David W. Dykhouse, Of Counsel

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. 

I don’t know if Congress foresaw, when it enacted new Subchapter V of Chapter 11 of the Code in the Small Business Reorganization Act of 2019 (“SBRA”), that debtors in pending cases would seek to convert or redesignate their cases as Subchapter V cases when SBRA became effective on February 19, 2020, but it was foreseeable.  The benefits and advantages of Subchapter V to the debtors entitled to use it were certain to attract not just new filings but pending cases, especially cases commenced during SBRA’s long “180-day runway to effectiveness.”

Our February 26 post entitled “SBRA Springs to Life” reported on the first case known to me that dealt with the issue whether a debtor in a pending Chapter 11 case should be permitted to amend its petition to designate it as a case under Subchapter V, the new subchapter of Chapter 11 adopted by the Small Business Reorganization Act of 2019 (“SBRA”), which became effective on February 19, 2020.  Since then, three more cases have considered the issue, and two of them permitted the amendment and one did not.

We reported on the adoption of the Small Business Reorganization Act of 2019 (“SBRA”), with its 180-day runway to effectiveness, at the time of its adoption last year.  The wait is over, and SBRA is springing to life.

Whether because of, or in spite of, the proliferating case law it is hard to say, but the issues in, underlying and surrounding third-party releases in Chapter 11 plans just continue to arise with incessant regularity, albeit without a marked increase in clarity.  We have posted about those issues here six times in little more than two years, and it is fair to assume that this post will not be the last.

Anglo-American legislators and judges have been dealing with the treatment of debtors’ transactions that adversely affect their creditors at least since the Sixteenth Century.  In 1571, Parliament enacted the famous statute with the short title “An act against fraudulent deeds, alienations &c.” That statute criminalized fraudulent transactions that “delay, hinder or defraud creditors,” but inventive common-law judges promptly found in it what today we would call an implied private right of action to avoid such transactions.

A bankruptcy trustee exercising her or his avoidance powers under Chapter 5 of the Bankruptcy Code may seek to recover the avoidably transferred property (or its value) from “the initial transferee,” “the entity for whose benefit such transfer was made” and “any immediate or mediate transferee of such initial transferee.  Despite the authorization to seek recovery from multiple sources, “[t]he trustee is entitled to only a single satisfaction . . . .”

Our January 22, May 23, June 28, July 13, August 3, September 11 and October 29, 2018 and January 11, 2019 posts discussed the First Circuit’s January 12, 2018 decision in Mission Product Holdings, Inc. v. Tempnology, LLC. and the appeal therefrom to the Supreme Court.  On May 20, the Supreme Court issued its decision reversing the First Circuit in a 8-1 opinion clarifying the consequences of the rejection of a trademark license by the licensor.  Justice Kagan’s majority opinion was joined by every Justice except Justice Gorsuch, and Justice Sotomayor also filed a concurring opinion.  Justice Gorsuch dissented.

Can another vain attempt to mitigate a $1.5 billion mistake provide the occasion for a thorough review of the doctrine of earmarking?  It did for Southern District Bankruptcy Judge Martin Glenn in the long tail on the General Motors bankruptcy case.

Although it may be difficult to define precisely what an “executory contract” is (with the Bankruptcy Code providing no definition), I think most bankruptcy lawyers feel how the late Supreme Court Justice Potter Stewart famously felt about obscenity--we know one when we see it.  Determining that a patent license was executory in the first place was an issue in the Fifth Circuit’s recent decision in RPD Holdings, L.L.C. v. Tech Pharmacy Services (In re Provider Meds, L.L.C.),[1] but more interesting to this blogger was the issue, apparently decided by a Court of Appeals for the first time under the Code, of the effect of a timing provision that is unique in Chapter 7 cases.

In hindsight, it seems inevitable that constitutional and other jurisdictional problems would arise when Congress, in enacting the Bankruptcy Reform Act of 1978, created impressive new powers and responsibilities for the bankruptcy courts (along with a considerable degree of independence) but denied them the status of Article III courts under the Constitution (by denying its judges lifetime tenure, as Article III requires).  And it didn’t take long for the problems to arise.

Our July 13 post stated that the deadline for the respondent in Mission Product Holdings, Inc. v. Tempnology, LLC, 879 F.3d 389 (1^st Cir. 2018), petition for cert. filed, No. 17-1657 (June 11, 2018), to submit a reply to the petition for certiorari seeking reversal of the First Circuit’s 2-1 decision had been extended to August 8. The respondent sought an additional extension to September 7, and, on July 24, its request was granted. We continue to monitor developments in what could become one of the most consequential Supreme Court cases on bankruptcy in decades.

Our June 28 post discussed the petition for certiorari in the U.S. Supreme Court seeking review of the First Circuit’s January 12 decision in Mission Product Holdings, Inc. v. Tempnology, LLC.  We noted that the respondent’s response to the petition was due on July 12. 

The respondent’s response to the petition was not filed on July 12, and its time to do so has apparently been extended to August 8.  In the meantime, however, an amicus curiae brief in support of the petition was filed by the International Trademark Association (INTA) on July 11.  The INTA brief makes two major points--

Our February 22 post (with updates on March 19, April 17 and April 25) reported on a bankruptcy court decision dismissing a voluntary corporate Chapter 11 petition that had not been approved by a preferred stockholder of the debtor whose approval was required by the debtor’s certificate of incorporation[1] that was on track for a direct and expedited appeal to the U.S. Court of Appeals for the Fifth Circuit, the first case squarely dealing with bankruptcy remoteness, in my memory, to reach a Court of Appeals on the merits.  Last night, about three weeks after oral argument, the Court issued its unanimous opinion--clear, careful, thorough, but materially more limited than the questions that were certified to it by the Bankruptcy Court--affirming the Bankruptcy Court’s dismissal of the voluntary petition.[2]

Our February 22 post reported that the Franchise Services of North America, Inc. decision of Bankruptcy Judge Edward Ellington of the Southern District of Mississippi dismissing a Chapter 11 petition because a shareholder had not approved the filing as required by the debtor’s charter was going directly to the U.S. Court of Appeals for the Fifth Circuit on an expedited basis.  It is the first case concerning the merits of contractual or structural bankruptcy-remoteness in my memory to reach a Court of Appeals since the adoption of the Bankruptcy Code in 1978.  We promised to report on developments as they occur and reported on the filing of the debtor-appellant’s brief on March 19 and the appellees’ brief on April 16.

Substantive consolidation is the ultimate disregard of the corporate separateness of a group of related debtors--it is “the effective merger of two or more legally distinct (albeit affiliated) entities into a single debtor with a common pool of assets and a common body of liabilities,”[1] but without the actual de jure merger of the debtors.  All of the assets of the several debtors are thrown into a single (metaphorical) pot, and all of the liabilities of the several debtors[2] are combined (with intercompany debts and multiple claims for the same underlying liability, such as parent or subsidiary guaranties, eliminated) against that pot of assets.  The substantive consolidation of entity debtors is not mentioned anywhere in the Bankruptcy Code[3] and rests entirely on judge-made law with its origins predating the adoption of the Code in 1978.[4]

Our post last year concerning “[t]he long-running litigation spawned by the leveraged buyout of Tribune Company . . . and the subsequent bankruptcy case” described a case--FTI v. Merit--that was then pending in the Supreme Court.  In that case, the Court of Appeals for the Seventh Circuit had construed the safe harbor provided in Section 546(e) of the Bankruptcy Code in conflict with its construction by the Second and Third Circuits (among others).  On February 27, the Supreme Court announced its unanimous decision affirming the Seventh Circuit.

A long-running issue concerning the treatment of trademark licenses in bankruptcy has seen a new milestone with the January 12 decision of the First Circuit in Mission Product Holdings, Inc. v. Tempnology, LLC.

It is a unique characteristic of debt restructuring under Chapter 11 of the Bankruptcy Code that a majority of a class of creditors can accept a modification of the terms of the debts owed to the class members, as provided in a plan of reorganization, and thereby bind non-accepting class members.  The ordinary route to confirming a Chapter 11 plan is to obtain its acceptance by a majority of every impaired class of creditors and equity holders.

The long-running litigation spawned by the leveraged buyout of Tribune Company, which closed in December 2007, and the subsequent bankruptcy case commenced on December 8, 2008 has challenged the maxim that “there’s nothing new under the sun” even for this writer with four decades of bankruptcy practice behind him.