2009 Chapter 11 Recent Developments (Part I)

Gas & Electric Co., 549 U.S. 443 (2007) undermines the Second Circuit's "instruction that courts should 'act very cautiously' in applying constructive trust law in the context of bankruptcy..." as provided in Superintendent of Ins. v. Ochs (In re First Cent. Fin. Corp.), 377 F.3d 209, 217 (2d Cir. 2004).

Rules: The First Cent. Fin. Corp. case's instruction with regard to the imposition of constructive trusts in bankruptcy does not undermine the Supreme Court's instruction in Travelers that "state law governs the substance of claims in bankruptcy,... [and] 'unless some federal interest requires a different result, there is no reason why [property] interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.'" Thus, the rule in First Cent. - that courts should 'act very cautiously' in imposing a constructive trust - stands.

Holding: Affirmed.

Reasoning: The purpose of the cautiousness by which the Second Circuit approaches constructive trusts in bankruptcies is that a constructive trust "creates 'a separate allocation mechanism outside the scope of the bankruptcy system,' and so can 'wreak... havoc with the priority system ordained by the Bankruptcy Code." First Central just instructs courts to be mindful of the equities that are involved in a bankruptcy before imposing a constructive trust. "Recognizing different equities in different contexts is not an impermissible transformation of the substantive law. It is simply a recognition that an equitable remedy is more or less appropriate when different interests are in play." Therefore, because there is no inequity in treating Ades-Berg in the same way as the other investors who deposited money with the Bennett Group, the bankruptcy court was right to deny the imposition of a constructive trust.

Doug Crosby, et. al. v. Orthalliance New Image, et. al. (In re OCA, Inc.), 2008 WL 5192077 (5th Cir. Dec. 12, 2008)

Facts: OCA, Inc., the Debtors, appealed the bankruptcy court partial summary judgment order that found that the Business Service Agreements or Management Agreements (the "BSAs") that OCA entered into with a number of orthodontists were illegal under Texas law for violating the Texas Occupations Code which prohibits a person from practicing dentistry without a license.

Issues: Whether corporations are "persons" for purposes of the Texas Occupations Code § 251.003(a)(4). Whether the BSAs are illegal.

Holding: Affirmed.

Rules:

(1)

The Texas Government Code defines person to include corporations "'unless the statute or context in which the word or phrase is used requires a different definition.'" Tex. Gov't Code § 311.005(2).

(2)

In Texas, a contract is illegal, and thus void, "if the contract obligates the parties to perform an action that is forbidden by the law of the place where the action is to occur."

Reasoning: The Texas Occupations Code at issue did not define 'person.' But the Texas Government Code's definition includes corporations and the text of the Texas Occupations Code "does not require a deviation for the general definition because its wording does not refer exclusively to a natural person." And regardless of whether the previous version of the Texas Occupations Code did not apply to corporations, the Texas Government Code must be given effect. OCA failed to argue why it believes the BSAs do not run afoul of § 251.003(a)(4) (its arguments referred to § 251.003(a)(9)); also, every district court that has considered the BSAs has found them