Under the Bankruptcy Code, a creditor may be reimbursed its actual and necessary expenses in making a “substantial contribution” in a chapter 9 or 11 case. Whether a creditor has made a substantial contribution is a question of fact, but generally requires that a creditor demonstrate a tangible benefit to the estate. It is unlikely that a creditor would “throw good money after bad” and attempt to make a substantial contribution in a chapter 7 case where creditor recoveries are typically limited to pennies on the dollar. There may nevertheless be instances where a creditor’s actions substantially contribute to a chapter 7 case and yield an increase recovery for all creditors. Despite the lack of express authority to reimburse such expenses as an administrative expense outside of chapter 9 or 11, a divided United States Court of Appeals for the Sixth Circuit recently concluded that a creditor could be awarded its expenses that substantially benefit a chapter 7 estate. See In re Connolly North America, LLC, No. 13-2489 (6th Cir. Sept. 21, 2015). Continue Reading
Chadbourne & Parke LLP currently represents the English liquidators of Hellas Telecommunications (Luxembourg) II SCA, a company that formerly owned one of the largest mobile phone operators in Greece. On behalf of the English liquidators, in 2012 Chadbourne obtained an order from the US Bankruptcy Court from the Southern District of New York granting Chapter 15 recognition of Hellas II’s liquidation proceeding. In March 2014, on behalf of the English liquidators, Chadbourne filed a lawsuit in the New York bankruptcy court asserting New York fraudulent transfer law and unjust enrichment claims and seeking the recovery of approximately €1 billion that was siphoned out of Hellas II as part of a dividend recapitalization by, among others, private equity giants TPG Capital Management and Apax Partners. Following the bankruptcy court’s dismissal of the New York law-based fraudulent conveyance claims, Chadbourne, on behalf of the liquidators, requested leave to file an amended complaint to assert, in addition to a surviving unjust enrichment claim, a fraudulent transfer claim under section 423 of the UK Insolvency Act, a fraudulent trading claim under section 213 of the UK Insolvency Act, and, in the alternative, a fraudulent transfer claim under Article 1167 of the Luxembourg Civil Code and Article 448 of the Luxembourg Commercial Code. Ultimately, the bankruptcy court authorized the liquidators to assert their English law claims (in addition to the surviving New York law unjust enrichment claim), clearing the way for the liquidators to move ahead in seeking recovery from TPG, Apax, and others.
There has been a lot of discussion, by both the courts and practitioners, regarding whether the bankruptcy court, as part of a chapter 11 plan, can release a third party from creditors’ claims over the objection of such creditors. We have talked about these non-consensual third-party releases on this blog as well. Courts are not unanimous on this issue, and the controversy provides something to talk about. Less time is spent discussing the less remarkable statement that bankruptcy courts can approve third-party releases when creditors consent to such release. However, what constitutes consent?
Earlier this summer, the bankruptcy court for the Southern District of New York confirmed the chapter 11 plan of reorganization for Chassix Holdings, Inc. and its affiliates. In overruling objections to the plan, the court provided some guidance on what constitutes “consent” by creditors to third-party releases. See In re Chassix Holdings, Inc., et al., 533 B.R. 64 (Bankr. S.D.N.Y. 2015). Continue Reading
On May 26, 2015, the Supreme Court of the United States (SCOTUS) decided Wellness International Network, Ltd. v. Sharif—another case addressing issues raised in the wake of the Court’s “narrow” Stern v. Marshall decision. While the case clarified some of the jurisdictional issues raised by litigants post-Stern, many issues remain and each Justice seems more content than the next to decide these issues on the narrowest grounds possible. Continue Reading
When a defendant in a lawsuit files for bankruptcy, the bankruptcy court will not necessarily have jurisdiction over the pending litigation. The court must determine that the case is either “core” or “related” to the bankruptcy. In Ammini v. Labgold (In re Labgold), Case No. 14-01043, decided on June 16, 2015, the Bankruptcy Court for the Eastern District of Virginia determined that it no longer had jurisdiction to adjudicate litigation involving the debtor—even though the litigation fell within the court’s “core” jurisdiction when first brought to the bankruptcy court—in part because the debtor/defendant had been denied a discharge under the Bankruptcy Code. The bankruptcy court therefore dismissed the adversary proceeding against the debtor/defendant and directed the plaintiffs to proceed with the case in state court. Continue Reading
In Nobel Group, Inc. v. Cathay Bank (In re Nobel Group, Inc.), the Bankruptcy Court for the Northern District of California reviewed the scope of its jurisdiction post-confirmation and held that, notwithstanding plan provisions stating the contrary, the court did not have jurisdiction over the reorganized debtor’s claims asserted against its previously secured creditor. Continue Reading
Circuit courts are divided as to whether provisions of a bankruptcy plan of reorganization may release a non-debtor from creditors’ claims over the objection of a non-consenting creditor (i.e. non-consensual third-party releases). A majority of courts will permit non-consensual third-party releases under certain limited circumstances. This issue has been in the news recently with speculation that the treatment of non-consensual third-party releases was a contributing factor in the decision by the debtors in the Caesars bankruptcy cases to file for bankruptcy in the Bankruptcy Court for the Northern District of Illinois (which is located in the Seventh Circuit—a circuit that permits non-consensual third-party releases and applies a less stringent test).
In a March 12th decision, the Eleventh Circuit addressed the issue of non-consensual third-party releases in the case of SE Property Holdings, LLC v. Seaside Engineering & Surveying, Inc., (In re Seaside Engineering & Surveying, Inc.). In its decision affirming the approval of a plan of reorganization that provided for a non-consensual third-party release, the Eleventh Circuit provided a refresher on the circuit split and joined the majority of courts that permit these releases under limited circumstances. Continue Reading
Fraudulent transfer statutes were enacted to protect creditors from improper depletion of a debtor’s assets. They generally accomplish this goal by allowing creditors (or a bankruptcy estate representative) to avoid transactions that are either actually or constructively fraudulent as to creditors, and to recover some or all of the proceeds of the transaction. For example, if a leveraged buyout leaves a company insolvent, amounts paid to pre-buyout shareholders may be clawed back in a constructive fraudulent transfer action, even if those shareholders had nothing to do with orchestrating the buyout.
However, many fraudulent transfer laws contain special protections to limit clawbacks from innocent parties. For example, section 550 of the Bankruptcy Code, which governs recoveries under the federal avoidance actions, provides that a plaintiff may not recover from a subsequent transferee that “takes for value . . ., in good faith, and without knowledge of the voidability of the transfer avoided.”
Legions of cases have addressed what constitutes “value” under the Bankruptcy Code and analogous state law fraudulent transfer actions. Far fewer have directly addressed who must benefit from this “value” for the defense to be available. In the recent case of Janvey v. The Golf Channel, Inc., the 5th Circuit addressed precisely that question. Continue Reading
The Third Circuit Court of Appeals recently passed on a chance to join numerous other federal and state jurisdictions in rejecting “deepening insolvency” as an independent tort, leaving the doctrine weakened, but still technically viable in the significant bankruptcy arena. However, in In re Lemington Home for the Aged, the Court did strongly indicate that the doctrine’s days are numbered, noting that its recognition of deepening insolvency as a tort “is problematic, and at the earliest appropriate opportunity . . . should be revisited.”
History of the Doctrine
Deepening insolvency refers to the wrongful prolongation of a corporation’s life, theoretically resulting in increased debt and lower recoveries for creditors. Whether deepening insolvency constitutes an independent cause of action has long been a controversial issue. The rise and fall of deepening insolvency, which the Third Circuit called a once “plausible argument gaining increasing acceptance,” but “has since been widely repudiated,” is interesting and instructive.
On February 24, 2014, Chadbourne’s New York office hosted an expert panel to discuss the future of municipal restructurings. The panel brought together judges and other experts with experience in two of the largest municipal restructurings to date: Jefferson County, Alabama and the City of Detroit, Michigan.