Daniel A. Lowenthal, Partner

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.

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.

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).

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)

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.

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).

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.

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).

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 10^th 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).

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.

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.

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.

There are several ways in which property owners can advantageously use the Bankruptcy Code to effectuate strategic dispositions of assets.  But the bankruptcy process can be fraught with uncertainty that can upend the best laid plans. The matter of In re Wansdown Properties Corp. N.V., No. 19-13223 (SMB), 2020 WL 5887542 (Bankr. S.D.N.Y. Oct. 5, 2020) provides an instructive and cautionary example.

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).

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.[1]  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 originally appeared in Norton Journal of Bankruptcy Law and Practice.

Bankruptcy court approval is required when a debtor wants to sell property outside the ordinary course of its business. Courts will allow transactions that reflect a debtor’s informed business judgment. When courts consider the rationale and evidence a debtor submits, they will sometimes cite the business judgment test as it has been articulated by the Delaware Supreme Court in cases involving consideration of corporate officers’ fiduciary duties. But, in practice, bankruptcy courts apply a different bankruptcy law business judgment standard when reviewing a debtor’s proposed sale of estate property. In the corporate law context, judges will not question a board’s decision if there is no evidence of flaws in the decision making process. But in the bankruptcy context, judges will make sure a debtor has a valid business reason for the proposed sale of estate property.

A recent decision, In re: Grandparents.com, Inc.., et al., Debtors. Joshua Rizack, as Liquidating Tr., Plaintiff, v. Starr Indemnity & Liability Company, Defendant, Additional Party Names: Grand Card LLC, provides insight on the intersection between and among contract, tort, and fraudulent transfer theories of recovery.

COVID-19 is taking an alarming and unfortunate toll on our country’s population. Each day, we collectively face daunting health risks, and the economic cost to individuals and businesses alike has already been, and will continue to be, staggering. Accordingly, more than at any point in the past decade, both debtors and creditors should consider the potential benefits of the bankruptcy process. This post discusses four basic bankruptcy concepts that always merit consideration, especially in these trying times.

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.