Justia U.S. 2nd Circuit Court of Appeals Opinion Summaries

A medical device distributor sued a former employee, alleging that he breached a non-compete agreement, his duty of loyalty, and misappropriated trade secrets after joining a competitor. The employee responded with counterclaims and third-party claims. During the litigation, the employee filed for Chapter 7 bankruptcy, which stayed the district court proceedings. In the bankruptcy case, the distributor filed a proof of claim for damages, which the employee did not contest. The bankruptcy court allowed the claim, and the distributor received a partial distribution from the bankruptcy estate. The employee also waived his right to discharge, leaving him potentially liable for the remaining balance.After the bankruptcy case closed, the United States District Court for the District of Vermont lifted the stay. The distributor sought summary judgment for the balance of its allowed claim, arguing that the bankruptcy court’s allowance of its claim should have preclusive effect. Initially, the district court denied this request, finding that using claim preclusion offensively would be unfair. Upon reconsideration, however, the district court reversed itself and granted summary judgment to the distributor for the remaining balance, holding that claim preclusion applied.On appeal, the United States Court of Appeals for the Second Circuit reviewed the district court’s grant of summary judgment de novo. The Second Circuit held that, even if claim preclusion could sometimes be used offensively, it could not be applied in this case because it would be unfair to the employee, who had less incentive to contest the claim in bankruptcy. The court vacated the district court’s judgment in favor of the distributor and remanded the case for further proceedings. The main holding is that claim preclusion cannot be used offensively to secure a judgment for the balance of an allowed bankruptcy claim under these circumstances. View "Thermal Surgical, LLC v. Brown" on Justia Law

Several investment funds based in the British Virgin Islands invested heavily in Bernard L. Madoff Investment Securities and were forced into liquidation after the Madoff Ponzi scheme was exposed in 2008. Liquidators were appointed in the BVI insolvency proceedings. Before the collapse, certain investors redeemed their shares in the funds for cash, receiving over $6 billion in payments. The liquidators, seeking to recover these redemption payments for equitable distribution among all investors, initiated approximately 300 actions in the United States, alleging that the payments were inflated due to fictitious Net Asset Value (NAV) calculations based on Madoff’s fraudulent statements.The U.S. Bankruptcy Court for the Southern District of New York consolidated the actions after recognizing the BVI proceedings under Chapter 15 of the Bankruptcy Code. The bankruptcy court dismissed most claims, finding it lacked personal jurisdiction over some defendants, that the liquidators were bound by the NAV calculations, and that the safe harbor for securities transactions under § 546(e) of the Bankruptcy Code barred the claims. However, it allowed constructive trust claims to proceed against certain defendants alleged to have known the NAVs were inflated. The U.S. District Court for the Southern District of New York affirmed the bankruptcy court’s judgment, leaving only the constructive trust claims.On appeal, the United States Court of Appeals for the Second Circuit held that all of the liquidators’ claims, including the constructive trust claims, should have been dismissed under the safe harbor provision of § 546(e), which applies extraterritorially via § 561(d) in Chapter 15 cases. The court concluded that the safe harbor bars both statutory and common-law claims seeking to avoid covered securities transactions, regardless of the legal theory or proof required. The Second Circuit reversed the district court’s judgment allowing the constructive trust claims and otherwise affirmed the dismissal of the remaining claims. View "In re Fairfield Sentry Ltd." on Justia Law

Debtor-Appellant Julia Soussis filed for Chapter 13 bankruptcy, proposed a repayment plan, and made $362,100 in pre-confirmation payments to the standing trustee. Before the court could confirm the plan, Soussis requested the dismissal of her case. The standing trustee returned most of the payments but retained $20,592 as his percentage fee. Soussis moved for disgorgement of this fee, arguing that the trustee should return all pre-confirmation payments if no plan is confirmed.The Bankruptcy Court denied Soussis’s motion, concluding that the trustee was entitled to keep the percentage fee regardless of plan confirmation. The District Court affirmed this decision, agreeing with the Bankruptcy Court’s interpretation of the relevant statutes.The United States Court of Appeals for the Second Circuit reviewed the case de novo. The court held that a standing trustee cannot keep any percentage fee collected from the debtor’s pre-confirmation payments if no plan is confirmed. The court interpreted Section 1326(a)(2) of title 11, which directs the trustee to return the “payments . . . proposed by the plan” if no plan is confirmed. The court reasoned that since the percentage fee is collected from these payments, it must also be returned. The court noted that Congress explicitly allowed for the deduction of the trustee’s fee in Chapter 11 (Subchapter V) and Chapter 12 bankruptcies but did not include similar language for Chapter 13 plans.The Second Circuit concluded that the trustee may collect the percentage fee from pre-confirmation payments but must return it if no plan is confirmed. The court reversed the District Court’s judgment and remanded the case for further proceedings consistent with this opinion. View "In re: Soussis" on Justia Law

Little Hearts Marks Family II L.P. ("Little Hearts") was a member of 305 East 61st Street Group LLC, a company formed to purchase and convert a building into a condominium. 61 Prime LLC ("Prime") was the majority member and manager, and Jason D. Carter was the manager and sole member of Prime. In 2021, the company filed for bankruptcy and sold the building to another company created by Carter. The liquidation plan established a creditor trust with exclusive rights to pursue the debtor’s estate's causes of action. Little Hearts sued Prime and Carter for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment, seeking damages for lost capital investment and rights under the Operating Agreement.The bankruptcy court dismissed all claims, ruling that they were derivative and belonged to the debtor’s estate, thus could only be asserted by the creditor trustee. The district court affirmed this decision.The United States Court of Appeals for the Second Circuit reviewed the case. The court affirmed the dismissal of the breach of fiduciary duty and aiding and abetting breach of fiduciary duty claims, agreeing that these were derivative and could only be pursued by the creditor trustee. However, the court vacated the dismissal of the breach of contract and breach of the implied covenant of good faith and fair dealing claims, determining that these were direct claims belonging to Little Hearts and could proceed. The unjust enrichment claim was dismissed as duplicative of the contract claims. The case was remanded for further proceedings consistent with this opinion. View "In re 305 East 61st Street Group LLC" on Justia Law

Debtor-Appellant Avianca Holdings S.A. agreed to pay additional rental payments to Creditors-Appellees Burnham Sterling and Company LLC and Babcock & Brown Securities LLC under 20 aircraft leases. Avianca failed to make certain payments that were due more than 60 days after filing for bankruptcy but before the leases were assumed or rejected. The creditors moved to compel payment under 11 U.S.C. § 365(d)(5), which requires timely performance of obligations arising from or after 60 days post-bankruptcy filing under an unexpired lease of personal property until the lease is assumed or rejected.The bankruptcy court granted the creditors' motion, concluding that Avianca's obligation to pay arose when the payments came due under the lease terms. Avianca appealed, arguing that the obligation arose pre-petition when the leases were executed. The district court affirmed the bankruptcy court's decision, agreeing that the obligations arose as the payments came due.The United States Court of Appeals for the Second Circuit reviewed the case and affirmed the lower courts' decisions. The court held that under 11 U.S.C. § 365(d)(5), a debtor's obligation to make payments arises when the payments come due according to the lease terms, not when the lease was executed. The court emphasized that the statutory language requires the debtor to perform obligations that originate from or after 60 days post-petition, aligning with the "billing date" approach rather than the "accrual" approach. The court also noted that this interpretation is consistent with the broader statutory scheme and bankruptcy policy, which aims to balance creditor protection with the debtor's ability to reorganize. View "In re Avianca Holdings S.A." on Justia Law

The case involves a Chapter 7 bankruptcy proceeding where the United States Bankruptcy Court for the Southern District of New York approved a settlement agreement among the trustee of the bankruptcy estate, the debtor, and other parties. The settlement released claims that appellants Richard and Marisa Stadtmauer had originally asserted in a New York state court action. The Stadtmauers alleged that the debtor, Mark Nordlicht, and others engaged in a scheme to conceal Nordlicht’s assets to avoid paying his debts. When Nordlicht filed for bankruptcy, the state court proceedings were stayed, and the trustee took possession of the Stadtmauers’ claims. The settlement included a $2.5 million payment to the estate by Nordlicht’s mother, Barbara Nordlicht, and provisions for indemnification and reimbursement of legal fees.The Stadtmauers objected to the settlement and appealed the bankruptcy court’s decision to the United States District Court for the Southern District of New York. They argued that the state court had granted them valid liens on two of Nordlicht’s properties, giving them secured property rights. They contended that the trustee lacked the authority to settle their claims, that the settlement violated due process and bankruptcy principles, and that the bankruptcy court abused its discretion in approving the settlement. The district court rejected these arguments and affirmed the approval of the settlement agreement.The United States Court of Appeals for the Second Circuit reviewed the case and agreed with the district court. The court held that the trustee had the authority to settle the Stadtmauers’ claims because they were general claims that were property of the bankruptcy estate. The court also found that the settlement did not violate the principles of creditor priority as articulated in Czyzewski v. Jevic Holding Corp. because the validity of the Stadtmauers’ liens was in bona fide dispute. The court concluded that the bankruptcy court did not abuse its discretion in approving the settlement and affirmed the district court’s judgment. View "In re Nordlicht" on Justia Law

Andrew Delaney, a lawyer acting pro se, filed a Chapter 7 bankruptcy petition in the Eastern District of New York, listing $1,110 in assets and $44,434 in liabilities. He later sought to dismiss his petition, arguing that he was not a debtor as defined by 11 U.S.C. § 109(a) and that venue was improper. The bankruptcy court denied his motion, stating that dismissal would not be in the interest of all parties, particularly his creditors, and that the trustee had made progress in achieving a modest settlement.Delaney appealed the bankruptcy court's denial to the United States District Court for the Eastern District of New York. The district court dismissed his appeal for lack of appellate jurisdiction, concluding that the denial of a motion to dismiss a bankruptcy petition is not a final order that can be appealed as of right under 28 U.S.C. § 158(a)(1). The district court also treated Delaney's notice of appeal as a motion for leave to appeal under 28 U.S.C. § 158(a)(3) and denied it.The United States Court of Appeals for the Second Circuit reviewed the case and determined that it too lacked jurisdiction over Delaney’s appeal. The court held that the bankruptcy court's order denying Delaney's motion to dismiss was nonfinal because it did not finally dispose of any discrete disputes within the larger bankruptcy case. Consequently, the district court's dismissal of the appeal left significant further proceedings in the bankruptcy court. As a result, the Second Circuit dismissed Delaney’s appeal for lack of appellate jurisdiction. View "Delaney v. Messer" on Justia Law

The case revolves around Windstream Holdings, Inc. ("Windstream"), a telecommunications provider that filed for Chapter 11 reorganization. During Windstream's bankruptcy, Charter Communications Inc. and Charter Communications Operating, LLC (collectively, "Charter"), a competitor, launched an advertising campaign targeting Windstream's customers. Windstream alleged that Charter's advertising campaign was an attempt to exercise control over Windstream's customer contracts and goodwill, thereby violating the automatic stay provision of the Bankruptcy Code.The United States Bankruptcy Court for the Southern District of New York agreed with Windstream, holding Charter in civil contempt for its actions and imposing sanctions against Charter. However, the United States District Court for the Southern District of New York reversed the bankruptcy court's decision, finding that a fair ground of doubt existed as to whether Charter violated the automatic stay.The United States Court of Appeals for the Second Circuit affirmed the district court's judgment. The court found that while Windstream's customer contracts and goodwill were property of the estate, Charter's advertising campaign did not exercise control over those assets. The court concluded that there was a fair ground of doubt as to whether Charter's actions violated the automatic stay, and therefore, the district court did not err by refraining from holding Charter in civil contempt. View "In re: Windstream Holdings, Inc." on Justia Law

In this case, Aquila Alpha LLC (Aquila) appealed against a judgment from the United States District Court for the Eastern District of New York, affirming a bankruptcy court’s decision to deny Aquila’s motion to vacate a default judgment. The default judgment was obtained by Howard M. Ehrenberg, as the liquidating trustee of several debtors, and granted the debtors the ownership of a $23.7 million mortgage purchased by Aquila.Aquila argued that the default judgment should be vacated due to lack of personal jurisdiction and misapplication of the relevant Rule 60(b) factors. Aquila posited that it was improperly included in the First Amended Complaint without leave from the bankruptcy court and was not correctly served.However, the United States Court of Appeals for the Second Circuit affirmed the judgment of the district court. The appellate court concurred with the district court that the bankruptcy court had personal jurisdiction over the parties and had correctly applied the Rule 60(b) factors to deny Aquila’s motion to vacate default.The appeals court ruled that Aquila was correctly added to the First Amended Complaint as of right pursuant to Rule 15(a). The court also concluded that Aquila was properly served. It was further determined that Aquila’s default was willful, and the district court did not abuse its discretion in declining to set aside the default judgment. View "In re Orion HealthCorp, Inc." on Justia Law

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 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. Plaintiffs appealed.   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. View "In re: Nine West LBO Sec. Litig." on Justia Law