1. AUTOMATIC STAY
1.1 Covered Activities
1.1.a Court declines to enjoin third party claims against the debtor's jointly liable parent corporation. The debtor manufactured earplugs for many years. A major multinational corporation acquired it. Two years later, it transferred its earplug manufacturing operation to its parent. Although the parent continued to manufacture and sell the earplugs, 80% of the sales occurred before the transfer. The earplugs were ineffective, resulting in hundreds of thousands of product liability actions against the debtor and the parent in both state and federal court, with the federal actions consolidated under an MDL procedure. The debtor and the parent entered into a funding agreement, which provided that the parent would fund up to $1 billion to a plaintiffs' recovery trust and up to $240 million for the debtor's chapter 11 fees and expenses, and the debtor would indemnify the parent for any claims against the parent but could draw funding from the parent to pay any indemnification claims, with no repayment obligation (in effect, a circular transaction). In addition, the debtor and parent shared insurance policies that would cover a substantial amount of claims. Upon filing its petition, the debtor sought to apply the automatic stay to, or to affirmatively enjoin, the prosecution of the product liability actions against the parent. Section 362(a)(1) enjoins only litigation against the debtor, not third parties, unless (in some circuits) there is such an identity of interest that a judgment against the third party would amount to a judgment against the debtor or would cause the debtor irreparable harm. Circuit authority here does not extend the (a)(1) stay, so the court declines to apply it. Section 362(a)(3) stays acts to obtain possession of or exercise control over property of the debtor. Here, because the parent, under the funding agreement, will ultimately fund any liability imposed on the debtor, the tort litigation will not affect the debtor's property or its ability to pay claims. Section 105(a) permits the court to issue any order necessary to carry out the provisions of title 11, but the court must first have jurisdiction. A court has jurisdiction over an action if it is related to the title 11 case, that is, if the outcome could have any conceivable effect on the case, the debtor's assets, or claims. Because of the debtor's ability to access funds under the funding agreement, the tort litigation would not have any such effect. Therefore, the court denies any order staying the tort litigation. 3M Occupational Safety LLC v. Those Parties Listed on Appendix A to the Complaint (In re Aearo Techs. LLC), 642 B.R. 891 (Bankr. S.D. Ind. 2022).
1.2 Effect of Stay
1.3 Remedies
2. AVOIDING POWERS
2.1 Fraudulent Transfers
2.1.a Failure to exercise option is not a transfer. The debtor had an option to purchase real property within a specified period. The optionor gave notice of the commencement of the period. The debtor did not timely exercise the option. The debtor filed a bankruptcy petition a few months later and sought to avoid the option lapse as a fraudulent transfer. A transfer is any mode, direct or indirect, or parting with an interest in property. The debtor's rights under the option were a future contingent interest, more akin to a business opportunity, not an actual interest in property. Therefore, there was no transfer. Berley Assocs. Ltd. v. 62-74 Speedwell Ave. LLC (In re Pazzo Pazzo Inc.), ___ Fed. App'x ___, 2022 U.S. App. LEXIS 34619 (3d Cir. Dec. 15, 2022).
2.1.b State court-approved settlement only partially binds a subsequent bankruptcy trustee. The debtor entered into a settlement of a shareholder derivative class action in which the plaintiffs alleged that a payment to the debtor's parent was a breach of fiduciary duty. The settlement provided for the director defendants to pay the shareholder class and the debtor and for a full released of the directors. After a thorough fairness hearing, the state court approved the settlement. A few months later, and within four years after the payment to the parent, the debtor filed chapter 11. The plan provided for the appointment of a liquidating trustee, who then sued the former director defendants and the parent for fraudulent transfers. The trustee may avoid as a constructive fraudulent transfer one that is made for less than reasonably equivalent value while the debtor is insolvent. A release of claims is a transfer. However, the state court's fairness approval determined that the releases were made for reasonably equivalent value and may not be attacked in a later bankruptcy. A bankruptcy trustee may bring fraudulent transfer claims for the benefit of creditors. The settlement of the breach of fiduciary duty claim for the payment to the parent was for the benefit of the corporation and its shareholders. For the prior settlement to bind the trustee, the parties must be in privity with the parties to the trustee's action. Here, the creditors for whom the trustee acts were not parties to or in privity with the shareholder derivative plaintiffs or the corporation, so the settlement does not preclude the trustee from seeking to avoid and recover the payment. Ogle v. Morgan (In re Evergreen Helicopters Int'l Inc.), 50 F.4th 547 (5th Cir. 2022).
2.2 Preferences
2.2.a Transfer under a wage garnishment order is made when money is paid. The creditor obtained a wage garnishment order more than 90 days before the debtor's bankruptcy and received payments within the 90-day period. The trustee may avoid a transfer of the debtor's property made within 90 days before bankruptcy if certain other conditions are met. Under prior circuit precedent, state law determined when a transfer was made, and a garnishment effected a transfer, even before money was paid. Barnhill v. Johnson, 503 U.S. 393 (1992), held that federal law governs and that a transfer by a check, which is an order to pay money, is made only when the money is paid. It effectively overrules prior circuit precedent. Therefore, the transfer under the garnishment was made only when the employer paid the creditor. Warsco v. Creditmax Collection Agency, Inc., ___ F.4th ___, 2023 U.S. App. LEXIS 447 (7th Cir. Jan. 9, 2023). 0
2.3 Postpetition Transfers
2.4 Setoff
2.5 Statutory Liens
2.6 Strong-arm Power
2.6.a State registry's use of nonstandard search logic makes abbreviated debtor's name in financing statement seriously misleading. The creditor filed its financing statement with an abbreviation of one word in the debtor's proper name. Under Florida's financing statement search procedures, a search returns a list of 20 names, starting with the name that most closely resembles the searched name, which permits the searcher to navigate forward and backward through all names indexed. UCC section 9-506.provides "a financing statement that fails sufficiently to provide the name of the debtor is seriously misleading" unless a search using "standard search logic" would disclose a financing statement for the debtor with an error in the debtor's name. Standard search logic produces an unambiguous list of hits. Florida's search method does not. Therefore, it is not standard search logic, and the exception in section 9-506 does not apply. The financing statement with the abbreviation in the debtor's name is seriously misleading and is ineffective to perfect the security interest. 1944 Beach Blvd., LLC v. Live Oak Banking Co. (In re NRP Lease Holdings, LLC), 50 F.4th 979 (11th Cir. 2022).
2.7 Recovery
2.7.a DIP may not use turnover order to collect judgment. The debtor in possession obtained a judgment against a third party and sought a turnover order under section 542(b) against the judgment debtor to turnover its property to pay the judgment. Section 542(b) requires an entity that owes a matured debt to the debtor that is property of the estate to pay the debt to the trustee. Although the judgment is property of the estate, the judgment debtor's property is not. The proper way to enforce a bankruptcy court judgment is through a writ of execution and, if necessary, supplemental proceedings, as provided under Bankruptcy Rule 7069. Therefore, the court denies the motion. In re J and M Supply of the Carolinas, LLC, ___ B.R. ___, 2022 Bankr. LEXIS 3469 (Bankr. E.D.N.C. Dec. 8, 2022).
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