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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.

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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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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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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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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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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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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Bankruptcy Court Denies Section 546(e) Safe Harbor Protection in Fraudulent Transfer Action

The Bankruptcy Code enables a trustee to set aside certain transfers made by debtors before bankruptcy.  See 11 U.S.C. §§ 544, 547, 548.  These avoidance powers are subject to certain limitations, including a safe harbor in section 546(e) exempting certain transfers.  Among other things, section 546(e) bars avoidance of a “settlement payment . . . made by or to (or for the benefit of) . . . a financial institution [or] a transfer made by or to (or for the benefit of) a . . . financial institution . . . in connection with a securities contract.”  The Bankruptcy Code in turn defines a “financial institution” to include not only financial institutions as conventionally understood, such as “a Federal reserve bank, or an entity that is a commercial or savings bank, industrial savings bank, savings and loan association, trust company, federally-insured credit union, or receiver, liquidating agent, or conservator for such entity,” but also a customer of such institutions when such institutions are “acting as agent or custodian for [such] customer . . . in connection with a securities contract.”  11 U.S.C. § 101(22)(A).  Because a transfer to a “financial institution” in connection with a securities contract is shielded by section 546(e) from avoidance, the question of which “customers” of financial institutions qualify as financial institutions under this definition has become highly litigated.  On October 22, the United States Bankruptcy Court for the Eastern District of Michigan issued a new decision on this question, ruling that the recipients of an alleged fraudulent transfer did not qualify as “financial institutions” under the Bankruptcy Code because the bank that transmitted the payments was not acting as an “agent or custodian” for the recipients.

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The Best Laid Plans: How a Proposed Sale of NYC Real Estate Under Section 363 of the Bankruptcy Code Went Awry

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.

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Delaware Bankruptcy Court Rejects Late Filings of Asbestos Claims

Last February, we blogged about the Third Circuit’s decision in In re Energy Future Holdings Corp, No. 19-1430, 2020 U.S. App. LEXIS 4947 (Feb. 18, 2020).  The Third Circuit approved a process for resolving asbestos claims in which a bar date was imposed on filing the claims, but late claimants who were unaware of their asbestos claims would be allowed to have the bar date excused through Bankruptcy Rule 3003(c)(3).  (A bar date is a date set by the court by which all claims against the debtor must be filed.  Rule 3003(c)(3) permits such time for filing to be extended “for cause shown,” and has been held, based on Rule 9006(b), to permit late filing upon a showing of “excusable neglect” by a claimant.)  In a recent decision, the United States Bankruptcy Court for the District of Delaware rejected an effort by two late claimants to make use of this process, reasoning that the claimants had failed to meet Rule 3003(c)(3)’s “excusable neglect” standard because they had participated in the bankruptcy case for years without seeking to file claims.

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Computing Time for a Filing Deadline: Should You Count a Day When a Clerk’s Office is Closed?

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).

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Proposed Amendments to the CARES Act Would Expand Access to PPP Loans to Small Businesses in Chapter 11

The paycheck protection program (“PPP”) has been one of the most popular aspects of the CARES Act (i.e., the initial legislation responding to the COVID-19 pandemic). Yet, as has been widely reported, debtors in chapter 11 cases are not allowed to receive PPP loans. But Congress might remedy that if it agrees on another round of COVID-19 related stimulus.

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District Court Addresses “Straddle Year” Treatment for Federal Income Tax in Bankruptcy

In an appeal of a bankruptcy court’s decision, a district court judge recently addressed the treatment of the “straddle year” for federal income tax under the Bankruptcy Code, which “does not appear to have been decided by any appellate court.”  In re Affirmative Ins. Holdings Inc. United States v. Beskrone, No. 15-12136-CSS, 2020 WL 4287375, at *1 (D. Del. July 27, 2020).

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New Appeals Court Ruling on the Scope of Subsequent Transferee Liability Under Section 550

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."

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A Primer On Administrative Expense Claims From An Oil And Gas Bankruptcy Case

This post provides a quick primer on administrative expense claims.  These claims are entitled to priority for actual and necessary goods and services supplied to a debtor in bankruptcy.  For a claim to qualify for administrative expense status, a debtor must request that the claimant provide goods and services post-petition or induce the claimant to do so.  The goods or services must result in a benefit to the bankruptcy estate.  And the claimant bears the burden of proof that a claim qualifies for priority treatment under 11 U.S.C. § 503(b)(1)(A).

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Bankruptcy Sales Under Section 363: The Business Judgment Test That Judges Often Cite Isn’t Always the One They Use

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.

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The Impact of the CARES Act on US Consumers, Small Businesses, Bankruptcy and Insolvency Laws and Procedures

This post originally appeared in International Corporate Rescue, published by Chase Cambria Company (Publishing) Ltd.

COVID-19 is taking an alarming and unfortunate toll on the world’s population. In the United States, the number of COVID-19-related deaths will soon approach 75,000. Billions of dollars of economic output will be lost. As a consequence, on 27 March 2020, US lawmakers signed the Coronavirus Aid, Relief, and Economic Security Act (the ‘CARES Act’) into law. It provides USD 2.2 trillion in economic stimulus to various sectors of the American economy. This article explains three aspects of the CARES Act: a consumer economic stimulus, a small business payment protection program, and the impact of the CARES Act on US bankruptcy laws and procedures in several of the nation’s busiest bankruptcy courts.
 

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Federal Appeals Court Addresses Equitable Mootness Doctrine

Courts reviewing a bankruptcy court’s decision to approve a chapter 11 reorganization plan over the objections of an interested party must consider not only the merits, but also (if implementation of the plan was not stayed) potential injury to the reliance interests of other parties relying on the plan. These issues are confronted in Drivetrain, LLC v. Kozel (In re Abengoa Bioenergy Biomass of Kansas), 2020 WL 2121449 (10th Cir. May 5, 2020), a recent Tenth Circuit decision holding, based on circuit precedent, that an objector’s challenge to a chapter 11 plan that had already been implemented was barred under the doctrine of equitable mootness. Nonetheless, the decision noted that the doctrine is controversial and open to question.

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Fraudulent Transfers and Constructive Fraud in the Contracts and Torts Contexts

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.

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Uncertainty in the Pipeline: Energy Companies Navigate COVID-19

COVID-19 has sent the price of oil per barrel in a downward spiral. The plummet in business travel, cruises, vacations, weekend getaways, and non-essential travel have all led to a decreased demand for oil.

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Bankruptcy Considerations in Light of COVID-19 Pandemic

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.

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Bankruptcy Court Closes Chapter 11 Cases Even with an Appeal Pending and Over the Objection of the U.S. Trustee.

Debtors in chapter 11 cases are required to make quarterly payments to the United States Trustee’s Office.  These fees support the UST Program that serves in all districts but those in two states.  Quarterly fees must be paid until cases are closed.  And cases are closed when they are “fully administered,” a term that isn’t defined in the Bankruptcy Code or Rules.

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Third Circuit Addresses the Due Process Rights of Asbestos Claimants

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.

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Bankruptcy Appellate Practice: The Entry of Bankruptcy Court Orders and the 14-Day Period to Appeal

An appeal from a bankruptcy court’s final judgment must be filed within 14 days of when an appealable order is entered on the docket.  Parties should not delay past the 14 days even if, for instance, the bankruptcy court must still decide a related request for an award of attorneys’ fees.  Otherwise, an appeal will be untimely under Federal Rule of Bankruptcy Procedure 8002(a)(1).

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Supreme Court Resolves the Appealability of Orders Denying Relief from the Automatic Stay

When a debtor files for bankruptcy, the Bankruptcy Code provides for an automatic stay of almost all proceedings to recover property from the debtor.  See 11 U.S.C. § 362(a).  A party in interest can seek an order exempting it from the automatic stay for cause.  11 U.S.C. § 362(d).  A creditor that fails to obtain relief from the stay is limited to the claim-adjudication process in bankruptcy court.  What happens if the bankruptcy court rules against a creditor seeking relief from the automatic stay, and the creditor seeks to appeal?  Can the creditor appeal immediately or must it wait until its claim is fully adjudicated in bankruptcy court?  The question turns on the interpretation of the federal statute governing bankruptcy appeals, which provides that appeals may be taken from “final judgments, orders and decrees . . . entered in cases and proceedings.”  28 U.S.C. § 158(a) (emphasis added).  An automatic stay does not finally resolve a bankruptcy “case,” but does it finally resolve a bankruptcy “proceeding”?  On January 14, the Supreme Court resolved that question affirmatively in an opinion by Justice Ginsburg, ruling that a creditor who is denied relief from the automatic stay may appeal immediately.

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Bankruptcy Courts Don’t Need to Hold an Evidentiary Hearing in Order to Appoint a Chapter 11 Trustee

The U.S. Bankruptcy Code allows debtors to stay in control of their businesses in chapter 11.  But the Code also empowers bankruptcy judges to replace a debtor’s management in certain circumstances with an outside trustee.  This will happen if either cause exists to expel management or appointing a trustee is in the best interests of creditors, any equity holders, and other interests of the estate.  11 U.S.C. § 1007.  Judges don’t need to hold an evidentiary hearing to appoint a trustee, but the decision to do so must be based on clear and convincing evidence.

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Federal Appeals Court Rules on Requirements for Involuntary Bankruptcy

Section 303 of the Bankruptcy Code allows creditors to initiate an involuntary bankruptcy case against a debtor. The petition initiating the case must be filed by creditors holding claims aggregating to at least $10,000, and those claims must not be “contingent as to liability or the subject of a bona fide dispute as to liability or amount.” 11 U.S.C. § 303(b)(1). Courts have disagreed as to how this provision applies when a portion of a claim is undisputed. Some courts have held that, when the undisputed portion of a claim is sufficient for the aggregated claims to reach $10,000, a dispute about the remainder of the claim does not disqualify the claim as a whole. Other courts have held that any bona fide dispute about the amount of a claim is a “bona fide dispute as to liability or amount” that prevents a claim from being used to support an involuntary bankruptcy petition. On November 26, in Montana Department of Revenue v. Blixseth, 942 F.3d 1179 (9th Cir. 2019), the Ninth Circuit embraced the second position, ruling against a state tax agency that had a large tax claim against the debtor, most of which was subject to bona fide dispute but $200,000 of which was not.

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Bankruptcy Court Addresses Standard For Recovery Of An Alleged Fraudulent Transfer From A Subsequent Transferee

The Bankruptcy Code gives a trustee powers to avoid certain pre-bankruptcy transfers of the debtor’s property to other entities. For example, a trustee can avoid transfers made with the intent to impair the ability of creditors to collect on their debts. 11 U.S.C. § 548(a)(1)(A). The Code gives the trustee the power to recover the transferred property from the initial recipient, and also from subsequent recipients, “to the extent the transfer is avoided.” 11 U.S.C. § 550(a). Courts have split on whether this language requires a trustee to get a judgment avoiding a transfer prior to recovering from a subsequent transferee, or whether a trustee can simply show that the transfer is avoidable as part of the action against the subsequent transferee. A related question, however, concerns what happens when a trustee has gotten a judgment avoiding a transfer, and then seeks to recover from subsequent transferees. Can those transferees challenge whether the original transfer was avoidable? This question is the central issue in a recent decision from the United States Bankruptcy Court for the Southern District of Florida. Yip v. Google LLC (In re Student Aid Ctr., Inc.), Adv. Proc. No. 18-1493, 2019 Bankr. LEXIS 3310 (Bankr. S.D. Fla. Oct. 22, 2019).

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A Bankruptcy Code Chapter 15 Primer: Decision in New York Addresses Key Issues of Jurisdiction, Recognition, Public Policy, and More

Judge Martin Glenn last week issued a decision in two related chapter 15 cases, In re Foreign Econ. Indus. Bank Ltd. “Vneshprombank” Ltd., No. 16-13534, and In re Larisa Markus, No. 19-10096, 2019 Bankr. LEXIS 3203 (Bankr. S.D.N.Y. Oct. 8, 2019). The decision is chock full of case citations and offers a tutorial on chapter 15. Practitioners should refer to the decision as a helpful, up-to-date resource.

Two insolvency proceedings had been filed in Russia. One debtor was a bank and the other was an individual. The chapter 15 cases that followed were initially assigned to Bankruptcy Judge Mary Kay Vyskocil. She issued orders recognizing both Russian cases as foreign main proceedings. An attorney who was involved in the cases filed a motion to vacate the recognition orders. Six days later the cases were transferred to Judge Martin Glenn. The opinion doesn’t say why the transfer occurred.

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District Court Rules on Property of the Debtor Requirement for Fraudulent Transfer Claims

Section 548 of the Bankruptcy Code enables trustees to avoid certain pre-bankruptcy transfers of “an interest of the debtor in property,” where the transfer was intended to defraud creditors or where the transfer was made while the debtor was insolvent and was not for reasonably equivalent value.   11 U.S.C. § 548(a).  Section 544 of the Bankruptcy Code enables trustees to avoid a transfer of “property of the debtor” where a creditor of the debtor would have such a right under state law.  11 U.S.C. § 544(a).  The statutory requirement that the transfer be “of an interest of the debtor” or “property of the debtor” (emphasis added) has important implications for claims brought under sections 544 and 548 in the aftermath of a merger or acquisition.  This point is illustrated by a recent decision from the District Court of Delaware, affirming the dismissal of fraudulent transfer claims brought under sections 544 and 548 for failure to allege transfer of property by a debtor.  Miller v. Matco Electric Corp. (In re NewStarcom Holdings), Civ. No. 17-309 (D. Del. Sept. 6, 2019).

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Bankruptcy Jurisdiction: The Time-of-Filing Rule Applies to “Related-To” Jurisdiction

Consider these facts.  A debtor in bankruptcy sued two parties for breach of contract.  The debtor assigned its rights and interests in the cause of action to another entity.  The defendants moved to dismiss the lawsuit, arguing that the court now lacked jurisdiction over the case.  They asserted that the debtor’s assignment of the cause of action destroyed the bankruptcy court’s “related to” jurisdiction.  Who wins?

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New York Bankruptcy Court Issues Ruling on Recognition of Foreign Proceedings

Chapter 15 of the Bankruptcy Code, added in 2005, provides a route for debtors to obtain US recognition of their insolvency proceedings in other countries.  A foreign proceeding can be recognized under chapter 15 as either a “foreign main proceeding” or a “foreign nonmain proceeding.”  11 U.S.C. § 1517.  Recognition as a foreign main proceeding entitles a debtor to certain rights, such as the automatic stay of actions against the debtor that would normally be imposed in a bankruptcy case filed in the United States.  11 U.S.C. § 1520.  To obtain recognition of a foreign proceeding as a foreign main proceeding, the foreign proceeding must be pending in the country where the debtor has the “center of its main interests” (usually abbreviated “COMI”).  The precise meaning of this somewhat elusive phrase is still being worked out by judicial decision.  On August 12, 2019, the Bankruptcy Court for the Southern District of New York issued another entry in the body of case law concerning this provision, ruling that an investment fund organized under Cayman Islands law, and involved in a liquidation proceeding there, had its COMI in the Cayman Islands rather than New York.

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Wagoner Rule, Episode 2: An Outsider Serving a Managerial Role Is an Insider

We previously discussed Bankruptcy Judge Martin Glenn’s analysis of the Wagoner Rule in the Feltman v. Kossoff & Kossoff LLP (In re TS Empl., Inc.) case.  The bankruptcy trustee (the “Trustee”) had asserted a fraud claim against the debtor’s outside accountant and its principal (the “Defendants”).  The Defendants moved to dismiss the complaint, citing the Wagoner Rule.  Judge Glenn held that the Trustee’s assertion of the adverse interest exception to the Wagoner Rule did not apply, but allowed the Trustee to amend the complaint to strengthen allegations concerning the insider exception.  In a recent decision, Judge Glenn denied the Defendants’ motion to dismiss the amended complaint, concluding that the Trustee alleged sufficient facts concerning application of the insider exception.

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SDNY Rejects Examination Request by a Claim Purchaser to Obtain Evidence for a Separate Litigation

New York Bankruptcy Judge Sean Lean recently denied a Rule 2004 request because the movant sought documents for use in an unrelated litigation.  In re Cambridge Analytica LLC, No. 18-11500, 2019 Bankr. LEXIS 1824 (Bankr. S.D.N.Y. Jun. 14, 2019).  Judge Lane said discovery sought through Rule 2004 should be used in the bankruptcy case and not in other disputes.

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Delaware Court Grants Substantial Contribution Award to Mechanic’s Lien Creditors

Delaware Bankruptcy Judged Brendan Shannon granted mechanic’s lien claimants $1.6 million for making a substantial contribution in a case by “demonstrably and materially facilitating the process of reorganization.”  In re M & G USA Corp., No. 17-12307, 2019 Bankr. LEXIS 1398 (Bankr. D. Del. May 6, 2019).

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Supreme Court Decides Civil Contempt Standard for Violations of Discharge Orders

Successful bankruptcy cases typically end with a court order releasing a debtor from liability for most pre-bankruptcy debts.  This order, generally known as a “discharge order,” prohibits the debtor’s creditors from trying to collect on those now-discharged debts.  See 11 U.S.C. § 524(a)(2).  But it is not always clear which debts are covered by a discharge order.  Some pre-bankruptcy debts are exempted from discharge by the Bankruptcy Code.  For example, section 523 of the Bankruptcy Code exempts certain debts of individual debtors from discharge, and section 1141 exempts certain debts of corporate debtors from discharge under chapter 11.  See 11 U.S.C. §§ 523(a), 1141(d)(6).  For other debts, it may be unclear whether they arose before or after the bankruptcy.  See In re Ybarra, 424 F.3d  1018 (9th Cir. 2005) (considering under what circumstances a discharge order covers an attorney’s fee award for fees incurred post-petition in an action brought before the bankruptcy petition).  Courts enforcing a discharge order’s prohibition on debt collection have thus struggled with the appropriate standard for holding a person in contempt for attempting to collect on a discharged debt.  Does it require that the person knew that the discharge applied to the debt, or is it sufficient that the discharge did in fact apply to the debt?

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SDNY Bankruptcy Court Reaffirms the Low Bar of the Property Requirement for Filing a Chapter 15 Case

Last year, we discussed a decision by Judge Sean Lane of the United States Bankruptcy Court for the Southern District of New York concerning section 109(a) of the Bankruptcy Code.  In a recent cross-border case, In re PT Bakrie Telecom Tbk, Judge Lane again addressed section 109(a) and held that an obligor on an indenture that contains New York governing law and forum selection clauses satisfies the eligibility requirement for filing a chapter 15 case in New York. 

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Bankruptcy Avoidance Actions Under Section 544(b): State Fraudulent Transfer Statutes and More

Creditors’ recoveries often hinge on claw-back lawsuits that trustees bring under bankruptcy law and non-bankruptcy law.  Trustees can file claims based on non-bankruptcy law because Bankruptcy Code section 544(b) allows them to assert claims that creditors have standing to file outside of bankruptcy.  This powerful tool enables trustees to challenge transactions that date back years before a bankruptcy filing.

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Another Ruling on Public Auctions Versus Private Sales Under Section 363

Two weeks ago, we discussed asset sales under Bankruptcy Code section 363.  As that post noted, section 363 requires court approval for asset sales outside the ordinary course of business, with courts ensuring that sales reflect a reasonable business judgment and have an articulated business justification.  Debtors may choose to sell assets via a public auction or through a private sale.  In our last post, we considered a case where a debtor initially arranged for a public auction and then decided to sell the property via a private sale.  What about the reverse case—what if a debtor agrees to sell property to a particular entity via a private sale, but then changes course and decides to hold a public auction instead?  On Wednesday, the Fifth Circuit Court of Appeals considered such a case in In re VCR I, LLC, No. 18-60368 (May 1, 2019).  The Fifth Circuit held that the prior agreement did not bar the change of course.

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Asset Sales in Bankruptcy: Public Auctions vs. Private Sales under Bankruptcy Code Section 363

We now address assets sales under Bankruptcy Code section 363.  The statute allows debtors to use, sell, or lease their property in the ordinary course of business without court permission.  But a debtor’s use, sale, or lease of property outside the ordinary course of business requires court approval.  And courts will usually approve a debtor’s disposition of property if it reflects the debtor’s reasonable business judgment and an articulated business justification.

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