Bankruptcy Update Blog

Visit the Full Blog

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.

Third Circuit Denies Large Break-up Fee in High-Profile EFH Case

The Third Circuit denied a $275 million break-up fee to a bidder that was unsuccessful in its attempt to buy the crown-jewel assets in the high-profile EFH bankruptcy case.  In re Energy Future Holdings Corp., No 18-1109, 2018 U.S. App. LEXIS 25945 (3rd Cir. Sept. 13, 3018).  The court held that the bidder’s efforts didn’t result in a benefit to the debtors’ estates.  Therefore, the bidder’s request for an administrative expense in the form of the fee was rejected. 

Go

Third Circuit Enforces Plan Releases Against Later-Purchasing Shareholders Bringing Claims Concerning Post-Confirmation Conduct

Bankruptcy plans often include provisions releasing debtors and their officers and directors from certain potential liability. In Zardinovsky v. Arctic Glacier Income Fund, No. 17-2522 (3d Cir. Aug. 20, 2018), the United States Court of Appeals for the Third Circuit held that such a provision bound shareholders who purchased the shares after confirmation, as to post-confirmation claims including securities fraud and breach of fiduciary duty. Because this decision was at the motion to dismiss stage, what follows are the court’s characterization of the facts as alleged in the complaint.

Go

Delaware Court Denies $60 Million Administrative Expense Claim in the EFH Case

The Bankruptcy Court in Delaware recently denied a request for an administrative expense claim to an entity that tried but failed to buy a debtor’s key assets.  The decision arises out of the first of three attempts by entities to purchase Oncor Electric Delivery Company LLC (“Oncor”) in the complex Energy Future Holdings Corp. bankruptcy cases.  In re Energy Future Holdings Corp., 2018 Bankr. LEXIS 2257 (Bankr. D. Del. Aug. 1, 2018).

Go

Court Affirms Ruling Requiring Accounting Firm to Produce Workpapers in Chapter 15 Case

An accounting firm in the United States must produce workpapers to a chapter 15 foreign representative even if the law where the foreign main proceeding is pending would not permit such production.  CohnReznick LLP v. Foreign Representatives of Platinum Partners Value Arbitrage Fund L.P. (In re Platinum Partners Value Arbitrage Fund L.P.),  No. 18-5176 (DLC), 2018 U.S. Dist. LEXIS 109684 (S.D.N.Y June 29, 2018). 

Go

Bankruptcy Court Rules Section 327 Inapplicable to Certain Management Consultant Retentions

Section 327(a) of the Bankruptcy Code imposes restrictions on the employment of professionals to assist a trustee, requiring that such professionals “not hold or represent an interest adverse to the estate” and be “disinterested persons.” Section 363(b) permits the trustee, after notice and a hearing, to “use, sell, or lease, other than in the ordinary course of business, property of the estate,” and does not impose restrictions on employment comparable to those of section 327(a). On Monday, in In re Nine West Holdings, Inc., Case No. 18-10947 (SCC), Judge Shelley C. Chapman of the Bankruptcy Court for the Southern District of New York considered the relationship between those provisions in deciding on an application to retain a management consultancy firm that had already been assisting the debtors prior to the bankruptcy petition. Judge Chapman held that the application was properly considered under section 363(b) rather than section 327(a). Applying the business judgment standard under 363(b) rather than the more stringent standard under 327(a), Judge Chapman approved the application.

Go

Supreme Court Resolves Circuit Split on the Dischargeability of Debts Obtained by Oral Misrepresentations

On June 4, the Supreme Court decided Lamar, Archer & Cofrin, LLP v. Appling, No. 16-1215, in a unanimous opinion by Justice Sotomayor. The Court affirmed the Eleventh Circuit and resolved a circuit split about the meaning of “statement respecting the debtor’s . . . financial condition” in section 523(a)(2) of the Bankruptcy Code.

Go

Chapter 15: US Court Respects UK Scheme of Arrangement: Third-Party Releases Enforced

Judge Martin Glenn granted recognition to a UK scheme of arrangement with third-party releases that lacked full creditor consent.  In re Avanti Communs. Grp., PLC, No. 18-10458, 2018 Bankr. LEXIS 1078 (Bankr. S.D.N.Y. Apr. 9, 2018).  While stating that “granting third-party releases in chapter 11 cases is controversial,” Judge Glenn noted that courts will more willingly enforce third-party releases in chapter 15 cases, given the importance of comity and respect for foreign proceedings.

Go

Chapter 15: Decision Reviews Jurisdictional Issues and Bankruptcy Code Section 109

In a recent decision, In re B.C.I Fins. Pty Ltd. (In Liquidation), No. 17-11266, 2018 Bankr. LEXIS 1217 (Bankr. S.D.N.Y. Apr. 24, 2018), Judge Sean Lane granted a chapter 15 petition after rejecting a challenge to jurisdiction in the Southern District of New York.  He held that, under Bankruptcy Code section 109(a), jurisdiction was established in the district because the debtors had a retainer payment there and claims against corporate directors for breaching fiduciary duties.

Go

Bankruptcy Court Holds That Transferee Not Liable For Intentional Fraudulent Transfer Where Funds Were Returned To Debtor

Section 544 of the Bankruptcy Code permits a bankruptcy trustee to avoid any transfer that would be avoidable by creditors under state fraudulent transfer law. Section 550 of the Bankruptcy Code permits the bankruptcy trustee to recover from the transferee the transferred property in a fraudulent transfer avoided under section 550. Where funds were transferred in an intentional fraudulent transfer, but subsequently an equal or greater quantity of funds were transferred back to the debtor from the transferee, can the trustee still recover from the transferee? The Bankruptcy Court for the Eastern District of Pennsylvania recently considered this question in In re Incare LLC, Adv. No. 14-0248, 2018 Bankr. LEXIS 1339 (E.D. Pa. May 7, 2018), and held that the answer was no, the trustee cannot recover.

Go

Can Tax Sales Be Set Aside In Bankruptcy? The Federal Courts Are Increasingly Split

In BFP v. Resolution Tr. Corp., 511 U.S. 531 (1994), the Supreme Court held that a mortgage foreclosure sale conducted in accordance with state law was shielded from avoidance under the Bankruptcy Code’s fraudulent conveyance provision, 11 U.S.C. § 548.  In the wake of BFP, the federal courts have wrestled with the question of whether tax sales—distinct from foreclosures, but similar in concept—may be avoided in bankruptcy.  Two strands of analysis have emerged: whether tax sales may be set aside as a fraudulent conveyance under section 548, and whether tax sales may be attacked as a preferential transfer under section 547.  In both strands, the federal courts have continued to reach divergent, and often contradictory, results.

Go

Delaware District Court Dismisses Appeal by Creditors’ Committee After Case is Converted from Chapter 11 to Chapter 7

The Bankruptcy Code provides for the appointment of a creditors’ committee in chapter 11 bankruptcy cases. See 11 U.S.C. § 1102. There is no parallel provision applicable to chapter 7 cases. When a bankruptcy case is converted from chapter 11 to chapter 7 while the creditors’ committee is pursuing an appeal, what happens to that appeal? In In re Constellation Enterprises LLC, Civ. No. 17-757-RGA, 2018 U.S. Dist. LEXIS 47153 (D. Del. Mar. 22, 2018), the United States District Court for the District of Delaware held that such an appeal should be dismissed because the appellant, the creditors’ committee, had been dissolved by the conversion.

Go

Court Decision Reviews Key Concepts Concerning Executory Contracts

This post reviews some concepts concerning executory contracts. The ground covered will be familiar to insolvency experts and should be insightful for readers who don’t specialize in U.S. bankruptcy law.

The springboard for the overview is an opinion issued last week, In re Cho, Case No. 17-22057, 2018 LEXIS 700 (MMH) (Bankr. D. Md. Mar. 13, 2018).  Before the chapter 11 case was filed, Chong Ok Lim and Young Jun (“Plaintiffs”) owned a dry cleaning business that was later owned and operated by Byung Mook Cho (“Cho”).  The parties had a dispute that led to lawsuit and a judgment for the Plaintiffs.  Plaintiffs later alleged that Cho and He Sook Paik (“Paik“) “conspired to fraudulently convey” the dry cleaning business to Cho.

Go

In “Non-Statutory Insider” Case, Supreme Court Clarifies the Standard of Review for Mixed Questions of Law and Fact

In U.S. Bank Nat'l Ass'n v. Village at Lakeridge, LLC, No. 15-1509, 2018 U.S. LEXIS 1520 (Mar. 5, 2018), the Supreme Court analyzed the appropriate standard of review for appellate courts reviewing a bankruptcy court’s determination of a “mixed question” of law and fact.  But the Court did not address whether the lower courts’ various “non-statutory insider” tests should be refined—although the concurrences strongly suggest that issue may be ripe for increased scrutiny.

Go

Bankruptcy court holds that state consumer fraud claims against corporations are dischargeable in bankruptcy

Section 1141(d)(6)(A) and section 523(a)(2) of the Bankruptcy Code together provide that debts owed by a corporation to a government entity are not dischargeable if such debts were obtained by false representations. Does this rule apply to claims by government entities seeking to enforce consumer fraud laws, where the government entities were not themselves the victims of the fraud? On February 14, 2018, the United States Bankruptcy Court for the District of Delaware held that it does not, ruling that such claims against corporations brought by states on behalf of their citizens are dischargeable in bankruptcy. In re TK Holdings Inc., Case No. 17-11375, 2018 Bankr. LEXIS 414 (Bankr. D. Del. Feb. 14, 2018).

Go

Eighth Circuit rejects foreseeability test for notice to unknown creditors

In Dahlin v. Lyondell Chemical Co., 2018 U.S. App. LEXIS 1956 (8th Cir. Jan. 26, 2018), the Eighth Circuit Court of Appeals rejected an argument that bankruptcy debtors were required by due process to provide more prominent notice of a case filing than they did, such that the notice might have been seen by unknown creditors with claims to assert.

Go

Third Circuit Holds Transfer from Non-Debtor Precludes Liability Under Delaware Fraudulent Transfer Law

In Crystallex Int'l Corp. v. Petróleos de Venez., S.A., Nos. 16-4012, 17-1439, 2018 U.S. App. LEXIS 95 (3d Cir. Jan. 3, 2018), the U.S. Court of Appeals held there could be no fraudulent transfer liability under the Delaware Uniform Fraudulent Transfer Act (“DUFTA”) where the transfer was made by a non-debtor entity—even where the debtor exercised complete control over the non-debtor and allegedly orchestrated transfers through the non-debtor to frustrate creditors.

Go

Chapter 15: U.S. Creditor Required to Seek Recovery in Foreign Main Proceeding

In this post, we return to cross-border insolvencies and examine one of the first decisions issued in 2018 by a bankruptcy court in a chapter 15 case: In re Energy Coal S.P.A., No. 15-12048 (LSS), 2018 Bankr. LEXIS 10 (Bankr. D. Del. Jan. 2, 2018), where the court allowed a creditor to liquidate its claim in a lawsuit brought against a debtor in the U.S., but required the creditor to seek collection from the debtor in the country where the foreign main proceeding was filed. The upshot of the decision is that respect for the foreign main proceeding and the concept of comity trumped contractual choice of law and venue provisions.

Go

Court Holds that Bankruptcy Judges Cannot Impose Punitive Sanctions

Bankruptcy courts lack the power to impose serious punitive sanctions, a federal district judge ruled recently in PHH Mortgage Corporation v. Sensenich, 2017 U.S. Dist. LEXIS 207801 (D. Vt.  Dec. 18, 2018). Judge Geoffrey Crawford reversed a bankruptcy judge’s ruling that had imposed sanctions against a creditor based on Rule 3002.1(i) of the Rules of Bankruptcy Procedure, the bankruptcy court’s inherent authority, and Bankruptcy Code section 105.

Go

Debtor’s Subchapter S Status Isn’t Property of the Estate

This post examines an interesting intersection between bankruptcy and tax laws: if a corporation terminates its Subchapter S status pre-bankruptcy, can a bankruptcy trustee bring fraudulent transfer claims against the corporation’s shareholders to recover resulting tax refunds they receive? One bankruptcy court recently dismissed such fraudulent transfer claims on the ground that the corporation’s S status wasn’t property of the debtor’s bankruptcy estate, and thus the trustee couldn’t pursue the claims. Richard Arrowsmith v. United States (In re Health Diagnostic Lab., Inc.), 2017 LEXIS 4148 (Bankr. ED Va. Dec. 6, 2017). This decision adds to a split of authority on this issue.

Go

Solicitor General recommends US Supreme Court review in dischargeability case

On November 9, responding to a request from the U.S. Supreme Court, the Solicitor General filed a brief at the Court recommending that the petition for writ of certiorari in Lamar, Archer & Cofrin, LLP v. Appling, No. 16-11911, be granted. The petition, seeking review of a unanimous panel decision of the Eleventh Circuit, presents the question of “whether (and, if so, when) a statement concerning a specific asset can be a ‘statement respecting the debtor's . . . financial condition’ within Section 523(a)(2) of the Bankruptcy Code.” There is a circuit split on this question, though the parties dispute its extent and its ripeness.

Go

In Preference Suit, Seventh Circuit Holds That Debtor’s Assignment of Contractual Rights Does Not Negate Creditor’s New Value Defense

In Levin v. Verizon Bus. Global, LLC (In re OneStar Long Distance, Inc.), 2017 U.S. App. LEXIS 18374 (7th Cir. Sept. 22, 2017), the Seventh Circuit recently addressed a situation where a debtor sought to reduce a creditor’s new value defense in a preference avoidance action.  The Seventh Circuit held that the debtor’s assignment of contractual rights to a third party did not constitute a transfer “to or for the benefit of” the creditor, such that the transfer would reduce the creditor’s new value defense under 11 U.S.C. § 547(c)(4)(B).

Go

Waivers of Jury Trials and Lawsuits in Bankruptcy Cases

Figuring out when a pre-petition waiver of a jury trial will be respected in lawsuits brought in bankruptcy cases can be tricky. In a recent case, In re D.I.T., Inc., 2017 Bankr. LEXIS 3386 (Bankr. S.D. Fla. Oct. 2, 2017), a court distinguished between claims belonging to a debtor pre-petition and those belonging to a debtor-in-possession.

Go

Court Nixes Amended Claim Filed After the Effective Date

In a recent post, here, we wrote about a court decision that discussed deadlines for proofs of claim in a case involving a Ponzi scheme. Then, last week, another court issued a decision concerning late amendments to proofs of claim. In re James F. Humphreys & Assocs., L.C., Case No. 2:16-bk-20006 (Bankr. S.D. W.Va. Sept. 27, 2017). The upshot of this case is that amendments to proofs of claim filed after a plan’s effective date will be denied absent “compelling reasons.”

Go

Reversing the District Court, the First Circuit Says PROMESA Provides for an “Unconditional Right to Intervene,” Deepening Circuit Split on Applicability of 11 U.S.C. § 1109(b) in Adversary Proceedings

Last week, in Assured Guaranty Corp. v. Fin. Oversight and Mgmt. Bd. for Puerto Rico, No. 17-1831, 2017 U.S. App. LEXIS 18387 (1st Cir., Sept. 22, 2017), the U.S. Court of Appeals for the First Circuit issued a noteworthy decision in the Puerto Rico quasi-bankruptcy proceedings.  Overturning the district court’s ruling, the Court of Appeals held that the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), 48 U.S.C. §§ 2161-2177, provides for a non-discretionary “unconditional right to intervene,” pursuant to Fed. R. Civ. P. 24(a)(1).  Although decided within the context of the Puerto Rico proceedings, the First Circuit’s decision deepens a circuit split on whether the unconditional right to intervene, set forth in 11 U.S.C. § 1109(b), applies to adversary proceedings.

Go

Lehman Brothers Announces Settlement to Resolve Massive RMBS Claims; Estimation Hearing Slated for Later This Year

For over eight years, In re Lehman Bros., No. 08-13555-scc (Bankr. S.D.N.Y.), has been one of the most active, complex bankruptcy dockets in the country.  A large portion of the remaining contested matters in that case are claims by trustees for residential mortgage backed securities (RMBS), who continue to pursue claims against the Lehman estate for losses caused by toxic mortgages.  Recent developments show that Lehman is trying to wrap up many, if not most, of those RMBS claims by the end of this year.

Go

First Circuit Clarifies the Scope of the Bankruptcy Court’s Jurisdiction in Civil Proceedings

Recently, in Gupta v. Quincy Medical Center, 858 F.3d 657 (1st Cir. 2017), the U.S. Court of Appeals for the First Circuit clarified the limits of the bankruptcy courts’ subject-matter jurisdiction over civil proceedings.  The decision, authored by Judge Lipez and joined by retired Supreme Court Justice David Souter (sitting by designation), provides a thorough analysis of the bankruptcy courts’ jurisdiction in such cases.

Go

Chapter 15 Petition Granted Over Allegations of Wrongdoing

Bankruptcy Judge Mary Kay Vyskocil recently granted chapter 15 recognition to a Russian insolvency case over objections that the foreign representative had engaged in wrongdoing. In re Poymanov, 2017 Bankr. LEXIS 2130 (S.D.N.Y. Bankr. July 31, 2017). Judge Vyskocil held that the evidence did not support the allegations of impropriety and that recognition of the Russian case as a foreign main proceeding would not violate US public policy.

Go