Daniel A. Lowenthal, Partner

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.

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.

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.

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.

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.

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.

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).

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.

A recent decision in Delaware discussed the Barton doctrine and the application of the automatic stay in chapter 15 cases.  McKillen v. Wallace (In re Ir. Bank Resolution Corp.), No. 18-1797, 2019 U.S. Dist. LEXIS 166153 (D. Del. Sept. 27, 2019).

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.

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?

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.

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.

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?

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.

The subject matter jurisdiction of bankruptcy courts causes confusion and can be hard to understand.  In a recent decision, the United States Court of Appeals for the Eleventh Circuit clarified the meaning of the phrase “related to” in 28 U.S.C. §1334(b),  the federal statute that governs the subject matter jurisdiction of bankruptcy courts.

When a debtor files for bankruptcy, almost all proceedings to recover property from the debtor are automatically stayed by force of law. See 11 U.S.C. § 362(a). This provision, known as the automatic stay, is a central feature of the bankruptcy process, but uncertainty remains about aspects of its scope. Last month, we wrote about a decision from a New Mexico bankruptcy court holding that the automatic stay was not applicable to the removal of a state court action to bankruptcy court and to the continuation of that there. Earlier this week, in response to a motion for reconsideration, the court partially reversed itself, again holding that the automatic stay is not applicable to removal or to motions to remand the action back to state court, but holding that continuation of the action, beyond mere consideration of a motion to remand, was barred by the automatic stay. In re Cashco Inc., No. 18-11968-j7 (Bankr. D.N.M. March 26, 2019).

When a party files for bankruptcy, the Bankruptcy Code imposes an automatic stay of litigation against a debtor for claims arising prior to the commencement of the bankruptcy case. See 11 U.S.C. § 362(a). Where there is a basis for bankruptcy jurisdiction in federal court, federal law also permits parties to a state court action to remove the state court action to the federal district court for the district in which the state court action is pending. See 28 U.S.C. § 1452(a). (Usually, the action will then be automatically referred to a bankruptcy court in that federal judicial district.) Absent court action to modify the automatic stay, does the automatic stay block parties from carrying out such removal of state court actions against a bankruptcy debtor? In In re Cashco Inc., No. 18-11968-j7 (Bankr. D.N.M. December 12, 2018), a bankruptcy court considered an objection to removal on this ground by a chapter 7 trustee (“the Trustee”). While noting that courts have split on this issue, the bankruptcy court ruled that the automatic stay does not apply to removing a case to the bankruptcy court where the bankruptcy case is pending, nor to other proceedings in that court, including continuation of the removed action.

If the National Labor Relations Board (“NLRB”) fines an employer for unlawfully firing workers who tried to unionize, can the employer discharge the fine in bankruptcy, or will the exception to discharge found in Bankruptcy Code section 523(a)(6) apply?  That section bars discharge of debts that arise from “willful and malicious injury.”  The issue was addressed recently in a decision by the United States Court of Appeals for the Seventh Circuit following proceedings before an administrative law judge (“ALJ”), the NLRB, a District Court, and a Bankruptcy Court.  An individual debtor had sought to use bankruptcy to discharge a liability imposed by the NLRB.  However, the NLRB argued that the discharge should be denied because the debtor had engaged in “willful and malicious injury,” citing 11 U.S.C. §523(a)(6). In a 2-1 decision, the Seventh Circuit held that the administrative finding that the debtor violated §158(a)(3) of the National Labor Relations Act —which prohibits an employer from discriminating an employee to encourage or discourage membership in any labor organization—did not bar the debtor from arguing that he had not acted with malice.

Fraudulent transfer law allows creditors and bankruptcy trustees, under certain circumstances, to sue transferees to recover funds received where a debtor’s transfers to the transferees actually or constructively defrauded its creditors. Under both the Uniform Fraudulent Transfer Act adopted by most states and the fraudulent transfer action created by federal bankruptcy law, a transferee of an alleged fraudulent transfer may assert a defense from such liability by establishing that it received the transfer in good faith and for reasonably equivalent value. See 11 U.S.C. § 548(c); Tex. Bus. & Com. Code § 24.009(a). Many courts have held that a transferee lacks good faith if it has “inquiry notice,” that is, if it has knowledge that would make a reasonable person suspicious and suggest a need for further investigation, even if it lacks actual knowledge of the fraudulent nature of the transfer. But some courts have held that even a transferee with inquiry notice can maintain a good faith defense if it establishes that an investigation into the facts would have been futile because it would not have revealed the fraud. In Javney v. GMAG, L.L.C., No. 17-11526, 2019 U.S. App. LEXIS 759 (Jan. 9, 2019), the Fifth Circuit held that such a futility defense was not available under the Texas Uniform Fraudulent Transfer Act (“TUFTA”).

In a recent cross-border insolvency case, In re Agrokor d.d., 591 B.R. 163 (Bankr. S.D.N.Y. 2018), Judge Glenn of the United States Bankruptcy Court for the Southern District of New York recognized and enforced a restructuring plan approved by a Croatian court.  Due to the nature of the debt to be discharged under the plan, the Court went through an in-depth analysis of international comity in the context of international bankruptcy law.

Started as a mail-order retailer, evolved to brick-and-mortar stores in urban areas and expanded to a big-box retailer through merger, Sears is now facing the most turbulent time in its history.  On October 15, 2018, Sears Holdings Corp.—the holding company of Sears and Kmart—along with its affiliated entities, filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the Southern District of New York. With assets of approximately $6.94 billion and liabilities of approximately $11.34 billion in total, the fate of “Where America Shops” remains unclear.

When a bankruptcy petition is filed, an automatic stay comes into effect staying proceedings against the debtor or the debtor’s property. 11 U.S.C. § 362(a). The stay centralizes litigation regarding the debtor and its property in the debtor’s bankruptcy case. When contract entered into pre-bankruptcy contains an arbitration clause, a bankruptcy court will consider if the stay should be enforced or if the parties can resolve the matter in arbitration. In In re Argon Credit, LLC, No. 16-39654 (Bankr. N.D. Ill. Sept. 21, 2018), a bankruptcy court considered this question in a dispute between  two non-debtor parties concerning the validity of loans issued by the debtor and part of the debtor’s estate. The bankruptcy court ruled that the arbitration clause was binding and ordered the stay lifted to permit arbitration to go forward.