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- Delaware District Court Disagrees with Bankruptcy Court’s Ruling and Holds That Committee’s Challenge Rights Survived Entry of the Sale Order and Consummation of Sale
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Practice Point: District Court Weighs in on Submission of Orders Under Certification of Counsel
Burtch v. Avnet, Inc., No. 13-060-LPS, 2015 WL 24318 (D. Del. Jan. 16, 2015)
This District Court Memorandum Order offers a cautionary tale to practitioners as to the proper—and often improper—use of certifications of counsel.
Avnet, Inc. (“Avnet”) filed a motion to enforce a stipulation whereby the Debtors would segregate Avnet’s purchase-money collateral in a sale of assets to Laurus Master, Ltd. (“Laurus”). A Notice of Agenda of Matters was circulated two days before a scheduled hearing, indicating that the enforcement motion was the only contested matter going forward but Avnet, Laurus and the Debtors were actively attempting to resolve the matter. The parties did indeed reach a settlement (the “Stipulation & Release”), which contained, in part, broad language releasing Avnet “from any and all actions, causes of action, suits,…claims and demands relating to the Debtors and their Chapter 11 cases….”
The day of the hearing, an Amended Notice of Agenda (“Amended Notice”) was served on all parties in interest. The Amended Agenda informed that the hearing had been cancelled and the parties were submitting a stipulation resolving the Enforcement Motion under certification of counsel (“CoC”). Contemporaneously, Avnet submitted a CoC pursuant to Local Bankruptcy Rule 9019-1, and attached the Stipulation & Release negotiated between the Debtors, Avnet and Laurus. The Bankruptcy Court entered an order approving the Stipulation & Release later that day.
The Debtors’ Chapter 11 cases were subsequently converted to Chapter 7 cases, and the Chapter 7 Trustee filed a preference action seeking to avoid and recover certain prepetition transfers to Avnet. Avnet moved to dismiss the preference action, contending that the claims had been released through the Stipulation & Release. The Bankruptcy Court granted the motion to dismiss, finding the Trustee was bound by the Stipulation & Release, which included the preference claims, and the Stipulation & Release was properly approved with notice and hearing as required by Bankruptcy Rule 9019.
The Trustee appealed the decision, arguing, among other things, that the Bankruptcy Court erred in two respects: (1) the Trustee was not bound by the Stipulation & Release because it was a “compromise or settlement” and the Debtors, Avnet and Laurus failed to move for Bankruptcy Court approval “after notice and a hearing” as required by Bankruptcy Rule 9019(a); and (2) creditors were not provided adequate notice of the Stipulation & Release. The District Court agreed, finding two separate, yet related, instances of reversible error.
First, the Court observed that Rule 9019 requires that the debtor, trustee and creditors be provided with 20 days’ notice of a hearing to approve a compromise or settlement, and while “the Bankruptcy Court is given broad discretion to approve settlements and reduce or eliminate notice periods, there are limits to the Bankruptcy Court’s discretion.” Here, the District Court held that no notice of the Stipulation & Release (and its sweeping release), submitted under CoC, was provided. While the Bankruptcy Court concluded it was probable that the parties had notice from the Amended Agenda and prior case pleadings and involvement, the District Court found the record devoid of such evidence.
Second, the Bankruptcy Court committed error to the extent it failed to examine the Stipulation & Release under the standards of Myers v. Martin (In re Martin), 91 F.3d 389 (3d Cir. 1996). Although not asked to do so, the Bankruptcy Court was obligated to assess the propriety of the Stipulation & Release under Martin given the fact that it waived rights beyond those addressed in the enforcement motion (e.g., preference claims), thereby affecting interested parties beyond the signatories. Accordingly, the District Court remanded the matter back to the Bankruptcy Court so that it could assess the merits of the Stipulation & Release under Martin.
This decision serves to highlight two of the potential pitfalls of relying on the local CoC practice. While a highly efficient tool often utilized in our fast-moving proceedings, it may shortcut existing mandates of the Code and Rules. Additionally, although not relevant to the Court’s decision, it is worth noting that the language of Local Rule 9019-1 limits use of CoCs to forms of order resolving “[f]iled objection(s) or informal objection(s) to a Motion, Omnibus Objection to Claims or other pleading filed with the Court…[or] such other circumstances as the Court directs.” Thus, notwithstanding common practice to the contrary, the Rule technically may not be utilized absent a pending filing or an explicit direction from the Court.