Welcome to the inaugural issue of Bankruptcy In a Civil Law State (Louisiana): Traps for the Unwary and Strategies for the Wary brought to you by Breazeale, Sachse & Wilson, L.L.P. We have created this newsletter to keep our clients and contacts current on hot topics and emerging issues in bankruptcy, and particularly in Louisiana.

We welcome your feedback in helping to make this newsletter as useful as possible. If you would like us to address any issues, or take an in-depth look at a subject, please email us at alan.goodman@bswllp.com.

Breazeale, Sachse & Wilson, L.L.P. is excited to welcome eight new attorneys to the New Orleans office. Alan Goodman, Tom Benjamin, Tim Mehok, Wes Plaisance and Rachael Jeanfreau are among the eight attorneys practicing bankruptcy law in whole or in part. Full press release is here.  

In Louisiana, a litigious right exists when a lawsuit has been commenced and an answer has been filed. When the plaintiff assigns or sells its litigious rights, the defendant can extinguish its obligations by paying the assignee the price it paid for the assignment, with interest. La. Civil Code ("C.C.") art. 2652. While Louisiana does not prohibit assignments of litigious rights, it creates a strong disincentive to such assignments, tracing its roots to Roman and French law.

We have always been intrigued - and concerned - how Louisiana's law on the sale of litigious rights would interact with and be applied in a federal bankruptcy case.

Recently, in In re East Cameron Partners, L.P., 2011 WL 4625368 (W.D. La. Bkrtcy. 2011), the court was presented with the "perfect case" to address these issues. The Debtor filed suit alleging fraudulent transfer claims against the Defendant, and the Defendant answered, thereby rendering the Debtor's claims "litigious rights" under Louisiana law. Thereafter, pursuant to Bankruptcy Code ("Code") § 363 the Debtor sold assets and its litigious rights to Buyer, and Buyer sought to prosecute the Debtor's fraudulent transfer action. Defendant sought to redeem the "litigious rights" from the Buyer by paying the price Buyer paid for them, with interest.

The Buyer opposed Defendant's efforts to redeem the litigious rights and made four arguments - namely, (1) that the sale of avoidance claims pursuant to Code § 363 is not covered by La. C.C. art. 2652; (2) that La. C.C. art. 2652 does not apply to judicial sales pursuant to a 1913 Louisiana case; (3) that bankruptcy law preempts La. C.C. art. 2652 where the claims sold consist of federal fraudulent transfer claims under Code §§ 544, 548, and 550 and the claims were sold pursuant to Code §363; and (4) that Texas law applies to the Defendant's rights regarding the assignment of the litigious rights under Code § 363.

Buyer's first three arguments in opposition are worthy of consideration, but the court never addressed them, instead holding that Texas law (which does not recognize redemption of litigious rights) applied.

Lawyering can be fun sometimes.

In a recent case, our client ("Client") was a secured lender whose mortgage and a related subordination agreement with a prior mortgagee were recorded by the Client's title agent without a property description. The borrower filed its Chapter 11 case on the 90th day after the defective recordation to invalidate the title agent's effort to remedy the defect during the 90-day preference period. Both the Creditors Committee and the (allegedly) "unsubordinated" prior mortgagee, as well as a later trustee, sought to invalidate the (allegedly) defective mortgage lacking the property description, claiming the later recordation of the property description was a preferential transfer. Our Client, nevertheless, still advanced the DIP loan to avoid a shutdown of the debtor's operations. See In re West Feliciana Acquisition, LLC, Case No. 10-10053 (M.D. La. Bkrtcy. 2010).

About three or four months after the petition date the debtor filed a Code § 363 motion to sell its property. Client credit bid its DIP loan and, subject to a letter of credit to be drawn in the event that its pre-petition mortgage were later deemed invalid, credit bid its pre-petition mortgage debt too.

Client was the successful bidder at the § 363 sale and posted a letter of credit for the amount of its credit bid of the pre-petition (allegedly) defective mortgage. The sale closed.

The debtor's Chapter 11 case was thereafter converted to a Chapter 7.

Litigation ensued, all successfully for the Client, the secured lender with the (allegedly) defective mortgage. How you may ask?

As for the Creditors Committee, it no longer existed in the Chapter 7 case and therefore lacked standing. The Court so held and dismissed its claims against Client.

As for the Trustee, the Court held that he was not the successor-in-interest to the Creditors Committee. Moreover, the debtor's release of Client in the DIP loan was binding on the Trustee as the successor-in-interest of the debtor. The Court so held and dismissed the Trustee's claims against Client too.

As for the "unsubordinated" prior mortgagee, its subordination agreement with Client still was binding on it regardless of its (allegedly) defective recordation without the property description. The Court so held and dismissed the prior mortgagee's claims against Client also.

None of the unsecured creditors of the debtor timely filed a suit to challenge the (allegedly) defective mortgage, setting aside the question of whether they would even have standing to do so under established bankruptcy law.

Client was home free, except for its losses due to the defective mortgage.

Now, Client is pursuing its title insurer for its losses. That litigation is pending before a jury.

The lessons here are simple: Still make the DIP loan to prevent asset values (here a large paper mill) from dissipating since the DIP loan will have first priority; persevere forward to salvage whatever can be salvaged, even when the title insurer ignores its responsibilities; and then seek recovery of the losses from the title insurer.

Piercing a corporate veil can be difficult. But a majority equity holder who operates the debtor without much regard for its and the debtor's separate existence can expose itself to all of the debts of the debtor under the "single business enterprise" theory, which Louisiana and a number of other states have adopted. The proof required to show a "single business enterprise" is less stringent than piercing the veil. So, even after plan confirmation, the liquidating trustee on behalf of the unsecured creditors can pursue that equity holder for all of the unpaid debts of the debtor under the single business enterprise theory. The issues are triable before a jury.

Investors (and lenders) be aware: Avoid treating a debtor as yours to do with as you please, or stated differently, make sure the debtor's management remains independent and at arm's length.

We are involved post-bankruptcy in just such a claim, among others, against a hedge fund which was the majority equity holder in the debtor.