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.
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.[1] This is black-letter bankruptcy law reflecting a sound policy judgment: it would be ruinous to business (not to mention an individual or family) if a landlord could upend a tenant’s possession whenever economic circumstances made a bankruptcy filing necessary or desirable.
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.[1]
A recent decision from the Ninth Circuit Court of Appeals highlights an existing circuit split regarding appellate standing.[1]
Courts in the Fourth and Seventh Circuits have disagreed whether objection and attendance at a hearing are prerequisites for satisfying the “person aggrieved” requirement for appellate standing. Compare In re Schultz Mfg. Fabricating Co., 956 F.2d 686, 690 (7th Cir. 1992) (attendance and objection at a bankruptcy court proceeding are requirements for appellate standing) with In re Urban Broad. Corp., 401 F.3d 236, 244 (4th Cir. 2005) (attendance and objection are not necessary for standing to appeal a bankruptcy court order).
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.
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.
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.”
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.
Every lawyer knows that it is important to enter into a signed engagement letter with a client before commencing legal representation. But, as one law firm recently discovered, even an unsigned engagement letter is better than none at all. The decision of the United States Bankruptcy Court for the Northern District of Georgia in Glass v. Miller & Martin, PLLC addresses this plus several other key concepts for Bankruptcy Court litigants.[1]
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.”
On Tuesday, two leading credit-rating agencies again downgraded the city of Hartford: Moody’s Investors Service now rates the struggling city at Caa3, while S&P Global Ratings has lowered its rating to CC. They attribute the junk classification to the increasing likelihood of a default by Hartford on its debt service obligations to bondholders.
On June 30, 2016, the Financial Oversight and Management Board for Puerto Rico (“Oversight Board”), which was established under the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), filed a voluntary petition for relief for the Commonwealth of Puerto Rico (the “Commonwealth”). On May 5, Chief Justice Roberts appointed District Judge Laura Taylor Swain of the Southern District of New York to conduct the case. Judge Swain was a bankruptcy judge in the Eastern District of New York before joining the district court in 2000.
Some legal malpractice defendants are content to litigate claims asserted by debtors in the bankruptcy court. But many others, fearing that the debtor’s creditors may view them as a deep-pocketed resource to augment their own recoveries, would prefer to defend malpractice claims in what they view as a more neutral forum. A recent decision by the United States District Court for the Southern District of Florida underscores how difficult it can be for lawyers and law firms in this latter group to move a legal malpractice case out of bankruptcy court, even when it is clear that the bankruptcy court cannot finally adjudicate the dispute.
A recent decision of the United States Bankruptcy Court for the Southern District of New York confirms that despite the increasing frequency and ease with which foreign plaintiffs and defendants can gain access to Bankruptcy Courts in the United States (through Chapter 15 or otherwise), those courts will not hesitate to dismiss a case on the ground of forum non conveniens.
