Category: Case Summaries
We have previously blogged about Siegel v. Fitzgerald, the Supreme Court decision last June that invalidated the 2018 difference in fees between bankruptcy cases filed in Bankruptcy Administrator judicial districts and U.S. Trustee judicial districts. As we explained, the parties in that case disputed whether, if the fee difference were to be held unconstitutional, the appropriate remedy would be a refund for the debtors charged the higher fee or additional fees imposed on the debtors charged the lower fee. The Supreme Court did not resolve that question, leaving the question to be resolved on remand.
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).
To encourage parties to transact with debtors in bankruptcy, the Bankruptcy Code in corporate bankruptcies provides highest priority to “administrative expenses,” which include “the actual, necessary costs and expenses of preserving the estate.” 11 U.S.C. § 503(b); id. § 507(a)(2). Section 365 of the Bankruptcy Code permits the assumption or rejection of any executory contract—a contract in which the parties have ongoing duties of performance to each other when a bankruptcy case is filed—and provides that if the debtor rejects the contract, such rejection is treated as a breach occurring “immediately before the date of the filing of the petition.” 11 U.S.C. § 365. Because section 365 treats liability from such a breach as arising pre-petition, it is not treated as an administrative expense and is usually a general unsecured claim. The combination of these provisions therefore raises a question: what happens if there is an ongoing executory contract which, during the bankruptcy case, potentially provides benefits to the estate, but then is rejected by the debtor? Does liability for breach in this circumstance have administrative priority? This question was addressed in Finance of America LLC v. Mortgage Winddown LLC (In re Ditech Holding Corp.), 21-cv-10038 (LAK), 2022 U.S. Dist. LEXIS 172793 (S.D.N.Y. Sept. 23, 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).
The doctrine of equitable mootness is in the news again. The Supreme Court recently denied a cert. petition in a case where the petitioner wanted the doctrine ruled unconstitutional. KK-PB Financial LLC v. 160 Royal Palm LLC, Case No. 21-1197, 2021 WL 7247541 (petition), 2022 WL 1914118, (denying certiorari).
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.
The Fifth Circuit recently dismissed an appeal of a confirmation order as equitably moot. The decision was based on three key factors: the appellant hadn’t obtained a stay pending appeal, the plan had been substantially consummated, and practical relief couldn’t be fashioned if the plan was unwound. Talarico v. Ultra Petro. Corp. (In re Ultra Petro. Corp.), Case No. 21-20049, 2022 U.S. App. LEXIS 8941 (5th Cir. Apr. 1, 2022).
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.
Fireworks in the Sky but not in Court: Bankruptcy Judge Takes a Practical Approach to the Ordinary Course of Business Defense
A recent decision applied the ordinary course of business defense to a preferential transfer claim where the parties had engaged in only two transactions. In re Reagor Dykes Motors, LP, Case No. 18-50214, Adv. No. 20-05031, 2022 LEXIS 70 (Bankr. N.D. Tex. Jan. 11, 2022). The court took a practical approach to the defense, given the absence of a detailed history of invoicing and payments between the parties.
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).
A federal judge recently allowed a trustee’s preferential transfer claim against a law firm to proceed but dismissed a constructive fraudulent transfer claim. The decision highlights the pleading standards and analytical framework for motions to dismiss such claims. Insys Liquidation Trust v. Urquhart (In re Insys Therapeutics Inc.), Case No. 19-11292, Adv. No. 21-50359, 21 Bankr. LEXIS 2965 (JTD) (Bankr. D. Del. Oct. 28, 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.
A key goal of the Bankruptcy Code is to prevent corporate insiders from profiting from their employer’s misfortune. Section 503(c) of the Code makes clear: “there shall neither be allowed, nor paid... a transfer made to, or an obligation incurred for the benefit of, an insider of the debtor for the purpose of inducing such person to remain with the debtor's business” absent certain court-approved circumstances.
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.
The Bankruptcy Code grants the power to avoid certain transactions to a bankruptcy trustee or debtor-in-possession. See, e.g., 11 U.S.C. §§ 544, 547–48. Is there a general requirement that these avoidance powers only be used when doing so would benefit creditors? In a recent decision, the United States Bankruptcy Court for the District of New Mexico addressed this question, concluding, in the face of a split of authority, that there was such a requirement. In re U.S. Glove, Inc., No. 21-10172-T11, 2021 WL 2405399 (Bankr. D.N.M. June 11, 2021).
Which Procedural Rules Apply to Non-Core, “Related-To” Matters in Federal District Court? Another Circuit Court Addresses the Issue
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]
A creditor in bankruptcy must normally file a proof of claim by a certain specified time, known as the bar date, or have its claim be barred. Bankruptcy Rule 3002(c)(6)(A) provides a narrow exception to this rule when a creditor files a motion and “the notice was insufficient under the circumstances to give the creditor a reasonable time to file a proof of claim because the debtor failed to timely file the list of creditors’ names and addresses required by Rule 1007(a).” Courts have disagreed about the meaning of this rule when a debtor timely files a list of creditors’ names and addresses (known as a creditor matrix), but improperly omits the creditor in question. Can the creditor then take advantage of this provision, or does it only apply when the creditor matrix is not timely filed at all? On May 25, 2021, the United States Bankruptcy Court for the Southern District of New York ruled in line with the former approach, holding that a known creditor omitted from a creditor matrix can take advantage of Bankruptcy Rule 3002(c)(6)(A) because when the creditor matrix omits a known creditor, it is not “the list of creditors’ names and addresses” that Rule 1007(a) requires.
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.
United States Bankruptcy Judge Harlin Hale recently dismissed the National Rifle Association’s Chapter 11 petition as not filed in good faith. The decision leaves the 150-year-old gun-rights organization susceptible to the New York Attorney General’s suit seeking to dissolve it.
Ignore the Court at Your Own Peril: First Circuit Affirms Denial of Discharge Based on Debtor’s Failure to Comply with Orders of the Bankruptcy Court
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.
A recent case shows how even late payments can be used to satisfy the ordinary course of business defense in a preference avoidance action. Baumgart v. Savani Props Ltd. (In re Murphy), Case No. 20-11873, Adv. Pro. No. 20-1070, 2021 Bankr. LEXIS 1035 (Bankr. N.D. Ohio Apr. 19, 2021).
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.
In March, we reported on a brief filed by the Solicitor General recommending denial of a petition for certiorari filed by Tribune creditors seeking Supreme Court review of the Second Circuit ruling dismissing their state-law fraudulent transfer claims. This morning, the Supreme Court denied the petition, letting the Second Circuit decision stand.
Appeals Court Rules That a Discharge Injunction Bars a Fraudulent Transfer Claim Based on a Non-Dischargeable Debt
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).
Debtor Alleges Thirteenth Amendment Violation; Court Says Debtor Has Standing to Assert the Claim; Decision on the Merits to Follow
It’s rare for a debtor in bankruptcy to raise allegations of involuntary servitude and a violation of the Thirteenth Amendment. But one debtor did just that in a recent chapter 11 case. The court had appointed a trustee to take over the debtor’s bankruptcy estate. This prompted the debtor to assert a violation of his constitutional rights, arguing that he would be involuntarily forced to work for his creditors.
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?
In 2019, we began following a Circuit split regarding a secured creditor’s obligation to return collateral that it lawfully repossessed pre-petition after receiving notice of a debtor’s bankruptcy filing. In our prior posts, which you may wish to review and can find here and here, we explained that the Third Circuit, joining the minority of courts to have ruled on the issue, held in November 2019 that a creditor does not violate the stay if it retains estate property until the debtor seeks turnover of the seized property under Section 542. The Seventh Circuit had reached the opposite conclusion in June 2019, holding that the automatic stay “becomes effective immediately upon filing the petition” and requires the creditor to return property seized pre-petition: “[it] is not dependent on the debtor first bringing a turnover action.” In December, the Supreme Court granted certiorari and on Thursday adopted the minority view.
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.
Proofs of Claim: Don’t Rely on the Mailbox Presumption – Be Sure Claims are Filed by the Bar Date with the Court Clerk or the Claims Agent
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.
Fox News: New Mexico Bankruptcy Court Reaffirms Committee Eligibility for Derivative Standing Despite Contrary Tenth Circuit B.A.P. Precedent
In an important affirmation of the rights and duties of a creditors’ committee, Bankruptcy Judge David T. Thuma of the United States Bankruptcy Court for the District of New Mexico has confirmed that a bankruptcy court may confer derivative standing on a committee to assert estate claims if a debtor in possession declines to assert them.
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.
Last February, we blogged about the Third Circuit’s decision in In re Energy Future Holdings Corp, No. 19-1430, 2020 U.S. App. LEXIS 4947 (Feb. 18, 2020). The Third Circuit approved a process for resolving asbestos claims in which a bar date was imposed on filing the claims, but late claimants who were unaware of their asbestos claims would be allowed to have the bar date excused through Bankruptcy Rule 3003(c)(3). (A bar date is a date set by the court by which all claims against the debtor must be filed. Rule 3003(c)(3) permits such time for filing to be extended “for cause shown,” and has been held, based on Rule 9006(b), to permit late filing upon a showing of “excusable neglect” by a claimant.) In a recent decision, the United States Bankruptcy Court for the District of Delaware rejected an effort by two late claimants to make use of this process, reasoning that the claimants had failed to meet Rule 3003(c)(3)’s “excusable neglect” standard because they had participated in the bankruptcy case for years without seeking to file claims.
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).
“Unfair discrimination is rough justice. It exemplifies the Code’s tendency to replace stringent requirements with more flexible tests that increase the likelihood that a plan can be negotiated and confirmed,” announced Judge Thomas Ambro of the United States Court of Appeals for the Third Circuit on August 26, 2020. Though limited to an explication of Section 1129(b)(1)’s prohibition on unfair discrimination against a class of dissenting creditors, Judge Ambro’s “rough justice” remark will echo in all areas of bankruptcy law among practitioners who prioritize pragmatism over perfectionism.
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. 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."
This post provides a quick primer on administrative expense claims. These claims are entitled to priority for actual and necessary goods and services supplied to a debtor in bankruptcy. For a claim to qualify for administrative expense status, a debtor must request that the claimant provide goods and services post-petition or induce the claimant to do so. The goods or services must result in a benefit to the bankruptcy estate. And the claimant bears the burden of proof that a claim qualifies for priority treatment under 11 U.S.C. § 503(b)(1)(A).
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.
Bankruptcy Court Closes Chapter 11 Cases Even with an Appeal Pending and Over the Objection of the U.S. Trustee.
Debtors in chapter 11 cases are required to make quarterly payments to the United States Trustee’s Office. These fees support the UST Program that serves in all districts but those in two states. Quarterly fees must be paid until cases are closed. And cases are closed when they are “fully administered,” a term that isn’t defined in the Bankruptcy Code or Rules.
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.
An appeal from a bankruptcy court’s final judgment must be filed within 14 days of when an appealable order is entered on the docket. Parties should not delay past the 14 days even if, for instance, the bankruptcy court must still decide a related request for an award of attorneys’ fees. Otherwise, an appeal will be untimely under Federal Rule of Bankruptcy Procedure 8002(a)(1).
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.
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.
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