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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.

Crypto Exchange Platforms Grapple with Consequence of Filing Bankruptcy

In the world of cryptocurrency, exchange platforms act as intermediaries allowing investors to buy and sell assets while making money through commissions and transaction fees.  Any assets purchased may be held in either non-custodial or custodial wallets.  If a customer chooses a custodial wallet, the platform holds and manages the assets through a private key, which is a string of characters that serves as a password.  If a key is lost or forgotten, it may be impossible to recover, resulting in the permanent loss of the asset.  In contrast, assets held in non-custodial wallets remain under the customer’s control with a private key.

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Supreme Court Agrees to Hear a Case About the Scope of the Fraud Exception to Discharge

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.

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Equitable Mootness Applied Again: The Fifth Circuit Refuses to Hear an Appeal

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).  

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Releases: How Did We Get Here and What is Next?

As a result of Purdue Pharma’s proposed plan of reorganization, and the ongoing opioid epidemic that continues to grip the nation, the debate over non-consensual third-party releases has gone mainstream despite being a popular tool for debtors for decades.

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Supreme Court to Consider Constitutionality of Chapter 11 Fees

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.

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Bankruptcy Court Won’t Dabble in Case Concerning a Marijuana Business

“[E]nsnared between his involvement in a business that is legal under the laws of Arizona but illegal under federal law,” one debtor’s chapter 13 petition was recently dismissed due to his undisputed violations of the Controlled Substances Act.

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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.

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Considering the Conduct of Two PPP “Fraudsters,” Bankruptcy Court Shows Its Teeth but Declines to Bite (For Now)

“Messrs. Woods and Wu are fraudsters,” Judge Christopher S. Sontchi declared in the opening salvo of his scathing opinion.  According to the former Chief Judge of the U.S. Bankruptcy Court for the District of Delaware, Woods and Wu fraudulently obtained a Paycheck Protection Program (“PPP”) loan on behalf of Urban Commons Queensway, LLC, which indirectly operates the Queen Mary, a cruise ship turned hotel docked near Long Beach, CA.  Woods and Wu then “absconded with the proceeds, leaving either the Debtor or the United States to pay back the lender.” 

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One Bankruptcy Court’s Analysis of a Motion to Dismiss Avoidance Claims: The Analytical Framework

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).

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Recent Decision on Derivative Standing by a Creditors’ Committee to Challenge a Lender’s Liens

In many chapter 11 cases, creditors’ committees play a vital role in maximizing the recoveries of unsecured creditors. But the powers of creditors’ committees are circumscribed by both the Bankruptcy Code and case law.

One way committees try to enhance recoveries is by seeking “derivative standing” to commence adversary proceedings challenging the validity of a secured lender’s pre-petition liens. A recent decision shows how one court analyzed if a committee had standing to bring such actions.  In re Platinum Corral, LLC, No. 21-00833-5-JNC, 2021 WL 4695327 (Bankr. E.D.N.C. Oct. 7, 2021).

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Unqualified CARES Act Funds Can't Be Used To Pay Creditors

U.S. Bankruptcy Judge Craig A. Gargotta rejected a debtor’s attempt to use “CARES Act” funds, which it did not actually qualify for, to pay creditors in its chapter 11 case.  BR Healthcare Solutions (the “Debtor”) operated a nursing home under the name Karnes City Health & Rehabilitation Center near San Antonio.  But in January of 2020, the Debtor’s principal “decided to close the nursing home [] due a sustained period of net operating losses.  By February 4, 2020, all of the remaining patients were transitioned out of the nursing home to other providers.”  In March of 2020, the Debtor filed for chapter 11. 

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Bankruptcy Courts Must Independently Assess Chapter 13 Plans

In a recent decision, a district court reversed the decision of the bankruptcy court and clarified the independent obligation of the Bankruptcy Court to ensure that a Chapter 13 Plan satisfies the necessary requirements of the Bankruptcy Code, irrespective of the parties’ conduct.  In re: BRUCE D. PERRY, Debtor. KRISTA PREUSS, Standing Chapter 13 Tr., SDNY, Appellant, v. BRUCE D. PERRY, Appellee., No. 20-CV-4617 (CS), 2021 WL 4298192 (S.D.N.Y. Sept. 21, 2021)

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Equitable Mootness on the Ropes

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.

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When Potentially Violating “Gatekeeping” Orders, Asking for Permission May Be Easier (And Cheaper!) Than Begging for Forgiveness

Judge Stacey Jernigan did not mince words in a recent opinion sanctioning the former CEO of Highland Capital Management, LP.  Entities related to the former CEO brought suit against Highland (the debtor in a Chapter 11 bankruptcy proceeding), and sought leave from the district court to add Highland’s replacement CEO as a defendant.  In Judge Jernigan’s view, such conduct violated her “gatekeeping” orders that required the bankruptcy court’s approval before “pursuing” actions against the new CEO. 

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Above-Board: Officers of a Corporation Not Entitled to Key Employee Retention Plan Payments

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.

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Critical Vendors Aren’t Immune from Lawsuits to Recover Preferential Transfers

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.

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New Court Ruling on Whether Avoidance Powers Require Benefit to Creditors

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).

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Executory Contracts: Third Circuit Does Not Recognize the Doctrine of Implied Assumption

A recent case before bankruptcy judge Karen B. Owens of the United States Bankruptcy Court for the District of Delaware, In re Dura Auto. Sys., LLC, No. 19-12378 (KBO), 2021 WL 2456944 (Bankr. D. Del. June 16, 2021), provides a cautionary reminder that the Third Circuit does not recognize the doctrine of implied assumption (i.e., assumptions implied through a course of conduct as opposed to those that are assumed pursuant to a motion and court order).

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Maryland Court Discharges Student Debt

As we reported, on June 21, 2021, the U.S. Supreme Court declined to revisit the rigid Brunner standard for determining “undue hardship” capable of discharging student debt.  The same day, United States Bankruptcy Judge Michelle M. Harner applied the Brunner standard, discharging $178,000 of student debt.

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That’s a Brunner, Man. Supreme Court Declines to Revisit Overly Rigid Standard for Discharge of Student Loans in Bankruptcy

On Monday, the United States Supreme Court denied Thelma McCoy’s petition for a writ of certiorari to the United States Court of Appeals for the Fifth Circuit, passing up a golden opportunity to bring uniformity to the “important and recurring question” of how to determine the sort of “undue hardship” that qualifies a debtor for a discharge of student loans under 11 U.S.C. § 523(a)(8).

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Foreign Trusts Present Tricky Eligibility Issues

In bankruptcy as in federal jurisprudence generally, to characterize something with the near-epithet of “federal common law” virtually dooms it to rejection.  But, since “common law” is “[t]he body of law derived from judicial decisions, rather than from statutes,” is judicial interpretation of the Bankruptcy Code ever “federal common law”?  Does it cross over to that dangerous territory if Congress left few clues as to what it intended in the provision undergoing interpretation?

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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]

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New Bankruptcy Court Ruling on When a Creditor Can File a Late Proof of Claim

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.

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Blurred Immunity: California Cannot Escape Adversary Proceeding on Grounds of Sovereign Immunity

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.

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Bankruptcy Court Dismisses NRA’s Ch. 11 Petition

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.

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The Crystal Anniversary: Chapter 15 Turns 15

In recognition of the 15th anniversary of the passage of chapter 15 of the Bankruptcy Code, the New York City Bar Association’s Bankruptcy & Corporate Reorganization Committee hosted a webinar on May 12, 2021 to discuss the current state of chapter 15 cases and potential, corresponding and significant future developments. Several dozen participants joined a panel of distinguished leaders in the field: the Honorable Allan Gropper, former United States Bankruptcy Judge for the Southern District of New York; Professor Jay L. Westbrook, Benno C. Schmidt Chair of Business Law, The University of Texas at Austin School of Law; Professor Edward Morrison, Charles Evans Gerber Professor of Law, Columbia Law School; and practitioners Rick Antonoff and Christine Okike.

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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. 

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Update: Seventh Circuit Revives Fulton Circuit Split

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. 

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Supreme Court Denies Petition for Certiorari in Tribune Creditors’ Case

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.

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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).

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The Final Say: Conversion from Chapter 11 to Chapter 7 is Not a Given

It is well-settled that if you are a debtor in chapter 11, you do not have the unfettered right to convert the case to a chapter 7 liquidation.  A recent 10th Circuit decision shows why. Kearney v. Unsecured Creditors Committee et al., BAP No. 20-33, 2021 WL 941435 (B.A.P. 10th Cir. Mar. 12, 2021).

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Consider Skipping the “Certified” Option When Serving Pleadings

When serving pleadings in an adversary proceeding, you may want to skip the certified option and go with regular first-class mail, or do both.

Federal Rule of Bankruptcy Procedure 7004 governs service of process in adversary proceedings.  The statute specifically provides for service by first class mail. And while some courts will also permit service of pleadings by certified mail, other courts forbid the use of certified mail.

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Solicitor General Recommends Denial of Cert. in Tribune Despite Perceived Errors

In January 2020 we reported that, after the reconsideration suggested by two Supreme Court justices and revisions to account for the Supreme Court’s Merit Management decision, the Court of Appeals for the Second Circuit stood by its original holding, in an appeal that was first argued in 2014, that the payments to former Tribune shareholders that Tribune creditors were seeking to avoid were protected from avoidance by the “safe harbor” provided by Code Section 546(e).  The creditors filed a petition for certiorari with the Supreme Court, and extensive briefing by the parties and several amici ensued. 

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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.

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All in a Day’s Work. Belk Achieves Confirmation of Pre-Packaged Plan in Record Time

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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Section 1126 of the Bankruptcy Code and the Dangers of Sleeping on Your Rights as a Creditor

A seat at the table: this is what you likely want when your financial interests are drawn into a bankruptcy court proceeding.  You’ll seek to be heard and do what you can to maximize your recovery. This is especially true if you’re a creditor in a chapter 11 case.  Yet a recent decision shows what can happen if you do the opposite and choose to “sit one out” rather than have a say in the outcome of a chapter 11 case. In re Fred Bressler, No. 20-31023, 21 WL 126184 (Bankr. S.D. Tex. Jan. 13, 2021).

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Update: Supreme Court Resolves Circuit Split Regarding Pre-Bankruptcy Seizure

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.

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Delaware Bankruptcy Court Issues Decision on Whether a Debtor Can Be a “Financial Participant”

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.

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The Importance of Loan Underwriting When Restrictions on Bankruptcy Cannot Singlehandedly Save the Day: Sutton 58 Associates LLC v. Phillip Pivelsky, et al.

In sophisticated real estate financing transactions, most prudent lenders attempt to deter borrowers from filing for bankruptcy before loans are paid in full by providing in loan documents that such a filing constitutes an event of default. Many lenders will insist that their borrowers remain “bankruptcy remote” in the form of a so-called “single asset real estate” entity during the term of the loan.

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Another Bankruptcy Court Weighs in on Postpetition Interest

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.[1]   But what rate is that?

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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.

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Cryptic Crypto: Creditors Move for Ch. 7 for Alleged Madoff-Like Fraud

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.

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