On Wednesday, February 23, just after 5:00 p.m., Belk, Inc. – a North Carolina-based department store chain – and its affiliates filed voluntary petitions under Chapter 11 of the Bankruptcy Code. Less than 24 hours later, Bankruptcy Judge Marvin Isgur of the United States Bankruptcy Court for the Southern District of Texas entered an order confirming Belk’s Chapter 11 plan. As a result, Belk “has received $225 million of new capital, significantly reduced its debt by approximately $450 million and extended maturities on all term loans to July 2025.” Critically, the plan leaves all unsecured creditors unimpaired.
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Bankruptcy Update Blog provides current news and analysis of key bankruptcy cases and developments in US and cross-border matters. Patterson Belknap’s Business Reorganization and Creditors’ Rights attorneys represent creditors’ committees, trade creditors, indenture trustees, and bankruptcy trustees and examiners in US and international insolvency cases. Our team includes highly skilled and experienced attorneys who represent clients in some of the most complex cases in courts throughout the US and elsewhere.
“Diminishing” Returns: A Pre-Petition Change of Life Insurance Beneficiary is Not Subject to Avoidance as a Fraudulent Transfer
Does a debtor’s pre-petition change of the beneficiary of a life insurance policy constitute a “transfer” of an interest of the debtor in property? Not according to the U.S. Bankruptcy Court for the Eastern District of North Carolina, which held earlier this week that such transfers do not “diminish” the estate.
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.
Cuker Interactive, LLC filed a Chapter 11 bankruptcy petition on December 13, 2018, in the United States Bankruptcy Court for the Southern District of California. Because it was solvent at confirmation, the debtor proposed to pay secured creditors in full, with interest at the contract rate, and general unsecured creditors in full, with postpetition interest at the “legal rate,” or a rate determined by the Court that leaves the creditors unimpaired. But what rate is that?
Third Time’s the Charm? Ultra Petroleum Make-Whole Dispute is Once Again Headed to the Fifth Circuit.
On Monday, November 30, Bankruptcy Judge Marvin Isgur approved a request by Ultra Petroleum and its affiliated debtors that he certify his October 26, 2020 memorandum opinion for direct review by the United States Court of Appeals for the Fifth Circuit. That decision, which we recently summarized here, held that certain creditors are entitled to allowance and payment of make-whole claims, and that post-petition interest is calculated at the contractual default rate. No creditor or other party in interest opposed the request for direct appeal.
On Wednesday, November 18, two customers of Cred Inc., a cryptocurrency investment platform currently in Chapter 11, asked Delaware Bankruptcy Judge John T. Dorsey to convert the Chapter 11 case to a Chapter 7 liquidation (or, in the alternative, to appoint a Chapter 11 Trustee “with expertise in hunting down . . . stolen cryptocurrency”). Prior to its Chapter 11 filing, Cred received investor-cryptocurrency, typically in the form of loans, and then purportedly used those funds across a variety of investments to generate favorable returns.
Losing Momentum: Houston Bankruptcy Court Holds that Make-Whole Claims are Not the Economic Equivalent of Unmatured Interest Subject to Disallowance; Solvent-Debtor Exception Lives
In December of last year, we wrote about the Fifth Circuit’s two decisions – Ultra I, from January 2019, and Ultra II, from December, which replaced Ultra I – regarding make-whole claims in the Ultra Petroleum bankruptcy cases. That blog post provides important background for this one.
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.
“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.
On Friday August 7th, the NAACP filed a motion to intervene in the chapter 11 bankruptcy cases of Purdue Pharma L.P. and its affiliated debtors (collectively, “Debtors”). The Motion argues that “[i]ntervention is warranted because the NAACP has an interest to ensure that the settlement allocates appropriate relief to communities of color adversely affected by the Opioid Crisis. Attention has been disproportionately focused on white suburban and rural communities with little consideration for the communities of color that have similarly experienced harm by the [c]risis, including dramatic increases in opioid misuse, addiction, and death.” These concerns are only exacerbated by the COVID-19 pandemic, the NAACP contends, which has led to economic contraction that has decreased states’ tax revenue, leading to concerns that the settlement fund may have a “disproportionate allocation and distribution” and “may be diverted for other use.” By intervening in the bankruptcy case, the NAACP hopes to protect communities of color from the repetition of “the long-storied history of [the] government’s disproportionate treatment of communities of color.”
Tenants in Bankruptcy: Landlord’s Ability to Draw on Letter of Credit May Turn on Notice Requirements in Lease
The economic fallout from the COVID-19 pandemic has been particularly acute for commercial landlords. As retail and other tenants fall further behind on rent and other obligations, lessors are finding themselves drawn into more and more Chapter 11 bankruptcy cases. Yet, while it may not always feel that way to them, landlords actually have it better than most creditors in bankruptcy. Section 365 offers an array of protections to lessors of non-residential real property that other stakeholders do not enjoy, and most commercial leases are backed by some form of cash or other security deposit.
Hertz Global Holdings Inc. and most of its affiliates filed for bankruptcy on May 22, 2020. This was just one corporate failure among many in the midst of the COVID-19 pandemic; but, a novel strategy by Hertz to raise capital to fund its bankruptcy has raised eyebrows instead.
We’ve reported here and here on the January 2019 bankruptcy filing by Pacific Gas and Electric (“PG&E”), which was primarily the result of potential liability stemming from catastrophic California wildfires. Since then, PG&E has proposed an approximately $58 billion-dollar reorganization plan that includes settlements exceeding $25 billion to resolve claims by wildfire victims and regulatory agencies.
Retail Apocalypse 2.0: The Fallout from the Coronavirus Will Present New Challenges to an Already Reeling Sector of the Economy
Changes in culture and technology have been reshaping the way Americans acquire and consume goods and services for a generation. Indeed, long before the coronavirus, insolvency professionals and industry experts understood that the retail landscape was experiencing a dramatic transformation. Reduced foot traffic, online competition from Amazon and others, and changing shopping patterns all combined to place enormous strain on traditional retailers. To keep up, and to match the tastes of consumers in the age of social media, retailers and shopping centers have placed a renewed focus on strategies that will create a more valuable and enriching in-store experience for consumers. It has to be modern, it has to be fun, and – above all – it has to look cool on Instagram: no one takes a selfie at Sears.
In what will come as a surprise to absolutely no one, we are already beginning to see the nascent signs of what may become significant distress in one of the industries likely to be most drastically impacted by the coronavirus outbreak: cruise lines.
The importance of clarity in drafting agreements can never be understated. And while there are strategies available to spouses of business owners to help protect a family in bankruptcy, it is imperative to properly plan and draft to receive such protection from the Courts. In re Somerset Regional Water Resources, LLC, _____________ F.3d ________________ (3rd Cir. 2020) (“Somerset”), recently decided by the Third Circuit Court of Appeals, offers a prime example of both cautionary concepts.
Big Progress in Big Cases: PG&E and Puerto Rico are Making Strides Towards Achieving Creditor Consensus
There has been considerable progress towards resolution in two of the largest bankruptcy cases pending in the United States: the Commonwealth of Puerto Rico and the California utility, Pacific Gas & Electric.
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.
We recently reported on a decision of the United States Court of Appeals for the Third Circuit in favor of a creditor that seized a debtor’s property pre-petition. In In re Denby-Peterson, the Third Circuit sided with the minority of courts that have held that “a secured creditor does not have an affirmative obligation under the automatic stay to return a debtor’s collateral to the bankruptcy estate immediately upon notice of the debtor’s bankruptcy.” Rather, the secured creditor’s obligation to return the property is subject to a motion for turnover under Section 542 of the Bankruptcy Code. The majority of courts of appeals to consider the question, including the Seventh Circuit, have reached the opposite conclusion, that the automatic stay, which “becomes effective immediately upon filing the petition” requires the creditor to return property seized pre-petition “and is not dependent on the debtor first bringing a turnover action.”
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.
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.
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.
“Reasonably Knowable Affirmative Defenses”: a Small Change to the Bankruptcy Code Could Have a Big Impact on Preference Litigation
On August 23, 2019, President Trump signed H.R. 3311 into law. The goal of the Small Business Reorganization Act is to facilitate reorganization among small businesses. One of my fellow bloggers has provided a summary that you can read here. But in addition to helping small businesses, the SBRA also offered some relief to vendors and other suppliers of goods from the bane of preference lawsuits—not just in small business cases, but in all cases under the Bankruptcy Code.
Hahnemann University Hospital: Healthcare Bankruptcy Highlights the Tension When Private Equity Collides with the Public Interest
A “little bit of a crisis” was averted last week in the Chapter 11 bankruptcy case of St. Christopher’s Hospital for Children, a Philadelphia-area hospital with ties to Hahnemann University Hospital, which is also a Chapter 11 debtor. On Tuesday, Delaware bankruptcy judge Kevin Gross said he could not approve a $65 million DIP loan requested by St. Christopher’s over the objection of several creditor groups because the terms of the loan were too onerous. The failure to obtain the much-needed liquidity might have forced the hospital into a chaotic, freefall liquidation, potentially jeopardizing patients and most certainly spelling disaster for creditor recoveries. But by Wednesday, after last-minute negotiations between the Debtor and the DIP Lender, MidCap Financial Trust, the parties reached a deal that increased the cash infusion to the estate. Later that same day, Judge Gross said he would approve the revised loan package. The funding is expected to keep St. Christopher’s open long enough to conclude a sale of the hospital as a going concern.
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.
Commonwealth Finds Common Ground: Deal with Bondholders May Be a Turning Point as Puerto Rico Seeks to Emerge in Early 2020
The Financial Oversight and Management Board for Puerto Rico (Oversight Board) announced Sunday that it had reached an agreement with bondholders regarding the terms of a plan of adjustment that would resolve $35 billion worth claims against the Commonwealth of Puerto Rico. If approved by the Bankruptcy Court, the deal would reportedly reduce the struggling island’s outstanding bond debt to less than $12 billion, a reduction of more than 60%.
When we last checked in on the Puerto Rico restructuring case, we reported on the February 15 decision of the First Circuit Court of Appeals that the members of the Financial Oversight and Management Board were appointed in contravention of the Appointments Clause of the U.S. Constitution because they were never confirmed by the U.S. Senate. But, in recognition of the implications of its decision, the Court delayed the effectiveness of its ruling for 90 days. That 90-day deadline was set to expire on May 16, causing several commentators to express skepticism that a legislative solution could be achieved in the time allotted.
Impermissible Third-Party Release Provisions Render a Plan “Patently Unconfirmable” in the Sixth Circuit
Ruling from the bench on April 4, Bankruptcy Judge Alan Koschik of the United States Bankruptcy Court for the Northern District of Ohio denied approval of a disclosure statement proposed by FirstEnergy Solutions Corp. because the plan it described was “patently unconfirmable.”
Under Section 1141(c) of the Bankruptcy Code, property “dealt with” in a confirmed plan is free and clear of the claims and interests of creditors, provided the holder of the claim or interest participated in the bankruptcy case. But what about assets that are not explicitly specified in a disclosure statement? United States District Court Judge Cathy Seibel of the Southern District of New York recently affirmed a decision by Bankruptcy Judge Robert D. Drain holding that Section 1141(c) can reach even assets that are not explicitly identified in a disclosure statement in certain circumstances.
There have been two significant developments in the ongoing restructuring case for the Commonwealth of Puerto Rico. First, as was widely expected, District Judge Laura Taylor Swain entered orders on February 4 and 5, respectively, approving the Commonwealth’s entry into the Commonwealth-COFINA settlement (which we reported on here) and confirming the Title III Plan of Adjustment for COFINA. The dispute over ownership of the sales taxes pledged to pay the COFINA bonds has complicated the Commonwealth’s bankruptcy case since it was commenced in 2017. Had Judge Swain been forced to resolve the dispute it could have wiped out the COFINA bondholders entirely, or assured them a 100% recovery. But, with a settlement of this dispute in hand, and a confirmed plan of adjustment confirmed for COFINA, the Debtors were poised to pivot towards pursuing a consensual plan for the Commonwealth itself.
On January 14, 2019, facing “billions of dollars in liability claims from two years of deadly wildfires,” PG&E Corporation and its regulated utility subsidiary, Pacific Gas and Electric Company, reported that they expect to file petitions under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of California on or about January 29, 2019. It is rare for a debtor to telegraph its filing so clearly in advance of the petition date, but a recently enacted California law required a 15-day advance notice period before the filing.
In a recent cross-border insolvency case, Judge Glenn of the United States Bankruptcy Court for the Southern District of New York recognized an insurance company rehabilitation proceeding in Curaçao as a “foreign main proceeding” under Chapter 15 of the Bankruptcy Code.
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.
Let the Seller Beware? Debtor’s Attempt to Monetize its Own Default May Impact Sellers of Credit Default Swaps
The Sears bankruptcy case made headlines this month in the complex world of credit default swaps (CDS). A credit default swap is a contract pursuant to which the seller receives payment from a buyer in exchange for which the seller must compensate the buyer in the event of a default or other specified credit event. On November 9, in what it openly admitted was an attempt to take advantage of the abundance of default protection issued in the days leading up to its bankruptcy filing, Sears sought permission to auction certain “medium-term notes” (MTNs) that were issued by Sears Roebuck Acceptance Corp. (“SRAC”) prior to the petition date and held entirely by affiliates of Sears.
As we reported last year, on August 10, 2017, Judge Swain entered an order establishing procedures to govern resolution of the Commonwealth-COFINA dispute (the “Resolution Stipulation”). In recognition of the fact that the Oversight Board acts for both the Commonwealth and COFINA, the Resolution Stipulation provided for appointment of agents to act independently for each of them: (i) the Creditors’ Committee, to serve as the Commonwealth’s representative (the “Commonwealth Agent”) and (ii) Bettina Whyte, an experienced restructuring professional with Alvarez & Marsal, LLC, to serve as the COFINA’s representative (the “COFINA Agent,” and, with the Commonwealth Agent, the “Agents”).
Started as a mail-order retailer, evolved to brick-and-mortar stores in urban areas and expanded to a big-box retailer through merger, Sears is now facing the most turbulent time in its history. On October 15, 2018, Sears Holdings Corp.—the holding company of Sears and Kmart—along with its affiliated entities, filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the Southern District of New York. With assets of approximately $6.94 billion and liabilities of approximately $11.34 billion in total, the fate of “Where America Shops” remains unclear.
The failure of Toys ‘R Us to successfully reorganize in Chapter 11 sent shockwaves throughout the retail world and the restructuring community. Saddled with unsustainable debt and unable to chart a viable path forward, the company – in bankruptcy since late 2017 – conducted going-out-of-business sales and closed most of its more than 700 stores this summer. As part of the wind-down process, the debtors scheduled an auction to sell their existing intellectual property, including the name, website, and, of course, their celebrated brand mascot, Geoffrey the Giraffe.
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.
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.
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.
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).
Bondholders announce framework for Commonwealth-COFINA Settlement; Oversight Board and Government say the deal is “Not Acceptable.”
On May 14, a large coalition of stakeholders in the COFINA-Commonwealth litigation, which we previously reported on here, announced a proposed settlement outline to resolve the long-running dispute over who owns the sales and use taxes pledged by COFINA to secure COFINA bonds. The proposed settlement is supported by the Ad Hoc Group of Puerto Rico General Obligation Bondholders, the COFINA Senior Bondholders Coalition, and certain monoline insurers. But while this is an important step forwards, the settlement does not yet have the support of the two agents appointed by the Oversight Board, the only parties with authority to settle the dispute.
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.
In September, we reported on the possible bankruptcy of Connecticut’s capital city and questioned whether anything short of a State-led bailout could save the City from its crippling deficit and mounting debt service payments.
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.”
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.
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.
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.
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.”
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