Category: Case Summaries

It’s often hard to persuade a bankruptcy court to grant a motion for substantial contribution.  Any attorney thinking about making a motion should first ask herself two questions.  First, has my work benefitted both my client and other creditors?  Second, did my work result in more than an incidental benefit to the bankruptcy estate?  If the answer to either question is no, then the attorney should forget about making the motion.  The time spent on it will be wasted, and the motion will be denied.

A U.S. bankruptcy court recently denied chapter 15 recognition to a case in the Isle of Man (IOM).  The court ruled that the foreign case was neither a foreign main proceeding nor a foreign non-main proceeding.  Although the court found that the IOM proceeding was a “foreign proceeding,” it also held that the debtor’s center of main interests wasn’t in the IOM and the debtor didn't have an establishment there.  In re Shimmin, No. 22-10039, 2022 LEXIS 2932 (Bankr. W.D. Okla. Oct. 14, 2022).

A bankruptcy court ruled that a creditor didn’t need to seek derivative standing to sue a liquidating trustee.  The creditor, himself a trustee of the debtor’s employee stock-option plan, had standing to sue without prior court permission because his suit wasn’t brought on behalf of the bankruptcy estate.  In re Foods, Inc., Case No. 14-02689, Adv. Pro. No. 21-3022, 2022 Bankr. LEXIS 2331 (Bankr. S.D. Iowa Aug. 23, 2022).

A discharge in bankruptcy usually discharges a debtor from the debtor’s liabilities.  Section 523 of the Bankruptcy Code, however, sets forth certain exceptions to this policy, including for “any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud. . . .”  11 U.S.C. § 523(a)(2)(A).  (We have previously written about this provision in the context of statements respecting a debtor’s financial condition.)  There is a split among the courts of appeal as to whether this provision applies only to a debtor who has some level of knowledge of the fraud, or whether the bar on discharge applies also when the debtor is liable only by imputation for a fraud committed by an agent or partner of the debtor.  On May 2, the Supreme Court granted a petition for certiorari in Bartenwerfer v. Buckley, No. 21-908, a case presenting this question.

Article I, Section 8 of the United States Constitution gives Congress the power to “establish . . .  uniform Laws on the subject of Bankruptcies throughout the United States.”  While Congress has general authority to establish a bankruptcy system, bankruptcy laws must be “uniform.”  But not every aspect of the bankruptcy system is the same across every judicial district.  For instance, while most judicial districts have United States Trustees, which are funded by a special fee charged to debtors, the judicial districts of Alabama and North Carolina instead have Bankruptcy Administrators, which are funded by general appropriations to the judiciary.  These different funding systems have sometimes resulted in differences in fees imposed on debtors between different judicial districts, raising the question of whether different fee obligations for debtors in different judicial districts is consistent with the uniformity requirement.  In Siegel v. Fitzgerald, No. 21-441, the Supreme Court has agreed to consider this question.

Another case shows the perils of waiting until the final minutes to meet a court deadline.  In re U-Haul, 21-bk-20140, 2021 Bankr LEXIS 3373 (Bankr. S.D. W. Va. Dec. 10, 2021).

Earlier this month – citing the “virtually unflagging obligation” of an Article III appellate court to exercise its subject matter jurisdiction – the Eighth Circuit Court of Appeals decried the pervasive overreliance by district courts on the doctrine “equitable mootness” to duck appeals of confirmation orders.

Some courts permit debtors to designate vendors crucial to their business as “critical vendors.”  These are vendors that supply debtors with necessary goods or services.  With court permission, debtors are allowed to pay critical vendors amounts owing when a bankruptcy case is filed.  Accordingly, critical vendors often recover more on their pre-petition claims than other unsecured creditors.  In other words, critical vendors could receive a full recovery, while other creditors only receive a fraction of what they are owed.

At stake in a recent decision by the First Circuit was this:  when a bankruptcy matter is before a federal district court based on non-core, “related to” jurisdiction, should the court apply the Federal Rules of Bankruptcy Procedure or the Federal Rules of Civil Procedure?  The First Circuit ruled that the former apply, and in so doing joined three other circuits that have also considered this issue.  Roy v. Canadian Pac. Ry. Co. (In re Lac-Megantic Train Derailment Litig.), No. 17-1108, 2021 U.S. App. LEXIS 16428 (1st Cir. June 2, 2021).[i]

In 2018, the liquidating trustee for Venoco, LLC and its affiliated debtors (collectively, the “Debtors”) commenced an action in the United States Bankruptcy Court for the District of Delaware seeking monetary damages from the State of California and its Lands Commission (collectively, the “State”) as compensation for the alleged taking of a refinery (the “Onshore Facility”) that belonged to the Debtors (the “Adversary Proceeding”).  The State moved to dismiss, claiming, among other things, sovereign immunity.  The Bankruptcy Court denied the motion to dismiss, and the District Court affirmed the denial.  The State appealed to the Third Circuit, and the Third Circuit affirmed.

Debtors who ignore instructions from the Bankruptcy Court do so at their own peril, as a recent case from the First Circuit Court of Appeals illustrates.  In In re Francis, the First Circuit reminds debtors and practitioners that “the road to a bankruptcy discharge is a two-way street, and a debtor must comply (or at least make good-faith efforts to comply) with lawful orders of the bankruptcy court.” Otherwise, debtors risk dismissal of their petition and denial of a discharge. 

In January, we reported that the Supreme Court had resolved a split among the Circuit Courts of Appeals regarding property seized from a debtor pre-petition, holding that “merely retaining possession of estate property does not violate the automatic stay.”  The underlying dispute in Fulton arose when individual debtors demanded that the City of Chicago return cars that were impounded for non-payment of various municipal parking and traffic violations immediately upon the filing of their bankruptcy petition, while the City maintained that debtors must seek turnover through an adversary proceeding. 

A discharge of debt in bankruptcy “operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor. . . .”  11 U.S.C. § 524(a)(2).  Certain debts, however, including debts “for violation of . . . any of the State securities laws,” are not subject to discharge.  See 11 U.S.C. § 523(a)(19).  A discharge injunction does not bar the collection of such debts.  Does a discharge injunction bar a fraudulent transfer action, when that action is brought based on an underlying non-dischargeable debt?  In a recent decision, the United States Court of Appeals for the Eleventh Circuit considered this issue, and concluded that the discharge injunction barred a fraudulent transfer action under the Alabama Uniform Fraudulent Transfer Act (“AUFTA”), because the fraudulent transfer claim gave rise to a separate liability from the underlying non-dischargeable debt.  SuVicMon Development, Inc. v. Morrison, 991 F.3d 1213 (11th Cir. March 25, 2021).

It is well known in the restructuring world that a debtor in bankruptcy can’t get a PPP loan.  But what if you’re a debtor and decide a PPP loan could save your business?  Will a court dismiss the case so you can seek a loan?

We have blogged previously about section 546(e), the Bankruptcy Code’s safe harbor for certain transfers otherwise subject to avoidance as preferences or fraudulent transfers.  See 11 U.S.C. § 546(e).  Among the transfers protected by the section 546(e) safe harbor are transfers by or to a “financial participant” made “in connection with a securities contract.”  Id.  The Bankruptcy Code in turn defines “financial participant” to mean an entity that has certain financial agreements or transactions of “total gross dollar value of not less than $1,000,000,000 in notional or actual principal amount outstanding” or “gross mark-to-market positions of not less than $100,000,000 . . . in one or more such agreements or transactions.”  11 U.S.C. § 101(22A)(A).  In both cases, the “agreements or transactions” must be “with the debtor or any other entity.”  Id.  Since an entity cannot engage in an agreement or transaction with itself, does the language providing that such agreements and transactions must be “with the debtor or any other entity” mean that the debtor cannot be a financial participant”?  On December 23, 2020, Judge Shannon of the United States Bankruptcy Court for the District of Delaware ruled that debtors could be financial participants, disagreeing with a previous decision from the Southern District of New York.

The Bankruptcy Code enables a trustee to set aside certain transfers made by debtors before bankruptcy.  See 11 U.S.C. §§ 544, 547, 548.  These avoidance powers are subject to certain limitations, including a safe harbor in section 546(e) exempting certain transfers.  Among other things, section 546(e) bars avoidance of a “settlement payment . . . made by or to (or for the benefit of) . . . a financial institution [or] a transfer made by or to (or for the benefit of) a . . . financial institution . . . in connection with a securities contract.”  The Bankruptcy Code in turn defines a “financial institution” to include not only financial institutions as conventionally understood, such as “a Federal reserve bank, or an entity that is a commercial or savings bank, industrial savings bank, savings and loan association, trust company, federally-insured credit union, or receiver, liquidating agent, or conservator for such entity,” but also a customer of such institutions when such institutions are “acting as agent or custodian for [such] customer . . . in connection with a securities contract.”  11 U.S.C. § 101(22)(A).  Because a transfer to a “financial institution” in connection with a securities contract is shielded by section 546(e) from avoidance, the question of which “customers” of financial institutions qualify as financial institutions under this definition has become highly litigated.  On October 22, the United States Bankruptcy Court for the Eastern District of Michigan issued a new decision on this question, ruling that the recipients of an alleged fraudulent transfer did not qualify as “financial institutions” under the Bankruptcy Code because the bank that transmitted the payments was not acting as an “agent or custodian” for the recipients.

On September 29, 2020, the House Judiciary Committee advanced H.R. 7370, Protecting Employees and Retirees in Business Bankruptcies Act of 2020, a Democrat-sponsored bill, to the full chamber. If enacted into law, the bill would usher in considerable changes in commercial bankruptcy cases, including in the areas of executive compensation, employee and retiree benefits, and confirmation of a Chapter 11 plan.  Some of the more salient provisions of the bill are listed below; for the complete text of H.R. 7370, click here.

This post concerns computation of time under Bankruptcy Rule 9006.  The specific issue addressed is whether a bankruptcy court — when computing a filing deadline — should count a day when its clerk’s office is closed, even if the electronic filing system is available.  In a recent case, a federal district judge explained why in his view the day shouldn’t be counted.  Labbadia v. Martin (In re Martin), No. 3:20-cv-939, 2020 WL 5300932, (SRU) (D. Conn. Sept. 4, 2020).

Section 550 of the Bankruptcy Code provides that, when a transfer is avoided under one of several other sections of the Code, a trustee may recover “the property transferred, or, if the court so orders, the value of such property” from “the initial transferee of such transfer,” “the entity for whose benefit such transfer was made,” or “any immediate or mediate transferee of such initial transferee.”  11 U.S.C. § 550(a).  (Transferees in the last category are known as subsequent transferees.)  For example, if an entity receives a fraudulent transfer of cash, and then passes on the cash to a third party, the third party can be liable under section 550.[1]  But what if the transfer is of a non-cash asset?  To qualify as an “immediate or mediate transferee” under section 550, is it necessary to receive the actual asset, or does it suffice to receive funds derived from the asset?  The Tenth Circuit addressed this question in its recent decision in Rajala v. Spencer Fane LLP (Generation Resources Holding Company, LLC), 2020 WL 3887850 (10th Cir. July 10, 2020).  The Tenth Circuit held that, to qualify as a “transferee” under section 550, a party must have received the actual “property transferred."

Courts reviewing a bankruptcy court’s decision to approve a chapter 11 reorganization plan over the objections of an interested party must consider not only the merits, but also (if implementation of the plan was not stayed) potential injury to the reliance interests of other parties relying on the plan. These issues are confronted in Drivetrain, LLC v. Kozel (In re Abengoa Bioenergy Biomass of Kansas), 2020 WL 2121449 (10th Cir. May 5, 2020), a recent Tenth Circuit decision holding, based on circuit precedent, that an objector’s challenge to a chapter 11 plan that had already been implemented was barred under the doctrine of equitable mootness. Nonetheless, the decision noted that the doctrine is controversial and open to question.

When there are large numbers of substantial individual tort claims against a debtor, potentially involving claimants unknowable to the debtor who themselves may not know they have a claim, the bankruptcy process faces special problems.  One objective of bankruptcy is to afford final relief to the debtor from the debtor’s debts, but discharging the claims of those unknown claimants without notice and a hearing poses due process problems.  A standard way to address this issue, which has arisen prominently in asbestos cases, is for the debtor to create and fund a trust to provide for tort claims brought in the future, with the court issuing an injunction channeling such claims to the trust rather than the reorganized entity.  See, e.g., 11 U.S.C. § 524(g) (providing for such trusts for asbestos-related litigation).  But are such trusts the only way to resolve such claims?  This question is raised by the Third Circuit’s recent decision in In re Energy Future Holdings Corp, No. 19-1430, 2020 U.S. App. LEXIS 4947 (Feb. 18, 2020).  The debtor instead devised a process reliant on Rule 3003(c)(3) of the Federal Rules of Bankruptcy Procedure, which authorizes a court to extend the time for filing a claim “for cause shown.”  In the circumstances of that case, and with publication notice to potential claimants, the Third Circuit held that this approach comported with due process.

When a debtor files for bankruptcy, the Bankruptcy Code provides for an automatic stay of almost all proceedings to recover property from the debtor.  See 11 U.S.C. § 362(a).  A party in interest can seek an order exempting it from the automatic stay for cause.  11 U.S.C. § 362(d).  A creditor that fails to obtain relief from the stay is limited to the claim-adjudication process in bankruptcy court.  What happens if the bankruptcy court rules against a creditor seeking relief from the automatic stay, and the creditor seeks to appeal?  Can the creditor appeal immediately or must it wait until its claim is fully adjudicated in bankruptcy court?  The question turns on the interpretation of the federal statute governing bankruptcy appeals, which provides that appeals may be taken from “final judgments, orders and decrees . . . entered in cases and proceedings.”  28 U.S.C. § 158(a) (emphasis added).  An automatic stay does not finally resolve a bankruptcy “case,” but does it finally resolve a bankruptcy “proceeding”?  On January 14, the Supreme Court resolved that question affirmatively in an opinion by Justice Ginsburg, ruling that a creditor who is denied relief from the automatic stay may appeal immediately.

The U.S. Bankruptcy Code allows debtors to stay in control of their businesses in chapter 11.  But the Code also empowers bankruptcy judges to replace a debtor’s management in certain circumstances with an outside trustee.  This will happen if either cause exists to expel management or appointing a trustee is in the best interests of creditors, any equity holders, and other interests of the estate.  11 U.S.C. § 1007.  Judges don’t need to hold an evidentiary hearing to appoint a trustee, but the decision to do so must be based on clear and convincing evidence.

Ultra Petroleum entered bankruptcy in significant financial distress, but then – thanks to a spike in oil prices – the debtor’s fortunes changed almost literally overnight.  It is generally accepted that a solvent debtor must pay its creditors their complete contractual entitlement before any amount is paid to equity or retained by the debtor.  So, in light of the debtor’s newfound solvency, bondholders and other lenders demanded payment of post-petition interest at the contract rate and payment of a “make-whole premium.”  Anything less, they said, would render them “impaired” and entitled to vote on the proposed plan.

In July 2016, Joy Denby-Peterson purchased a Chevrolet Corvette.  When she defaulted on one of her car payments a few months later, the Corvette was repossessed by her lender.  Denby-Peterson then filed a voluntary petition under Chapter 13 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of New Jersey and demanded the lender return the Corvette.  When the lender refused, she filed a motion for an order compelling turnover of the Corvette and imposing sanctions for an alleged violation of the automatic stay.