Categories & Search

Category: Case Summaries

Bankruptcy Avoidance Actions Under Section 544(b): State Fraudulent Transfer Statutes and More

Creditors’ recoveries often hinge on claw-back lawsuits that trustees bring under bankruptcy law and non-bankruptcy law.  Trustees can file claims based on non-bankruptcy law because Bankruptcy Code section 544(b) allows them to assert claims that creditors have standing to file outside of bankruptcy.  This powerful tool enables trustees to challenge transactions that date back years before a bankruptcy filing.

Go

Another Ruling on Public Auctions Versus Private Sales Under Section 363

Two weeks ago, we discussed asset sales under Bankruptcy Code section 363.  As that post noted, section 363 requires court approval for asset sales outside the ordinary course of business, with courts ensuring that sales reflect a reasonable business judgment and have an articulated business justification.  Debtors may choose to sell assets via a public auction or through a private sale.  In our last post, we considered a case where a debtor initially arranged for a public auction and then decided to sell the property via a private sale.  What about the reverse case—what if a debtor agrees to sell property to a particular entity via a private sale, but then changes course and decides to hold a public auction instead?  On Wednesday, the Fifth Circuit Court of Appeals considered such a case in In re VCR I, LLC, No. 18-60368 (May 1, 2019).  The Fifth Circuit held that the prior agreement did not bar the change of course.

Go

Asset Sales in Bankruptcy: Public Auctions vs. Private Sales under Bankruptcy Code Section 363

We now address assets sales under Bankruptcy Code section 363.  The statute allows debtors to use, sell, or lease their property in the ordinary course of business without court permission.  But a debtor’s use, sale, or lease of property outside the ordinary course of business requires court approval.  And courts will usually approve a debtor’s disposition of property if it reflects the debtor’s reasonable business judgment and an articulated business justification.

Go

Bankruptcy Court Applies Automatic Stay to Continuation of Removed State-Court Action Against Debtor

When a debtor files for bankruptcy, almost all proceedings to recover property from the debtor are automatically stayed by force of law. See 11 U.S.C. § 362(a). This provision, known as the automatic stay, is a central feature of the bankruptcy process, but uncertainty remains about aspects of its scope. Last month, we wrote about a decision from a New Mexico bankruptcy court holding that the automatic stay was not applicable to the removal of a state court action to bankruptcy court and to the continuation of that there. Earlier this week, in response to a motion for reconsideration, the court partially reversed itself, again holding that the automatic stay is not applicable to removal or to motions to remand the action back to state court, but holding that continuation of the action, beyond mere consideration of a motion to remand, was barred by the automatic stay. In re Cashco Inc., No. 18-11968-j7 (Bankr. D.N.M. March 26, 2019).

Go

Key Concepts Concerning Bankruptcy Fraud: the Wagoner Rule and the In Pari Delicto Defense

It’s time for a primer on the Wagoner rule and the in pari delicto defense, two concepts that arise when a debtor’s fraud leads to bankruptcy.  Trustees who replace a debtor’s management often sue those involved in the corporation’s misdeeds.  But the Wagoner rule and the in pari delicto defense can shield third-party defendants from liability.

Go

Bankruptcy Court Holds Automatic Stay Inapplicable to Removal of State Court Action Against Debtor

When a party files for bankruptcy, the Bankruptcy Code imposes an automatic stay of litigation against a debtor for claims arising prior to the commencement of the bankruptcy case. See 11 U.S.C. § 362(a). Where there is a basis for bankruptcy jurisdiction in federal court, federal law also permits parties to a state court action to remove the state court action to the federal district court for the district in which the state court action is pending. See 28 U.S.C. § 1452(a). (Usually, the action will then be automatically referred to a bankruptcy court in that federal judicial district.) Absent court action to modify the automatic stay, does the automatic stay block parties from carrying out such removal of state court actions against a bankruptcy debtor? In In re Cashco Inc., No. 18-11968-j7 (Bankr. D.N.M. December 12, 2018), a bankruptcy court considered an objection to removal on this ground by a chapter 7 trustee (“the Trustee”). While noting that courts have split on this issue, the bankruptcy court ruled that the automatic stay does not apply to removing a case to the bankruptcy court where the bankruptcy case is pending, nor to other proceedings in that court, including continuation of the removed action.

Go

Chapter 15: Court Permits Foreign Debtors to Access and Receive Funds in U.S. Account

A court in New York has allowed offshore debtors to take control of an investment account in the U.S. over the objection of a shareholder.   At stake was the court’s discretion to permit chapter 15 debtors to access the funds and to transfer them outside the U.S.  The shareholder asserted that its interests weren’t fully protected, but the court ruled that on balance the debtors’ need for the money outweighed the shareholder’s concerns.

Go

Fifth Circuit Rejects “Futility” Defense in a State-Law Fraudulent Transfer Action

Fraudulent transfer law allows creditors and bankruptcy trustees, under certain circumstances, to sue transferees to recover funds received where a debtor’s transfers to the transferees actually or constructively defrauded its creditors. Under both the Uniform Fraudulent Transfer Act adopted by most states and the fraudulent transfer action created by federal bankruptcy law, a transferee of an alleged fraudulent transfer may assert a defense from such liability by establishing that it received the transfer in good faith and for reasonably equivalent value. See 11 U.S.C. § 548(c); Tex. Bus. & Com. Code § 24.009(a). Many courts have held that a transferee lacks good faith if it has “inquiry notice,” that is, if it has knowledge that would make a reasonable person suspicious and suggest a need for further investigation, even if it lacks actual knowledge of the fraudulent nature of the transfer. But some courts have held that even a transferee with inquiry notice can maintain a good faith defense if it establishes that an investigation into the facts would have been futile because it would not have revealed the fraud. In Javney v. GMAG, L.L.C., No. 17-11526, 2019 U.S. App. LEXIS 759 (Jan. 9, 2019), the Fifth Circuit held that such a futility defense was not available under the Texas Uniform Fraudulent Transfer Act (“TUFTA”).

Go

“Free and Clear” Means You’re out of Here?

Section 365(h) of the Bankruptcy Code provides considerable protection to a tenant in the event of a bankruptcy filing by its landlord.  Despite rejection of its lease, the tenant can elect to retain its rights, including the right to possession, for the balance of the term of the lease, including any renewal or extension period.[1]  This is black-letter bankruptcy law reflecting a sound policy judgment:  it would be ruinous to business (not to mention an individual or family) if a landlord could upend a tenant’s possession whenever economic circumstances made a bankruptcy filing necessary or desirable.

Go

Arbitration Not Waived in Lawsuit Pending for Two Years

Defendants in a lawsuit didn’t waive their right to arbitrate even after moving to dismiss and answering a complaint, a court held last week.  Arbitration wasn’t waived because the defendants hadn’t filed affirmative defenses or counterclaims and had taken no discovery. Trevino v. Select Portfolio Servicing, Inc. (In re Jose Sr. Trevino), Adv. Pro. No. 16-7024, 2018 Bankr. LEXIS 3605 (Bankr. S.D. Tex. Nov. 14, 2018).

Go

Bankruptcy Court Finds Arbitration Clause in Consumer Loan Contract to be Sufficient Cause to Grant Relief from Automatic Stay

When a bankruptcy petition is filed, an automatic stay comes into effect staying proceedings against the debtor or the debtor’s property. 11 U.S.C. § 362(a). The stay centralizes litigation regarding the debtor and its property in the debtor’s bankruptcy case. When contract entered into pre-bankruptcy contains an arbitration clause, a bankruptcy court will consider if the stay should be enforced or if the parties can resolve the matter in arbitration. In In re Argon Credit, LLC, No. 16-39654 (Bankr. N.D. Ill. Sept. 21, 2018), a bankruptcy court considered this question in a dispute between  two non-debtor parties concerning the validity of loans issued by the debtor and part of the debtor’s estate. The bankruptcy court ruled that the arbitration clause was binding and ordered the stay lifted to permit arbitration to go forward.

Go

Third Circuit Denies Large Break-up Fee in High-Profile EFH Case

The Third Circuit denied a $275 million break-up fee to a bidder that was unsuccessful in its attempt to buy the crown-jewel assets in the high-profile EFH bankruptcy case.  In re Energy Future Holdings Corp., No 18-1109, 2018 U.S. App. LEXIS 25945 (3rd Cir. Sept. 13, 3018).  The court held that the bidder’s efforts didn’t result in a benefit to the debtors’ estates.  Therefore, the bidder’s request for an administrative expense in the form of the fee was rejected. 

Go

Punitive Damages for Involuntary Bankruptcy Petitions Filed in Bad Faith are Ineligible for Setoff

We generally advise clients to think carefully before commencing an involuntary bankruptcy petition against an alleged debtor.  One of the primary reasons for our caution is section 303(i) of the Bankruptcy Code, which provides that “(i) If the court dismisses [an involuntary] petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment—(1) against the petitioners and in favor of the debtor for—(A) costs; or (B) a reasonable attorney’s fee; or (2) against any petitioner that filed the petition in bad faith, for—(A) any damages proximately caused by such filing; or (B) punitive damages.”  A recent unreported decision of the Third Circuit Court of Appeals underscores the serious consequences that can flow from an adverse judgment under this section of the Code.  

Go

Third Circuit Enforces Plan Releases Against Later-Purchasing Shareholders Bringing Claims Concerning Post-Confirmation Conduct

Bankruptcy plans often include provisions releasing debtors and their officers and directors from certain potential liability. In Zardinovsky v. Arctic Glacier Income Fund, No. 17-2522 (3d Cir. Aug. 20, 2018), the United States Court of Appeals for the Third Circuit held that such a provision bound shareholders who purchased the shares after confirmation, as to post-confirmation claims including securities fraud and breach of fiduciary duty. Because this decision was at the motion to dismiss stage, what follows are the court’s characterization of the facts as alleged in the complaint.

Go

Post-Confirmation Jurisdiction of the Bankruptcy Court: “Close Nexus” or “Conceivable Effect”?

In January 2014, Lehman Brothers Holdings, Inc. (“Lehman”) settled claims filed by Fannie Mae and Freddie Mac arising out of each of their purchases of mortgage loans from Lehman and its affiliates. Lehman then sought to recoup the amounts paid to Fannie and Freddie by way of third-party indemnification claims brought in the Bankruptcy Court against financial institutions that it alleges sold or submitted the defective mortgage loans into Lehman’s loan sale and securitization channels in the first place. A number of the financial institutions moved to dismiss for lack of subject matter jurisdiction. Earlier this week, Bankruptcy Judge Shelley Chapman held that the Bankruptcy Court has “related to” jurisdiction over the indemnification claims pursuant to 28 U.S.C. § 1334(b) and therefore denied the motions to dismiss.

Go

Delaware Court Denies $60 Million Administrative Expense Claim in the EFH Case

The Bankruptcy Court in Delaware recently denied a request for an administrative expense claim to an entity that tried but failed to buy a debtor’s key assets.  The decision arises out of the first of three attempts by entities to purchase Oncor Electric Delivery Company LLC (“Oncor”) in the complex Energy Future Holdings Corp. bankruptcy cases.  In re Energy Future Holdings Corp., 2018 Bankr. LEXIS 2257 (Bankr. D. Del. Aug. 1, 2018).

Go

That Settles It: Attorney Emails Can Create an Enforceable Settlement Agreement

In 2010, Lehman Brothers Special Financing Inc. (“Lehman”) commenced an adversary proceeding against Shinhan Bank (“Shinhan”) to avoid and recover pre-bankruptcy transfers made to the South Korean bank.  In 2015, while a motion to dismiss the case was pending, a mediator proposed a resolution to both sides at a settlement conference.  Two weeks later, counsel for Shinhan emailed the mediator that “Shinhan has agreed to accept” the settlement, whereupon the mediator notified both parties that a settlement was reached.[1] 

Go

Court Affirms Ruling Requiring Accounting Firm to Produce Workpapers in Chapter 15 Case

An accounting firm in the United States must produce workpapers to a chapter 15 foreign representative even if the law where the foreign main proceeding is pending would not permit such production.  CohnReznick LLP v. Foreign Representatives of Platinum Partners Value Arbitrage Fund L.P. (In re Platinum Partners Value Arbitrage Fund L.P.),  No. 18-5176 (DLC), 2018 U.S. Dist. LEXIS 109684 (S.D.N.Y June 29, 2018). 

Go

Speak Now? The Ninth Circuit Weighs in on Appellate Standing

A recent decision from the Ninth Circuit Court of Appeals highlights an existing circuit split regarding appellate standing.[1] 

Courts in the Fourth and Seventh Circuits have disagreed whether objection and attendance at a hearing are prerequisites for satisfying the “person aggrieved” requirement for appellate standing. Compare In re Schultz Mfg. Fabricating Co., 956 F.2d 686, 690 (7th Cir. 1992) (attendance and objection at a bankruptcy court proceeding are requirements for appellate standing) with In re Urban Broad. Corp., 401 F.3d 236, 244 (4th Cir. 2005) (attendance and objection are not necessary for standing to appeal a bankruptcy court order).

Go

Supreme Court Resolves Circuit Split on the Dischargeability of Debts Obtained by Oral Misrepresentations

On June 4, the Supreme Court decided Lamar, Archer & Cofrin, LLP v. Appling, No. 16-1215, in a unanimous opinion by Justice Sotomayor. The Court affirmed the Eleventh Circuit and resolved a circuit split about the meaning of “statement respecting the debtor’s . . . financial condition” in section 523(a)(2) of the Bankruptcy Code.

Go

Chapter 15: US Court Respects UK Scheme of Arrangement: Third-Party Releases Enforced

Judge Martin Glenn granted recognition to a UK scheme of arrangement with third-party releases that lacked full creditor consent.  In re Avanti Communs. Grp., PLC, No. 18-10458, 2018 Bankr. LEXIS 1078 (Bankr. S.D.N.Y. Apr. 9, 2018).  While stating that “granting third-party releases in chapter 11 cases is controversial,” Judge Glenn noted that courts will more willingly enforce third-party releases in chapter 15 cases, given the importance of comity and respect for foreign proceedings.

Go

Chapter 15: Decision Reviews Jurisdictional Issues and Bankruptcy Code Section 109

In a recent decision, In re B.C.I Fins. Pty Ltd. (In Liquidation), No. 17-11266, 2018 Bankr. LEXIS 1217 (Bankr. S.D.N.Y. Apr. 24, 2018), Judge Sean Lane granted a chapter 15 petition after rejecting a challenge to jurisdiction in the Southern District of New York.  He held that, under Bankruptcy Code section 109(a), jurisdiction was established in the district because the debtors had a retainer payment there and claims against corporate directors for breaching fiduciary duties.

Go

Bankruptcy Court Holds That Transferee Not Liable For Intentional Fraudulent Transfer Where Funds Were Returned To Debtor

Section 544 of the Bankruptcy Code permits a bankruptcy trustee to avoid any transfer that would be avoidable by creditors under state fraudulent transfer law. Section 550 of the Bankruptcy Code permits the bankruptcy trustee to recover from the transferee the transferred property in a fraudulent transfer avoided under section 550. Where funds were transferred in an intentional fraudulent transfer, but subsequently an equal or greater quantity of funds were transferred back to the debtor from the transferee, can the trustee still recover from the transferee? The Bankruptcy Court for the Eastern District of Pennsylvania recently considered this question in In re Incare LLC, Adv. No. 14-0248, 2018 Bankr. LEXIS 1339 (E.D. Pa. May 7, 2018), and held that the answer was no, the trustee cannot recover.

Go

Can Tax Sales Be Set Aside In Bankruptcy? The Federal Courts Are Increasingly Split

In BFP v. Resolution Tr. Corp., 511 U.S. 531 (1994), the Supreme Court held that a mortgage foreclosure sale conducted in accordance with state law was shielded from avoidance under the Bankruptcy Code’s fraudulent conveyance provision, 11 U.S.C. § 548.  In the wake of BFP, the federal courts have wrestled with the question of whether tax sales—distinct from foreclosures, but similar in concept—may be avoided in bankruptcy.  Two strands of analysis have emerged: whether tax sales may be set aside as a fraudulent conveyance under section 548, and whether tax sales may be attacked as a preferential transfer under section 547.  In both strands, the federal courts have continued to reach divergent, and often contradictory, results.

Go

Check Pleas: Reimbursement Check Delivered to Employee Pre-Petition is Unauthorized Post-Petition Transfer

Section 549 of the Bankruptcy Code permits a trustee or debtor in possession to avoid (and ultimately recover) a transfer of the debtor’s property “that occurs after the commencement of the case” and “is not authorized under this title or by the court.”  11 U.S.C. § 549.  This sensible provision safeguards property of the estate for ratable distribution to creditors in accordance with the priorities established by the Bankruptcy Code and provides the Trustee with the necessary authority to pursue transferees that receive property of the estate without Court approval. 

Go

Court Decision Reviews Key Concepts Concerning Executory Contracts

This post reviews some concepts concerning executory contracts. The ground covered will be familiar to insolvency experts and should be insightful for readers who don’t specialize in U.S. bankruptcy law.

The springboard for the overview is an opinion issued last week, In re Cho, Case No. 17-22057, 2018 LEXIS 700 (MMH) (Bankr. D. Md. Mar. 13, 2018).  Before the chapter 11 case was filed, Chong Ok Lim and Young Jun (“Plaintiffs”) owned a dry cleaning business that was later owned and operated by Byung Mook Cho (“Cho”).  The parties had a dispute that led to lawsuit and a judgment for the Plaintiffs.  Plaintiffs later alleged that Cho and He Sook Paik (“Paik“) “conspired to fraudulently convey” the dry cleaning business to Cho.

Go

In “Non-Statutory Insider” Case, Supreme Court Clarifies the Standard of Review for Mixed Questions of Law and Fact

In U.S. Bank Nat'l Ass'n v. Village at Lakeridge, LLC, No. 15-1509, 2018 U.S. LEXIS 1520 (Mar. 5, 2018), the Supreme Court analyzed the appropriate standard of review for appellate courts reviewing a bankruptcy court’s determination of a “mixed question” of law and fact.  But the Court did not address whether the lower courts’ various “non-statutory insider” tests should be refined—although the concurrences strongly suggest that issue may be ripe for increased scrutiny.

Go

Major Section 546(c) Safe Harbor Issue Resolved by the Supreme Court

Our post last year concerning “[t]he long-running litigation spawned by the leveraged buyout of Tribune Company . . . and the subsequent bankruptcy case” described a case--FTI v. Merit--that was then pending in the Supreme Court.  In that case, the Court of Appeals for the Seventh Circuit had construed the safe harbor provided in Section 546(e) of the Bankruptcy Code in conflict with its construction by the Second and Third Circuits (among others).  On February 27, the Supreme Court announced its unanimous decision affirming the Seventh Circuit.

Go

Bankruptcy court holds that state consumer fraud claims against corporations are dischargeable in bankruptcy

Section 1141(d)(6)(A) and section 523(a)(2) of the Bankruptcy Code together provide that debts owed by a corporation to a government entity are not dischargeable if such debts were obtained by false representations. Does this rule apply to claims by government entities seeking to enforce consumer fraud laws, where the government entities were not themselves the victims of the fraud? On February 14, 2018, the United States Bankruptcy Court for the District of Delaware held that it does not, ruling that such claims against corporations brought by states on behalf of their citizens are dischargeable in bankruptcy. In re TK Holdings Inc., Case No. 17-11375, 2018 Bankr. LEXIS 414 (Bankr. D. Del. Feb. 14, 2018).

Go

One and Done. Cramdown Requirement for an Impaired Assenting Class Applies on a Per-Plan, Not a Per-Debtor, Basis.

Confirmation of a Chapter 11 plan of reorganization generally requires the consent of each impaired class of creditors.  But, upon satisfaction of additional statutory requirements, a plan proponent can obtain confirmation of a “cramdown” plan over the dissent of one or more classes of creditors as long as “at least one class of claims that is impaired under the plan has accepted the plan.”

Go

Eighth Circuit rejects foreseeability test for notice to unknown creditors

In Dahlin v. Lyondell Chemical Co., 2018 U.S. App. LEXIS 1956 (8th Cir. Jan. 26, 2018), the Eighth Circuit Court of Appeals rejected an argument that bankruptcy debtors were required by due process to provide more prominent notice of a case filing than they did, such that the notice might have been seen by unknown creditors with claims to assert.

Go

Third Circuit Holds Transfer from Non-Debtor Precludes Liability Under Delaware Fraudulent Transfer Law

In Crystallex Int'l Corp. v. Petróleos de Venez., S.A., Nos. 16-4012, 17-1439, 2018 U.S. App. LEXIS 95 (3d Cir. Jan. 3, 2018), the U.S. Court of Appeals held there could be no fraudulent transfer liability under the Delaware Uniform Fraudulent Transfer Act (“DUFTA”) where the transfer was made by a non-debtor entity—even where the debtor exercised complete control over the non-debtor and allegedly orchestrated transfers through the non-debtor to frustrate creditors.

Go

Chapter 15: U.S. Creditor Required to Seek Recovery in Foreign Main Proceeding

In this post, we return to cross-border insolvencies and examine one of the first decisions issued in 2018 by a bankruptcy court in a chapter 15 case: In re Energy Coal S.P.A., No. 15-12048 (LSS), 2018 Bankr. LEXIS 10 (Bankr. D. Del. Jan. 2, 2018), where the court allowed a creditor to liquidate its claim in a lawsuit brought against a debtor in the U.S., but required the creditor to seek collection from the debtor in the country where the foreign main proceeding was filed. The upshot of the decision is that respect for the foreign main proceeding and the concept of comity trumped contractual choice of law and venue provisions.

Go

Court Holds that Bankruptcy Judges Cannot Impose Punitive Sanctions

Bankruptcy courts lack the power to impose serious punitive sanctions, a federal district judge ruled recently in PHH Mortgage Corporation v. Sensenich, 2017 U.S. Dist. LEXIS 207801 (D. Vt.  Dec. 18, 2018). Judge Geoffrey Crawford reversed a bankruptcy judge’s ruling that had imposed sanctions against a creditor based on Rule 3002.1(i) of the Rules of Bankruptcy Procedure, the bankruptcy court’s inherent authority, and Bankruptcy Code section 105.

Go

Debtor’s Subchapter S Status Isn’t Property of the Estate

This post examines an interesting intersection between bankruptcy and tax laws: if a corporation terminates its Subchapter S status pre-bankruptcy, can a bankruptcy trustee bring fraudulent transfer claims against the corporation’s shareholders to recover resulting tax refunds they receive? One bankruptcy court recently dismissed such fraudulent transfer claims on the ground that the corporation’s S status wasn’t property of the debtor’s bankruptcy estate, and thus the trustee couldn’t pursue the claims. Richard Arrowsmith v. United States (In re Health Diagnostic Lab., Inc.), 2017 LEXIS 4148 (Bankr. ED Va. Dec. 6, 2017). This decision adds to a split of authority on this issue.

Go

Litigation Funders’ Collateral Did Not Include Malpractice Claims

When the fallout from failed intellectual-property litigation collides with bankruptcy, the complexities may be dizzying enough, but when the emerging practices and imperatives of litigation financing are imposed on those complexities, the situation might be likened to three-dimensional chess.  But in the court of one veteran bankruptcy judge, the complexities were penetrated to reveal that elementary errors and oversights can have decisive effects.

Go

Forum Selection Clause in an Unsigned Pre-Petition Engagement Letter is Binding on Chapter 11 Trustee.

Every lawyer knows that it is important to enter into a signed engagement letter with a client before commencing legal representation.  But, as one law firm recently discovered, even an unsigned engagement letter is better than none at all.  The decision of the United States Bankruptcy Court for the Northern District of Georgia in Glass v. Miller & Martin, PLLC addresses this plus several other key concepts for Bankruptcy Court litigants.[1]  

Go

Solicitor General recommends US Supreme Court review in dischargeability case

On November 9, responding to a request from the U.S. Supreme Court, the Solicitor General filed a brief at the Court recommending that the petition for writ of certiorari in Lamar, Archer & Cofrin, LLP v. Appling, No. 16-11911, be granted. The petition, seeking review of a unanimous panel decision of the Eleventh Circuit, presents the question of “whether (and, if so, when) a statement concerning a specific asset can be a ‘statement respecting the debtor's . . . financial condition’ within Section 523(a)(2) of the Bankruptcy Code.” There is a circuit split on this question, though the parties dispute its extent and its ripeness.

Go

Non-Consensual Third-Party Releases in Chapter 11 Plans: a Recent Decision

A recent decision of the United States Bankruptcy Court for the Southern District of New York provides important guidance on the limits of nonconsensual third-party releases in the Second Circuit. SunEdison, Inc. sought confirmation of a plan for itself and its affiliated debtors.  The plan included releases of claims against non-debtor third parties by any creditor that was entitled to but did not cast a vote on the plan. No party objected to the release at the confirmation hearing, but Judge Bernstein asked sua sponte whether he had authority to bind non-voting creditors to broad releases of claims against third parties.

Go

Second Circuit Addresses Key Chapter 11 Plan Issue

It is a unique characteristic of debt restructuring under Chapter 11 of the Bankruptcy Code that a majority of a class of creditors can accept a modification of the terms of the debts owed to the class members, as provided in a plan of reorganization, and thereby bind non-accepting class members.  The ordinary route to confirming a Chapter 11 plan is to obtain its acceptance by a majority of every impaired class of creditors and equity holders.

Go

In Preference Suit, Seventh Circuit Holds That Debtor’s Assignment of Contractual Rights Does Not Negate Creditor’s New Value Defense

In Levin v. Verizon Bus. Global, LLC (In re OneStar Long Distance, Inc.), 2017 U.S. App. LEXIS 18374 (7th Cir. Sept. 22, 2017), the Seventh Circuit recently addressed a situation where a debtor sought to reduce a creditor’s new value defense in a preference avoidance action.  The Seventh Circuit held that the debtor’s assignment of contractual rights to a third party did not constitute a transfer “to or for the benefit of” the creditor, such that the transfer would reduce the creditor’s new value defense under 11 U.S.C. § 547(c)(4)(B).

Go

Waivers of Jury Trials and Lawsuits in Bankruptcy Cases

Figuring out when a pre-petition waiver of a jury trial will be respected in lawsuits brought in bankruptcy cases can be tricky. In a recent case, In re D.I.T., Inc., 2017 Bankr. LEXIS 3386 (Bankr. S.D. Fla. Oct. 2, 2017), a court distinguished between claims belonging to a debtor pre-petition and those belonging to a debtor-in-possession.

Go

Fees for Fees: Testing the Limits of ASARCO

Unsecured creditors and other stakeholders sometimes challenge the reasonableness of fees incurred by estate professionals in a bankruptcy case.  Whether this is to augment unsecured creditor recoveries or serve as a check on the private bar is in the eye of the beholder.  Whatever the reason, fee litigation in bankruptcy caused many professionals to seek payment from the bankruptcy estate for any fees incurred defending against an objection to their fees. This practice was eventually challenged and, in 2014, the Supreme Court ruled that the Bankruptcy Code does not permit it.  The Court’s holding was grounded in the American Rule, which provides that “[e]ach litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise.”  Section 330(a)(1)’s provision for “reasonable compensation for actual, necessary services rendered,” the Court announced, “neither specifically nor explicitly authorizes courts to shift the costs of adversarial litigation from one side to the other—in this case, from the attorneys seeking fees to the administrator of the estate—as most statutes that displace the American Rule do.”

Go

Court Nixes Amended Claim Filed After the Effective Date

In a recent post, here, we wrote about a court decision that discussed deadlines for proofs of claim in a case involving a Ponzi scheme. Then, last week, another court issued a decision concerning late amendments to proofs of claim. In re James F. Humphreys & Assocs., L.C., Case No. 2:16-bk-20006 (Bankr. S.D. W.Va. Sept. 27, 2017). The upshot of this case is that amendments to proofs of claim filed after a plan’s effective date will be denied absent “compelling reasons.”

Go

Reversing the District Court, the First Circuit Says PROMESA Provides for an “Unconditional Right to Intervene,” Deepening Circuit Split on Applicability of 11 U.S.C. § 1109(b) in Adversary Proceedings

Last week, in Assured Guaranty Corp. v. Fin. Oversight and Mgmt. Bd. for Puerto Rico, No. 17-1831, 2017 U.S. App. LEXIS 18387 (1st Cir., Sept. 22, 2017), the U.S. Court of Appeals for the First Circuit issued a noteworthy decision in the Puerto Rico quasi-bankruptcy proceedings.  Overturning the district court’s ruling, the Court of Appeals held that the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), 48 U.S.C. §§ 2161-2177, provides for a non-discretionary “unconditional right to intervene,” pursuant to Fed. R. Civ. P. 24(a)(1).  Although decided within the context of the Puerto Rico proceedings, the First Circuit’s decision deepens a circuit split on whether the unconditional right to intervene, set forth in 11 U.S.C. § 1109(b), applies to adversary proceedings.

Go

Ninth Circuit Opens the Door A Bit Wider for Recoveries from the IRS

Avoiding a fraudulent transfer to the Internal Revenue Service (“IRS”) in bankruptcy has become easier, or at least clearer, as a result of a recent unanimous decision by a panel of the Court of Appeals for the Ninth Circuit, Zazzali v. United States (In re DBSI, Inc.), 2017 U.S. App. LEXIS 16817 (9th Cir. Aug. 31, 2017).

Go

Something New Under the Sun?

The long-running litigation spawned by the leveraged buyout of Tribune Company, which closed in December 2007, and the subsequent bankruptcy case commenced on December 8, 2008 has challenged the maxim that “there’s nothing new under the sun” even for this writer with four decades of bankruptcy practice behind him.

Go