In re Velo Holdings, Inc.

The Bankruptcy Court for the Southern District of New York recently held that a state’s post-confirmation investigation of a debtor’s post-confirmation conduct does not violate a plan confirmation order that enjoins actions against the debtor. In re Velo Holdings, Inc. et al., 500 B.R. 693 (Bankr. S.D.N.Y. 2013). Before the debtors filed bankruptcy in Velo Holdings, the Florida state attorney general investigated debtors’ advertising practices and resolved those investigations under a settlement agreement. During debtors’ bankruptcy, Florida did not file a proof of claim or object to the debtors’ plan. After the plan was confirmed and became effective, Florida subpoenaed the debtors as part of an investigation under Florida’s Unfair and Deceptive Trade Practices Act. When the debtors refused to respond, Florida sought to enforce the subpoena in state court. Seeking protection from the bankruptcy court, the debtors argued that the confirmation-order injunction barred the subpoena, which debtors alleged continued the prepetition investigation. In addition, the debtors sought contempt sanctions for willful violation of the confirmation order. But the court rejected debtors’ arguments, holding that the subpoena did not violate the confirmation order because it only sought information relating to conduct occurring after plan confirmation. Moreover, the court held that Florida could expand its investigation to include information regarding prepetition conduct only if that information was used to inform a claim based on postpetition conduct.