day and Seyfarth Shaw LLP for profits they made on work that began at the now-defunct firm.

The New York Court of Appeals recently ruled to the contrary in response to a question by the New York-based Second Circuit Court of Appeals in litigation involving the failed law firms Thelen and Coudert Brothers.  The New York Court of Appeals stated:  “We hold that pending hourly fee matters are not partnership ‘property’ or ‘unfinished business’ within the meaning of New York’s Partnership Law.  A law firm does not own a client or an engagement, and is only entitled to be paid for services actually rendered.”

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Editor’s note: this post originally appeared in Law360.

Buying distressed assets is big business.  Many distressed assets are acquired through the seller’s Chapter 11 bankruptcy case.   In those instances, a buyer will enter into a purchase and sale agreement with the seller/debtor and the agreement is generally subject to notice and opportunity for overbids by third parties and ultimate bankruptcy court approval.

The somewhat problematic issue is determining what rights or obligations, if any, do the parties have under the agreement between the date of execution and the date the Court enters an order approving the sale?   This is precisely the issue the parties encountered in the chapter 11 bankruptcy case of Hot Dog on a Stick, which is pending before the U.S. Bankruptcy Court for the Central District of California.