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Red & Black:

Bankruptcy and Class Actions

Presented by:

Donna L. CulverMorris Nichols, Arsht & Tunnell LLP

Marcy Hogan Greer Alexander Dubose Jefferson & Townsend LLP

March 11, 2015

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Use of the Unclaimed Property Professionals Organization, Inc., (UPPO) name of copyrighted materials in this presentation does not constitute an endorsement by UPPO of a member, vendor, product or service. The content represents the opinions of the author and not necessarily those of UPPO. This information is not intended as legal advice and should not be used to replace the advice of legal counsel.

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Today’s Agenda

• The Intersection of Bankruptcy and Unclaimed Property Law– The Bankruptcy Process

• Types of Bankruptcy Cases

• Claims’ Bar Date

• Distributions and Discharge

– Bankruptcy Preemption of State Unclaimed Property Law• Pre-Petition vs. Post-Petition Liabilities

• Unclaimed Distributions

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Today’s Agenda (cont.)

• The Intersection of Class Actions and Unclaimed Property Law

– Introduction to Class-ActionSettlements

– History of the Doctrine ofCy Pres

– Recent Cases Defining the Boundaries of Permissible Cy Pres Awards

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• Commenced by filing a petition under title 11 of the United States Code (the “Bankruptcy Code”).

• Court supervised process to marshal assets for distribution to creditors with claims in accordance with priority scheme established under the Bankruptcy Code.

• Fundamental Concepts:– Breathing spell

– Equality of treatment for similarly situated creditors

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The Bankruptcy Process

The Bankruptcy ProcessTypes of Bankruptcy Cases

• Chapter 7 Liquidation – Court appointed trustee liquidates the debtor’s non-exempt assets and makes distributions to creditors.

• Chapter 11 Reorganization (Business) – Creates a debtor in possession which continues to own, manage and operate the business while working with creditors to negotiate and confirm a plan of reorganization.

• Chapter 13 Reorganization (Personal) – Personal reorganization administered by a trustee which enables an individual with regular income to consolidate debt and pay it back over time.

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The Bankruptcy ProcessClaims’ Bar Date

• Filing of a bankruptcy petition creates a stay of any collection activity against the debtor.

• The claims’ bar date is the deadline established for the filing of claims against the debtor’s estate.

• Varies by chapter:

– Chapter 7, 12, 13 – Automatic 90 days after 341 meeting.

– Chapter 9, 11 – Bar date set by court order. Governmental creditors get no less than 180 days from the order for relief.

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The Bankruptcy ProcessDistributions and Discharge

• Chapter 7 Cases – Distributions made when the case is fully administered (often many years). Corporate debtor does not receive a discharge.

• Chapter 11 Cases – Distributions made pursuant to a plan of reorganization confirmed by the Bankruptcy Court. Except for corporations liquidating in chapter 11 (which cease to exist), the debtor typically receives a discharge of liability.

• Chapter 13 – Distributions made pursuant to a plan by a chapter 13 trustee who receives payments from the debtor in accordance with an agreed schedule. Individual typically receives a discharge.

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Bankruptcy Preemption of State Unclaimed Property Law

Pre-Petition vs. Post-Petition Liabilities

State of Arkansas v. Federated Department Stores, Inc.,

175 B.R. 924 (S.D. Ohio 1992)

– States’ claims to a debtor’s unclaimed property are not automatically preempted by federal bankruptcy law.

– Noting that “Congress has generally left the determination of property rights and the assets of a bankrupt’s estate to state law, the Court held that states’ unclaimed property laws did not interfere with the operation of bankruptcy or reorganization proceedings, or thwart any significant purposes of the Bankruptcy Code.

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In re Drexel Burnham Lambert Groups, Inc.,151 B.R. 684 (S.D.N.Y. 1993); In re Continental Airlines, 161 B.R. 101 (Bankr. Del. 1993)

– Where a debtor fails to report and deliver possession of property as to which the dormancy period has run pre-petition, the state acquires a pre-petition claim against the debtor.

– States’ claims for property as to which the dormancy period runs post-petition are preempted by the Bankruptcy Code.

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Cases Under Chapter 7 and 13:

• 11 U.S.C. § 347(a) – “Ninety days after the final distribution under section 726, 1226 or 1326 of this title in a case under Chapter 7, 12, or 13 of this title, as the case may be, the trustee shall stop payment on any check remaining unpaid, and any remaining property of the estate shall be paid into the court and disposed of under Chapter 129 of title 28.”

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Cases Under Chapter 7 and 13:

• 28 U.S.C. § 2041 – Unclaimed distributions deposited with the Treasurer of the United States, or a designated depository, in the name of the Court. Owner may request payment for a period of five years after which time such funds are deposited into the United States Treasury to the credit of the United States.

• 28 U.S.C. § 2042 – Establishes a procedure whereby an owner of property paid into the Treasury as to which the five year period has expired may petition the Court for an order directing payment to the owner.

Cases Under Chapter 11:

• 11 U.S.C. § 347(b) – “Any security, money or other property remaining unclaimed at the expiration of the time allowed in any case under Chapter 9, 11, or 12 of this title for the presentation of a security or the performance of any other act as a condition to participation in the distribution under any plan confirmed under section 943(b), 1129, 1173 or 1225 of this title, as the case may be, becomes the property of the debtor or of the entity acquiring the assets of the debtor under the plan, as the case may be.”

• Subject to modification by the reorganization plan.14



The Intersection of Bankruptcy and Unclaimed Property Law

Takeaway:

• A bankruptcy filing may altogether eliminate unclaimed property liability for any property types as to which the dormancy period has run as of the petition date if a state has failed to file a proof of claim by the applicable bar date.

Caveats:

• Pass-through or 100 cent plans with no bar date.

• Publication notice of claims’ bar dates and/or hearing on plan confirmation may give rise to challenges by creditors who fail to receive actual notice.

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The Intersection of Class Actions and Unclaimed Property Law

• Introduction to Class Action Settlements

– Procedural Framework

• Court Appointment of Class Counsel

• Notice/Opportunity to Opt Out

– Preclusion Issues

– Role of Judicial Approval

– Compensation/Remedies for the Class

– Residue

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• History of the Doctrine of Cy Pres

• French term meaning “as close as possible”

• Historically used to prevent failure of a trust

• Has been used in class action settlements for decades now

• Important tool in the Settlement Toolkit

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• What’s at Stake?

• $200 million: In re Holocaust Victim Assets Litig., 424 F.3d 132 (2d Cir. 2005)

• $18.5 million (vacated): In re Baby Prods. Antitrust

Litig., 708 F.3d 163 (3d Cir. 2013)

• $11.4 million: In re Lupron Mktg. & Sales Practices

Litig., 677 F.3d 21 (1st Cir. 2012)

• $10.2 million: In re Lease Oil Antitrust Litig., 570 F.3d 244 (5th Cir. 2009)

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• Recent Cases Involving Unclaimed Property Challenges to Cy Pres Awards

• Highland Homes, Ltd. v. Texas, 448 S.W.3d 403 (Tex. 2014)

• Klier v. Elf Atochem N. Am., Inc., 658 F.3d 468 (5th Cir. 2011)

• All Plaintiffs v. All Defendants, 645 F.3d 329 (5th Cir. 2011) (Lease Oil)

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• Proper Use of Cy Pres Awards

• No Property Right Can Be Created:

– “Claimants who do not meet the eligibility requirements to be Settlement Class Members have no right to or interest in any relief from [the settling defendant] under the terms of the Settlement Agreement . . . .”

• ALI characterizes as “when direct distributions to class members are not feasible” due to inability to identify class members or size of awards

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Special Challenges for Cy Pres Awards

• Must Be Appropriate: Marek v. Lane, ––– U.S. –––, 134 S. Ct. 8 (2013) (Roberts, C.J., statement respecting denial of certiorari)

• Who Decides?

• Nexus Requirement

• Overall Fairness

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• Resources/Practice Tools

• Federal Judicial Center: Manual for Complex Litigation (Fourth) http://www.fjc.gov/public/pdf.nsf/lookup/mcl4.pdf/$file/mcl4.pdf

• American Law Institute: Principles of the Law of Aggregate Litigation

• American Bar Association: A Practitioner’s Guide to Class Actions

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Speakers

Donna L. CulverPartner | Morris Nichols, Arsht & Tunnell LLP

Donna is a business reorganization and commercial litigation partner, with more than 20 years’ experience in state and federal court. She regularly represents corporate clients in bankruptcy and business litigation matters, and in administrative, regulatory and government proceedings, including unclaimed property (escheat) audits and voluntary disclosure agreements.

Donna’s bankruptcy litigation experience includes the representation of corporate debtors, creditors and litigation trusts in a variety of commercial disputes, including preference and fraudulent transfer litigation and contested claims matters. She also has substantial experience litigating breach contract and fiduciary duty claims in state and federal court and in alternative dispute resolution proceedings, including mediation and arbitration.

She can be reached at (302) 351-9208 or [email protected].

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Speakers

Marcy Hogan GreerPartner | Alexander Dubose Jefferson & Townsend LLP

Marcy Hogan Greer is recognized for her work in federal and state trial and appellate courts throughout the country. She has handled class actions, mass torts, and multi-district litigation of all types and served as the National Editor for the American Bar’s best-selling book, A Practitioner’s Guide to Class Actions (2010), including its 2012 supplement. She has also handled litigation strategy and appellate proceedings in complex commercial matters involving patents, trademarks, and copyrights, administrative agency challenges, health care (provision and payment), employment disputes, insurance, oil and gas, real estate, and utilities.

Marcy is listed in Best Lawyers in America in appellate, bet-the-company litigation, and commercial litigation and was selected as the 2014-15 Austin Bet-the Company Litigation “Lawyer of the Year” by that organization. She has been included in Texas Super Lawyers for her appellate work every year since its inaugural list and was listed in the Top 100 for several years.

She can be reached at (512) 716-8310 or [email protected].

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Documents

Red & Black: Bankruptcy and Class Actions - c.ymcdn.comc.ymcdn.com/sites/ · Red & Black: Bankruptcy and Class Actions Presented by: Donna L. Culver ... –Chapter 7, 12, 13 –Automatic