A bankruptcy court has jurisdiction to dismiss a legal malpractice claim of non-debtor plaintiffs against non-debtor attorneys.

That’s the ruling in Murray v. Willkie Farr & Gallagher LLP (In re Murray Energy Holdings Co.), Adv. Pro. No. 22-2007, Southern Ohio Bankruptcy Court (decided October 5, 2023, Doc. 89)—appeal is pending.

Summary of Issue and Ruling

Bankruptcy Court denies a party’s request to enforce arbitration of a legal malpractice claim—and then dismisses that malpractice claim for failure to state a claim.

The opinion is Murray v. Willkie Farr & Gallagher LLP (In re Murray Energy Holdings Co.), Adv. Pro. No. 22-2007, Southern Ohio Bankruptcy Court (decided October 5, 2023, Doc. 89)—appeal is pending.

Context

This ideal is floating around:

• upon removal of a Subchapter V debtor from possession, for fraud or other cause,
• the Subchapter V trustee has no expanded right, power, function or duty beyond operating debtor’s business (the “Ideal”).

This Ideal is both:

• contrary to unambiguous language of the Bankruptcy Code, as a matter of law; and
• in Never-Never Land, as a matter of practice.

I’ll try to explain.

This is a truism:

The Insolvency Service released the quarterly insolvency statistics for July - September 2023 on 31 October, painting a picture of growing corporate distress. This period saw a total of 6,208 company insolvencies, which together with Q2 2023 marks the highest number of quarterly insolvencies since the midst of the financial crisis in 2009.

Although a comparison with Q2 figures shows a slight reduction of 2% in overall insolvencies, the figures for Q3 showed a marked rise in both compulsory liquidations (14% up on Q2) and administrations (11% higher than Q2).

A study on using round-number offers and precise-number offers in negotiations reaches these two conclusions:

Here’s the latest opinion on a controversial question: In re Franco’s Paving LLC, Case No. 23-20069, Southern Texas Bankruptcy Court, (decided 10/5/2023; Doc. 74).

The Question & Answer

Voter apathy is a problem in Subchapter V cases. That apathy is in the form of creditors failing or refusing to vote on a Subchapter V plan. The In re Franco’s opinion addresses this apathy problem head-on.

Recent expressions of concern about courts mandating mediation reminded me of a mandated mediation process that worked well: the City of Detroit bankruptcy.

An illustration of the success of mandated mediation in the Detroit case is this line:

The Bankruptcy Judge“put an end to the public bickering over the water deal by ordering the parties into confidential mediation.”

In Purdue Pharma, the U.S. Supreme Court grants certiorari on this question:

Summary

In this High Court case ICC Judge Barber ordered a disqualified director to compensate creditors for losses under s15A of the Company Directors' Disqualification Act 1986 (CDDA) as a result of negligent conduct in trading a company illegally.

Facts

The absolute priority rule [Fn. 1] has been a problem for businesses in bankruptcy—for a very long time! The rule dates back to at least 1899, when the U.S. Supreme Court prevents certain shareholder actions “until the interests of unsecured creditors have been preserved.” [Fn. 2]

Since then, the U.S. Supreme Court has followed a long and relatively straight road for the absolute priority rule. And the rule has shown staying power, along that road.