Category: Case Summaries
A Stern Rebuke: Bankruptcy Courts have Constitutional Authority to Confirm Plans Containing Nonconsensual Third-Party Releases
On December 19, the Court of Appeals for the Third Circuit became the first federal circuit court of appeals to hold that a bankruptcy court may confirm a plan containing nonconsensual third-party releases without exceeding the constitutional limits on its jurisdiction articulated in Stern vs. Marshall. The decision in In re Millennium Lab Holdings II, LLC is notable because it rejects a new line of attack on nonconsensual releases in a jurisdiction where they are regularly permitted.
Bankruptcy Courts Don’t Need to Hold an Evidentiary Hearing in Order to Appoint a Chapter 11 Trustee
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.
Section 303 of the Bankruptcy Code allows creditors to initiate an involuntary bankruptcy case against a debtor. The petition initiating the case must be filed by creditors holding claims aggregating to at least $10,000, and those claims must not be “contingent as to liability or the subject of a bona fide dispute as to liability or amount.” 11 U.S.C. § 303(b)(1). Courts have disagreed as to how this provision applies when a portion of a claim is undisputed. Some courts have held that, when the undisputed portion of a claim is sufficient for the aggregated claims to reach $10,000, a dispute about the remainder of the claim does not disqualify the claim as a whole. Other courts have held that any bona fide dispute about the amount of a claim is a “bona fide dispute as to liability or amount” that prevents a claim from being used to support an involuntary bankruptcy petition. On November 26, in Montana Department of Revenue v. Blixseth, 942 F.3d 1179 (9th Cir. 2019), the Ninth Circuit embraced the second position, ruling against a state tax agency that had a large tax claim against the debtor, most of which was subject to bona fide dispute but $200,000 of which was not.
The Solvent Debtor Exception Lives . . . Probably: Fifth Circuit Withdraws Controversial Ruling, but Key Holding Remains
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.
A recent decision in Delaware discussed the Barton doctrine and the application of the automatic stay in chapter 15 cases. McKillen v. Wallace (In re Ir. Bank Resolution Corp.), No. 18-1797, 2019 U.S. Dist. LEXIS 166153 (D. Del. Sept. 27, 2019).
Pre-Bankruptcy Seizure: Recent Third Circuit Decision Widens Circuit Split Regarding Obligations of Secured Creditors in Respect of Collateral Seized Pre-Petition
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.
Bankruptcy Court Addresses Standard For Recovery Of An Alleged Fraudulent Transfer From A Subsequent Transferee
The Bankruptcy Code gives a trustee powers to avoid certain pre-bankruptcy transfers of the debtor’s property to other entities. For example, a trustee can avoid transfers made with the intent to impair the ability of creditors to collect on their debts. 11 U.S.C. § 548(a)(1)(A). The Code gives the trustee the power to recover the transferred property from the initial recipient, and also from subsequent recipients, “to the extent the transfer is avoided.” 11 U.S.C. § 550(a). Courts have split on whether this language requires a trustee to get a judgment avoiding a transfer prior to recovering from a subsequent transferee, or whether a trustee can simply show that the transfer is avoidable as part of the action against the subsequent transferee. A related question, however, concerns what happens when a trustee has gotten a judgment avoiding a transfer, and then seeks to recover from subsequent transferees. Can those transferees challenge whether the original transfer was avoidable? This question is the central issue in a recent decision from the United States Bankruptcy Court for the Southern District of Florida. Yip v. Google LLC (In re Student Aid Ctr., Inc.), Adv. Proc. No. 18-1493, 2019 Bankr. LEXIS 3310 (Bankr. S.D. Fla. Oct. 22, 2019).
A Bankruptcy Code Chapter 15 Primer: Decision in New York Addresses Key Issues of Jurisdiction, Recognition, Public Policy, and More
Judge Martin Glenn last week issued a decision in two related chapter 15 cases, In re Foreign Econ. Indus. Bank Ltd. “Vneshprombank” Ltd., No. 16-13534, and In re Larisa Markus, No. 19-10096, 2019 Bankr. LEXIS 3203 (Bankr. S.D.N.Y. Oct. 8, 2019). The decision is chock full of case citations and offers a tutorial on chapter 15. Practitioners should refer to the decision as a helpful, up-to-date resource.
Two insolvency proceedings had been filed in Russia. One debtor was a bank and the other was an individual. The chapter 15 cases that followed were initially assigned to Bankruptcy Judge Mary Kay Vyskocil. She issued orders recognizing both Russian cases as foreign main proceedings. An attorney who was involved in the cases filed a motion to vacate the recognition orders. Six days later the cases were transferred to Judge Martin Glenn. The opinion doesn’t say why the transfer occurred.
Close Enough: Fifth Circuit Holds That Section 510(B) of the Bankruptcy Code Requires Subordination of Payments That “Look a Lot like” Dividends
In 1930, Clarence Bennett’s wealthy uncle died. He left behind shares in Berry Holding Company ("BHC") that were subdivided into three groups. Bennett was the beneficiary of dividends paid out of one of these groups and, for many years, received his share of dividends from BHC. In 1986, BHC became Berry Petroleum Company ("BPC"), a publicly traded company, and Bennett’s interest changed. In order to preserve the intent of the wealthy uncle’s bequest, that his heirs receive income on the shares of his company, and because of an unrelated dispute with a third-party that resulted in certain of the shares being retired, BPC agreed to pay Bennett “deemed dividends” each time BPC paid an actual dividend to its shareholders.
Section 548 of the Bankruptcy Code enables trustees to avoid certain pre-bankruptcy transfers of “an interest of the debtor in property,” where the transfer was intended to defraud creditors or where the transfer was made while the debtor was insolvent and was not for reasonably equivalent value. 11 U.S.C. § 548(a). Section 544 of the Bankruptcy Code enables trustees to avoid a transfer of “property of the debtor” where a creditor of the debtor would have such a right under state law. 11 U.S.C. § 544(a). The statutory requirement that the transfer be “of an interest of the debtor” or “property of the debtor” (emphasis added) has important implications for claims brought under sections 544 and 548 in the aftermath of a merger or acquisition. This point is illustrated by a recent decision from the District Court of Delaware, affirming the dismissal of fraudulent transfer claims brought under sections 544 and 548 for failure to allege transfer of property by a debtor. Miller v. Matco Electric Corp. (In re NewStarcom Holdings), Civ. No. 17-309 (D. Del. Sept. 6, 2019).
Chapter 15 of the Bankruptcy Code, added in 2005, provides a route for debtors to obtain US recognition of their insolvency proceedings in other countries. A foreign proceeding can be recognized under chapter 15 as either a “foreign main proceeding” or a “foreign nonmain proceeding.” 11 U.S.C. § 1517. Recognition as a foreign main proceeding entitles a debtor to certain rights, such as the automatic stay of actions against the debtor that would normally be imposed in a bankruptcy case filed in the United States. 11 U.S.C. § 1520. To obtain recognition of a foreign proceeding as a foreign main proceeding, the foreign proceeding must be pending in the country where the debtor has the “center of its main interests” (usually abbreviated “COMI”). The precise meaning of this somewhat elusive phrase is still being worked out by judicial decision. On August 12, 2019, the Bankruptcy Court for the Southern District of New York issued another entry in the body of case law concerning this provision, ruling that an investment fund organized under Cayman Islands law, and involved in a liquidation proceeding there, had its COMI in the Cayman Islands rather than New York.
We previously discussed Bankruptcy Judge Martin Glenn’s analysis of the Wagoner Rule in the Feltman v. Kossoff & Kossoff LLP (In re TS Empl., Inc.) case. The bankruptcy trustee (the “Trustee”) had asserted a fraud claim against the debtor’s outside accountant and its principal (the “Defendants”). The Defendants moved to dismiss the complaint, citing the Wagoner Rule. Judge Glenn held that the Trustee’s assertion of the adverse interest exception to the Wagoner Rule did not apply, but allowed the Trustee to amend the complaint to strengthen allegations concerning the insider exception. In a recent decision, Judge Glenn denied the Defendants’ motion to dismiss the amended complaint, concluding that the Trustee alleged sufficient facts concerning application of the insider exception.
We’ve focused a lot on third-party releases lately, as bankruptcy courts across the country continue to evaluate whether and under what circumstances they are permissible. But, as a recent opinion of the United States Court of Appeals for the Fifth Circuit demonstrates, bankruptcy courts are not the only courts grappling with this issue.
Delaware Bankruptcy Judged Brendan Shannon granted mechanic’s lien claimants $1.6 million for making a substantial contribution in a case by “demonstrably and materially facilitating the process of reorganization.” In re M & G USA Corp., No. 17-12307, 2019 Bankr. LEXIS 1398 (Bankr. D. Del. May 6, 2019).
Successful bankruptcy cases typically end with a court order releasing a debtor from liability for most pre-bankruptcy debts. This order, generally known as a “discharge order,” prohibits the debtor’s creditors from trying to collect on those now-discharged debts. See 11 U.S.C. § 524(a)(2). But it is not always clear which debts are covered by a discharge order. Some pre-bankruptcy debts are exempted from discharge by the Bankruptcy Code. For example, section 523 of the Bankruptcy Code exempts certain debts of individual debtors from discharge, and section 1141 exempts certain debts of corporate debtors from discharge under chapter 11. See 11 U.S.C. §§ 523(a), 1141(d)(6). For other debts, it may be unclear whether they arose before or after the bankruptcy. See In re Ybarra, 424 F.3d 1018 (9th Cir. 2005) (considering under what circumstances a discharge order covers an attorney’s fee award for fees incurred post-petition in an action brought before the bankruptcy petition). Courts enforcing a discharge order’s prohibition on debt collection have thus struggled with the appropriate standard for holding a person in contempt for attempting to collect on a discharged debt. Does it require that the person knew that the discharge applied to the debt, or is it sufficient that the discharge did in fact apply to the debt?
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.
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.
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.
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).
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.
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.
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.
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”).
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. 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.
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).
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.
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.
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.
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.
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.
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).
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.
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).
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).
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.
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.
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.
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.
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.
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.
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.
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.
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.
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).
The Second Circuit recently issued an important decision on a “related to” jurisdiction case arising out of the Bernie Madoff Ponzi scheme. SPV Osus, Ltd. v. UBS AG, 2018 U.S. App. LEXIS 3088 (2d Cir. Feb. 9, 2018).
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.”
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.
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.
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.
Dispute Evolution: A bona fide dispute regarding claim amount may disqualify creditor from maintaining an involuntary case.
Section 303(b)(1) of the Bankruptcy Code generally requires three petitioning creditors to join an involuntary petition, each of which must hold claims against the debtor that are not contingent as to liability and are not the subject of a bona fide dispute as to liability or amount.
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