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Liberty Lobby Bankruptcy — Transcript of Hearing (7/5/2001)


In Re:




Case No. 01-1234

Washington, D.C.
Thursday, July 5, 2001


Debtor’s Motion to Stay Dismissal Order and Continue to Automatic Stay Pending Appeal


On behalf of the Debtor

On behalf of Legion for the Survival
of Freedom, Inc.


THE CLERK: The next matter on Your Honor’s calendar is the matter of Liberty Lobby, Inc., Bankruptcy Case 01-1234. The matter before the Court is debtor’s motion to stay dismissal order and to continue automatic stay pending appeal.

Parties may come forth and state your appearance for the records, please.

MR. CLARK: Good morning, Your Honor. Darrell Clark for a creditor of the debtor, Legion for Survival of Freedom, or LSF for short.

MR. STANTON: Thomas Stanton for the debtor, Your Honor, Liberty Lobby.

THE COURT: All right, Mr. Stanton.

MR. STANTON: Your Honor, this is on our motion.

I am somewhat confused as to the appeal status of this. We filed the appeal on the 28th when I understood the order had been entered, the order from the hearing on the 27th, but apparently the order wasn’t entered until the 2nd and I am not sure that my appeal was filed before the order was filed --

THE COURT: It doesn’t matter.

MR. STANTON: — has any validity.

THE COURT: The notice of appeal is still effective. You can take an appeal from a decision. If you want to file a second notice of appeal to alleviate any possibility of there being a technical glitch, that is fine, but as far as I am concerned, your motion for stay pending appeal is ripe to be considered.

MR. STANTON: Your Honor, Liberty Lobby has been in business for 46 years. It is an operating newspaper. By virtue of Your Honor’s order on June 20th, we were under from that point on enforced liens from these UCC-1’s that should have been filed.

Going into any further operations, unless Your Honor would let us operate under some temporary basis where we might post cash collateral or make additional payments or the payments that we had been making prior, there can be no further operations. We are asking the Court to let us operate during the pendency of the appeal. Otherwise, the appeal gets to be pretty moot if the company has to be effectively shut down during the pendency of the appeal. There is no availability for Liberty Lobby to function unless it is able to use its assets and its cash.

I would ask the Court to consider the fact that the issue of an appeal in this case, it always difficult when you are dealing with a judge who has ruled to say that there is a good opportunity for a likelihood for success, but I think in this case, there certainly is some, particularly in the situation where Liberty Lobby is not operating in the usual norm of bad faith in these cases, but effectively has no other recourse but to come into this Court after the issue of its agreement with the Legion was basically set aside by the Court in California.

I think the facts in this case are so unique in that we cannot find any case anywhere near the facts of this, that certainly an appellate court might very well find differently.

I do believe that there is sufficient payment history with Liberty Lobby. There is a reference in Mr. Clark’s brief that he filed that says that this case has gone on for 3 years, but most of those 3 years, Liberty Lobby has been making payments, made a substantial amount of payments, payments double the liquidation value of Liberty Lobby and the plan, and they had been making the payments up until June of this year. If the Court would let operations continue, payments would continue during the pendency of the appeal.

The other issue is an issue of the appeal bond. If the Court were to find that an appeal bond would be appropriate, as long as there was some reason for a loss that would be governed by the appeal bond other than normal operations, which actually turn a profit and have turned a profit, it is the profit of operations that have kept the payments going, and Liberty Lobby, I think the Court should take judicial notice of the fact that Liberty Lobby in its schedules shows that there are no other debts other than the Legion and the subscribers, and operations would not impact on any other creditors. If the Legion were receiving what it previously agreed to accept, it would seem to me that they’re saying that they are going to be damaged is minor. The only damage is delay, nothing else, Your Honor.

And if Liberty Lobby isn’t functioning, they will be damaged, and if the paper is not able to publish, the assets are relatively limited in they are old and worn out, and other than somebody using them, they probably have no liquidation value. The issue of whether to take the paper over or something like that might be somewhat different, but still that is not going to produce any more money than has been produced from the very lean and fiscally conservative operation that has gone on, not only through this case, but most of the 46 years of the operation of Liberty Lobby.

We would ask the Court to give us an opportunity to have an appeal of this case, considering the fact that Liberty Lobby is here because it did not get an appeal in the first case in California because there was a $4-million judgment, and didn’t get an appeal in the most recent case in California, again, because there is a $4-million judgment, and has never been able to get an appellate court to look at this thing and to — I take that back.

One of the appeals went forward without the stay, and we lost on that one, but we would like very much to have an opportunity to have at least a second court look at Your Honor’s decision.

Thank you.

MR. CLARK: Good morning, Your Honor. Darrell Clark for the Legion.

Your Honor, the District of Columbia Circuit has a four-part task to determine stays pending appeal. I cited in my brief the Serrato [ph] case which sets forth those four factors. It is the movant’s burden to prove each of those four factors. They are as follows, a strong likelihood of success on the merits in the appeal, the moving party will suffer irreparable injury. The third criteria is the substantial harm … that substantial harm would not be suffered by the Legion if the stay is granted, and the fourth factor is that the stay will not harm public interest.

As to the first factor, the strong likelihood of success, the debtor’s motion fails to point out a single factual error or erroneous legal conclusion that this Court has allegedly made. The appeal here — Mr. Stanton says the facts are unique, but the appeal here is not of the California Court’s decision. That appeal was already dismissed. The appeal is of your order dismissing the case as a serial filing, and the facts in that decision are matters of record. There was a prior case. There was a confirmed plan. There was substantial consummation to the plan. There was a default which was the California Court’s order. There was a failed attempt to revive the plan, and when that attempt failed and this Court ruled, 2 days later they ran in and filed this current bankruptcy case.

As to the law, there is no split in authorities as to the application of the law and serial filings. The statute is clear. You can’t modify a plan after it has been substantially consummated, and many cases on serial filings all say you can’t have serial filings absent changed circumstances, and there was none shown at the hearing.

As to the second factor, the irreparable harm, at the last hearing, the Court described the debtor as the goose that lays the golden egg, and certainly, as the going concern, it has a lot more value than — or it at least has its highest value as a going concern, and I would represent to the Court that we would like to operate the debtor. We would probably remove the current management and try to take over the debtor through a receivership or by other means. So the only irreparable harm here is to management. It is not to the subscribers or to the other creditors of the debtor.

The Circuit Court in Serrato also said that you need to look at the application of this factor with the merits of the appeal, and when the merits of the appeal have a de minimis chance of success, it is difficult to give the irreparable harm argument much consideration.

The third factor is the potential harm to the Legion. Mr. Stanton represented that the only damage is delay, and I would state, Your Honor, that that is not true.

I attached some things here to the motion, and I hope the Court had the chance to read the articles that have been written in the debtor’s newspaper. One of those articles talks about the Friends of Liberty Lobby is a completely separate organization from Liberty Lobby, your money will be safe with Friends.

Mr. Ryan, who is in the back of the courtroom, is writing this article for Liberty Lobby and says, Those of you who have remembered Liberty Lobby in your will or trust should change the listing to Friends of the Spotlight and Liberty Lobby as soon as possible. That was written while they were in their first bankruptcy case in January of 2000. The July 9th, 2001, edition — excuse me. The prior article was in January 2001. The July 2001 edition of the Spotlight again has an advertisement for Friends of the Spotlight and says, Make your check or money order payable to either Friends or Friends of the Spotlight and Liberty Lobby. Do not send money to Liberty Lobby or the Spotlight because it will be confiscated by the Court. So there is some harm to LSF if this stay goes forward because the debtor at least is allowing or taking active steps to steer assets that would be coming to the debtor to another organization.

The underlying judgment here, Your Honor, is one for a fraudulent conveyance. The principal of the debtor, Mr. Carto, is also a judgment debtor, and there is a real fear by my client that these assets will be wasted during the stay. Now, perhaps that rationale, while they have done it once, this fraudulent conveyance, they will do it again, maybe somewhat irrational in the abstract, but given this article in the advertisement in their newspaper, it gives the LSF — or it gives the Legion a reason to be concerned that there will be some harm.

Finally, I would assert, Your Honor, that delay is damage here. There is a longstanding history of disputes between these parties that has been going on for years. I attached the 30-some-odd legal proceedings that have been going on between these companies over the period of years and detailed some of the other proceedings that have happened since that list was compiled, and it has been going on too long. There have been many courts and many proceedings and many lawyers and many costs, and it needs to end.

And that dovetails with the fourth factor that the Court of Appeals suggests that you look at, and that is the public interest because public interest, as the case I cited states, favors finality in litigation. Denial of the stay may not bring finality to this longstanding fight, but it will certainly help.

Additionally, by giving them the stay, the Court may be counteracting the public policy behind Section 1127(b) where you are essentially giving the debtor that breathing spell that they are not supposed to have after the first bankruptcy plan was substantially consummated.

In short, the debtor does not meet any of the required criteria. The movant has the burden to show these, and the burden has not been met.

The remainder of my argument, Your Honor, deals with the criteria and the factors in posting a bond, and I would ask that I could reserve argument on that in case the Court decides that a bond needs to be put in place.

Thank you.

THE COURT: Thank you.

Anything else, Mr. Stanton?

MR. STANTON: Your Honor, I do think it is important in evaluating the decision to grant a stay in this case to also look at the fact that Mr. Clark says that there have been 30-some lawsuits involved in this case. All of those lawsuits were dismissed with prejudice by the debtor as one of the considerations for getting that settlement agreement. So the debtor has lost the 32 suits. This is the only litigation left. So, for him to be representing there is all of this other going on, it is not — it is all focused to this one, and the one was based on that settlement agreement that they had set aside.

And the change in circumstance here wasn’t that the debtor was — debtor was making its payments. The change in circumstance is they set the settlement agreement aside, and there was no other recourse for the debtor except to come back into this Court.

MR. CLARK: To set the record straight, the debtor has sued us for $43 million in a case that Judge Kessler is hearing right now, and we are a named defendant in that proceeding. The Court — and we have discussed that before.

MR. STANTON: That wasn’t these cases. There are the cases from before.

THE CLERK: Address your comments to the Court, Mr. Stanton.

MR. STANTON: I’m sorry.

This is the case that they effectively circumvented by filing the action in California. The case with Judge Kessler was pending and the issue of whether or not it was even covered by the settlement agreement was before Judge Kessler and then they filed the case in California.

MR. CLARK: Nevertheless, to represent there is no litigation between the parties anymore, there is certainly this case going on upstairs.

THE COURT: This is a hearing on the motion filed by Liberty Lobby, Inc., to continue pendency of case and the automatic stay pending appeal.

Essentially, this is a motion for a stay pending appeal. The Court last week rendered a decision and issued an order agreeing that the debtor’s case ought to be dismissed. The basis for that decision was that in a prior case, a plan had been confirmed and substantially consummated, and that plan could not be modified by reason of Section 1127(b) of the Bankruptcy Code.

The Court held that it was inappropriate for the debtor to file a new case which, in effect, was an attempt to circumvent the prohibition against modifying a confirmed plan in the prior case. The Court cited case law which deals with this issue.

This is a debtor who has a newspaper it runs. It has one creditor, the Legion for the Survival of Freedom, the creditor that was dealt with by the prior plan, and that has not been paid in full, and it has its subscribers who have contingent claims if the debtor’s operations were to stop and those subscribers were to file claims for losing their bargain in the subscription agreement, namely the receipt of the newspaper over time.

The Court felt that this was essentially a two-creditor dispute between Liberty Lobby, Incorporated, the debtor-in-possession, and the Legion for the Survival of Freedom. The Court felt that those disputes between them had been resolved in the prior case by a confirmed plan, and that the deal had been struck in the prior case and bound both parties and it was not appropriate for the debtor to attempt to get out of the deal struck in the prior case. There has to come a time when the debtor’s efforts to stave off collection by a creditor come to an end.

The Court cited case law that supports the view that a new case filing may not be used to circumvent the prohibition against modification of a plan in a prior case. It seems to me this is a particularly appropriate case for the adhering to that line of cases because you essentially have a creditor that prior to the prior bankruptcy case, it had recovered a judgment for a substantial sum against the debtor. The debtor filed bankruptcy to attempt to reorganize, and a reorganization plan was adopted that addressed paying the judgment.

The debtor also addressed paying off certain trade creditors. Those trade creditors were completely paid off, and only the Legion for the Survival of Freedom remained with any amount still owed it. Although there were substantial payments made by Liberty Lobby, Inc., to the Legion for the Survival of Freedom under the confirmed plan, the debtor defaulted, and as was the right of the Legion for the Survival of Freedom, it took the issue to State Court and asked for a declaration that the payment plan agreed to as a part of the confirmed plan could be set aside, and the State Court agreed that the judgment was now enforceable in full instead of the Legion for the Survival of Freedom having to wait to receive plan payments from the debtor.

This is a ruling that the debtor appealed, but did not prosecute the appeal. The ruling is res judicata in this Court; in other words, the California judgment is binding upon this Court. As I have said, this is principally a two-party dispute that was addressed by the prior plan of reorganization that was confirmed to address the debtor’s rights, and the debtor didn’t live up to its end of the bargain. It has been adjudicated that the debtor did not do so, and as a consequence, the Legion for the Survival of Freedom should have the right to pursue collection.

I frankly cannot think of a stronger case for barring the debtor from using a successive bankruptcy case to try to undo the terms of a confirmed plan in the earlier case. The debtor has not made any argument as to how the District Court might disagree with this Court other than to simply say the debtor was making substantial payments and, therefore, was proceeding in good faith, but I don’t think that subjective good faith is the criterion here. The real issue is whether there is an abuse of the bankruptcy system, whether there is an abuse of what ought to be the settled expectation of a creditor that was dealt with by the debtor in the earlier case.

What was driving that earlier case was the dispute between the Legion for the Survival of Freedom and the debtor, and the parties agreed how the parties’ rights would be resolved.

It left intact a forbearance agreement that could be set aside under State law remedies. It was set aside under State law remedies. There can be no argument that the State Court’s judgment violated the confirmed plan because that defense was available to Liberty Lobby to litigate in the California Court, and the California Court’s decision that collection could proceed is res judicata as to any defense against collection.

So I think it is a very, very weak case for the debtor to urge that it has a chance of prevailing on appeal.

I note that one issue I did not address was this Fourth Circuit case called Carolin, C-a-r-o-l-i-n, cited in the parties’ papers, and I have criticized the Carolin case before. I don’t know if there is a published decision in which I have done it, but I have done it in oral decisions and also in a few written decisions.

It seems to me that the inquiry here isn’t one of good faith. The inquiry is whether there is an abuse of the bankruptcy system as it is supposed to operate, and the debtor may in good faith believe that just given a few more months of leeway, it can resume making payments to the creditor and accomplish that which the prior plan provided. And it is not really trying to make life hard for the Legion. It just wants a little breathing space after it had a minor default.

That type of subjective good faith, it seems to me, is irrelevant. What is relevant is that the parties struck a deal. The Legion is entitled to see that deal stick, and it is not a question of whether objectively the debtor could succeed in this case if it were allowed to put forward a plan of reorganization, which is typically an issue in motions to dismiss for bad faith.

This is a special issue of abuse of the provisions of the Bankruptcy Code, the filing of a new case when the terms of a — when the debtor has been unable to comply with the terms of a confirmed plan that cannot be modified by reason of a prohibition against modification. The circumstances have really not changed.

The debtor has cleansed itself of some trade creditors it had in the prior case, still running a paper with subscribers, and it has this one creditor with which it has been trying to deal with years. The parties settled their differences pursuant to a confirmed plan, and now the debtor wants another try at dealing with this creditor after its confirmed plan in the earlier case failed.

So it is irrelevant, it seems to me, whether the debtor objectively could put its finances in place where it could get a confirmed plan in this case, based on feasibility of revenues and based on the existence of contingent claims on the part of the subscribers that might as a class vote in favor of a confirmed plan.

The likelihood is that the debtor’s paper will continue to be published through a receivership. Everybody recognizes that is what is generating revenue on behalf of the estate, but it is likely that these subscribers will never have a contingent claim turn into an actual claim, and what we really are dealing with is a two-party dispute. Chapter 11 peculiarly inappropriate for a two-party dispute, and this is recognized by the requirement of Section 1129(a)(10) of the Bankruptcy Code that there be at least one excepting class. If it is a two-party dispute between the debtor and one creditor, obviously you can’t have an excepting class. This class of contingent claims on the part of subscribers, it seems to me, is a lame excuse for arguing that the bankruptcy is — a new bankruptcy is necessary in order to protect the interests of intervening parties.

So this really isn’t the typical motion to dismiss a new bankruptcy filing that is not preceded by a prior bankruptcy case. In those types of cases where the debtor has not filed previously and a motion to dismiss is made on the basis of lack of good faith, what the creditor is really saying is this debtor really can’t make a go of it, and this debtor even knows that it can’t make a go of it and the case ought to be dismissed as filed in bad faith.

Really, that type of analysis doesn’t get us very far because what is really important is whether it is an abuse of the bankruptcy system. An abuse exists whether there is subjective good faith or not, whether the debtor honestly believes it has some way of reorganizing. There is still an abuse of the system if there just plainly is no way of the debtor reorganizing.

This case doesn’t involve that question of whether the debtor can reorganize. This case involves, instead, whether when you have two parties, they resolve their differences in a prior case and are now filing — and the debtor is filing a new case that would result in a circumvention of the prohibition of modification of the plan in the earlier case, it is an abuse of the bankruptcy system to allow the new filing to be filed, and I think it is because the parties settled their differences, and I think the judicial system requires that the debtor and its major creditor be able to have some assurance that their rights are settled upon the confirmation of a plan addressing the rights of that major creditor in the earlier case.

I just don’t see that the debtor has any substantial likelihood of succeeding on appeal. The debtor has some practical problems with reorganization, even if I were to permit it to proceed, because the prior case included a provision that the Legion would be granted a lien upon all of the debtor’s property.

Now, it appears that no UCC-1 was ever granted to the creditor and the debtor urges that the creditor didn’t protect itself, and as far as any other creditors are concerned, they are entitled to look to the debtor-in-possession as having the power of a trustee to treat the property of the estate as free of whatever lien rights the Legion was supposed to have by reason of the confirmed plan in the prior case.

Whether that argument would succeed generally, if I were to permit this case to go forward, the fact remains that it illustrates that the parties had settled rights in the prior case that were effectively to tie up all of the debtor’s assets in favor of this one creditor, and the Court would have entertained a motion to reopen the prior case to cure the defect of the UCC-1, the financing statement, the granting of a security interest to be reflecting the granting of a security interest to be required of the debtor and to be filed, and the debtor, in effect, is attempting to do an end run around that by filing this new case.

It certainly is bad faith for the debtor to try to undo what were the rights the creditor could have enforced in the prior case by filing this new case. For that reason, I believe this is a case in which the debtor, one, should not be allowed to refile, and, two, if it were allowed to refile, there would be problems with allowing it to have access to collateral that was supposed to be available to the creditor by reason of provisions of the plan in the prior case, the assets that were to be available to the creditor by way of a security interest, a lien on all assets of the debtor.

At the time of the hearing on the motion for use of paying of creditors, post-petition creditors, the employees of the debtor, the debtor recognized that there would be an issue of the propriety of operating with the funds that would have otherwise been encumbered by the Legion for the Survival of Freedom’s lien.

That brings us to the additional issues of irreparable harm to the debtor, substantial harm to the creditor, and the public interest.

There is, of course, the possibility that the creditor would simply start seizing assets and stop the publication of the newspaper and bring the debtor’s ability to generate funds for an estate to a halt, and I think that would be counterproductive to the interest of the creditor, which has indicated that its interest would lie with a receivership that would attempt to preserve the going-concern value of the debtor.

There is no guarantee that the creditor couldn’t change its mind and decide to simply sell off assets and put the debtor out of business. So that factor weighs in favor of the debtor.

On the other hand, there is the factor of substantial harm to the Legion. The Legion had a judgment that it was attempting to collect. The prior case was filed. It resolved the rights of the parties and put on hold to some extent the right of the Legion to obtain payments. When there was a default, the Legion undertook the expense of litigation to determine if there was a default and to commence its efforts to collect on the judgment.

The harm to the Legion is that this has been a long drawn-out process of having first recovered a substantial judgment against the debtor and then having engaged in a long drawn-out prior case resolving the debtor’s attempt to reorganize and pay off the debt over time instead of the Legion stepping in and exercising its judgment creditor rights.

It seems to me, there is substantial harm to the Legion in the form of once again being put to protractive litigation regarding its rights to collect as a judgment creditor after those rights had been settled by reason of the confirmed plan in the earlier case.

That brings us forth to the public interest. The public interest. The public interest, it seems to me, is inextricably tied up with the issues of the likelihood of success on the merits. It is not in the public interest to bring a second filing to undo the settled expectations that arose from confirmation of a plan between the debtor and its principal creditor in the prior case.

This is a case in which the debtor is seeking a stay pending appeal. You have to look at what it was that was ruled by this Court. This Court ruled that there should not be an automatic stay by reason of dismissal of the case. The debtor should not be allowed to file this case and obtain the benefit of an automatic stay, and the automatic stay is in and of itself an injunction. So, essentially, what this is, is the Court has denied an injunction to the debtor by reason of dismissal of the case, and the debtor is now saying please give us an injunction pending appeal. That is an extraordinary remedy. If the Court determines that there is not cause for granting an injunction at the outset, for the debtor to then come and say but we want an injunction pending the appeal would effectively undo the — if the Court were to grant that request, it would effectively undo the Court’s ruling that an injunction is not appropriate.

So, for all of those reasons, the Court is going to deny the motion for a stay pending appeal.

Thank you, Counsel.

MR. STANTON: Your Honor, one issue of clarification. Is the status of the existing — the former Chapter 11 case, is Your Honor going to dismiss that case, too? That is still hanging open.

THE COURT: That issue is not on the calendar today. I don’t know if there is a motion to dismiss pending or —

MR. STANTON: Yes, there was, Your Honor, filed sometime ago.

THE COURT: By who?

MR. STANTON: By us, and there was no objection to it.

THE COURT: I will take a look at it in due course. Thank you very much.

THE CLERK: Your Honor, that concludes the matters for this morning.

Everyone rise. This Honorable Court stands in recess. The parties in this matter are excused.

(Proceedings adjourned.)