Briefly, in this case, the company's former officer, director, and shareholder, wearing his tough guy hat as the company's major secured creditor, unsuccessfully challenged the company's bankruptcy filing in Chicago, with Bankruptcy Judge Jack B. Schmetterer issuing a lengthy opinion finding that (i) the former insider's claims should be only partially recharacterized as equity, but not equitably subordinated, and (ii) most importantly for purposes of this post, the debtor's chapter 11 filing was not in bad faith because there was a business to reorganize and the filing was a "rational reaction" to the creditor's threat to foreclose on debtor's business assets.
Repository Technologies, Inc.
v. Nelson (In re Repository Technologies, Inc.), 363 B.R 868 (Bankr. N.D. Ill. 2007) (pdf).
District Court Judge Amy St. Eve, who's had one of the more interesting years as federal judge while overseeing the Tony Rezko and Lord Conrad Black of Crossharbour trials, heard the appeal in her spare time, and affirmed Judge Schmetterer's decision in its entirety.
Adopting the standards for claim preclusion from the 7th Circuit
, not Delaware (which were noted to be essentially the same as the 7th Circuit's), Vice Chancellor Strine held that Nelson was collaterally estopped from asserting a breach of duty claim based on management's alleged bad faith in filing the bankruptcy petition because, in the first instance, Judge St. Eve had already ruled in the district court case that Judge Schmetterer's
finding on the bad faith issue was not "dicta.
As an aside, one has to wonder whether Nelson miscalculated by first having the District Court, not the Chancery Court, decide whether Judge Schmetterer's ruling was dicta.
Indeed, Judge St. Eve's own ruling looks a bit like dicta itself, since that ruling on dicta really wasn't essential to affirming Judge Schmetterer's decision.
But once she
was asked to decide whether it was in fact dicta, and she
did so decide, then Nelson was most definitely bound by that result.
Still, Vice Chancellor Strine covered his
bases by not relying exclusively upon Judge St. Eve's holding that Judge Schmetterer ruling wasn't dicta, and instead undertook his
own independent analysis of Judge Schmetterer's
decision, drawing the following important two conclusions:
Bankruptcy litigation, however, is a horse of a different color, as Judge Schmetterer
reminds us in In re Ha-Lo Industries, Inc.
(2005 WL 2160087), and a trap for the unwary.