Zone of Insolvency

Zone of Insolvency

Non-Consensual Third-Party Releases: Eleventh Circuit Joins “Pro-Release” Majority

Posted in Bankruptcy

ThinkstockPhotos-99188298Circuit 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

Think You Have a “Good Faith, for Value” Defense? Value to Creditors is the Key!

Posted in Bankruptcy

EricpicFraudulent 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

“Deepening Insolvency” Staggers On

Posted in Bankruptcy

122507381The 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.

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Chadbourne Hosts Expert Panel on Future of Municipal Restructurings After Detroit and Jefferson County

Posted in Chadbourne Presentations

Muni bankruptcy February event ITK2On 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.

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Don’t Forget to Object!

Posted in Bankruptcy

526495477On January 23, 2015, the Eleventh Circuit recognized the res judicata effect of provisions contained in a bankruptcy plan of reorganization that released all claims against a third-party guarantor. In deciding In re FFS Data, Inc., the court examined (i) the plain language of the plan provisions to determine whether a particular claim was included in the stated releases and (ii) whether the requirements for res judicata were met such that the confirmation order should be given preclusive effect.

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International Restructuring NewsWire Winter 2015

Posted in Chadbourne Presentations

INTLR_NW_WINTER2015-1

Chadbourne released its Winter 2015 International Restructuring NewsWire this week.

Find the following topics (and more) in the Winter 2015 issue:

  • The Year in Review: U.S. Bankruptcy and Restructuring Matters
  • Think Twice Before Entering into a Pre-Filing Restructuring Support Agreement
  • Review of Chapter 15 Cases in 2014: Relief Available to a Foreign Representative
  • Stern v. Marshall: A “Narrow” Decision Still Causing Jurisdictional Mayhem Three Years Later
  • Trademark Licensees May be Afforded Special Protections in the Licensor’s Bankruptcy
  • Are Secured Claim Purchasers Under Attack?

To read the NewsWire, click here.

Third Time’s the Charm: Supreme Court May Finally Clarify Bankruptcy Courts’ Power

Posted in Bankruptcy

SupremeCourt_178740915_100dpiOn January 14, 2015, the Supreme Court of the United States heard oral argument in Wellness International Network, Limited v. Sharif, a case that gives SCOTUS the opportunity to finally clarify the constitutional limits of bankruptcy courts’ decision-making power raised by its 2011 decision in Stern v. Marshall. But as we saw with last year’s decision in Executive Benefits Insurance Agency v. Arkison, just because SCOTUS has an opportunity to resolve Stern uncertainty and restore clarity to bankruptcy litigation does not mean that it will do so. It therefore remains an open question whether clarity will be restored to bankruptcy litigation or whether Sharif, like Arkison, will be resolved on narrow grounds that leave the most important Stern questions unanswered and fodder for further litigation.

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A Refresher on Constitutional Mootness and Its Application to Lift-Stay Motion Appeals

Posted in Bankruptcy

joshConstitutional mootness is a threshold question for determining whether a court has jurisdiction over an appeal. It arises from the “case or controversy” requirement under Article III of the U.S. Constitution – if no “case or controversy” exists for which the court may grant effective relief, the court lacks jurisdiction and must dismiss the appeal as moot. Specifically, constitutional mootness is characterized by the occurrence of an event during the pendency of an appeal that makes it impossible for the court to grant any effective relief to a moving party, even if that party were to prevail on appeal.

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Bankruptcy Court Slaps Down Chapter 11 Filing Used as a Litigation Tactic

Posted in Bankruptcy

Derma PenChapter 11 of the Bankruptcy Code is designed to allow struggling companies to reorganize their debts and emerge as stronger, healthier companies or to liquidate in an orderly fashion. In either case, the company better be struggling, as made clear in a recent decision in In re Derma Pen, LLC, No. 14-11894, 2014 WL 7269762 (Bankr. D. Del. Dec. 19, 2014). In Derma Pen, the Bankruptcy Court for the District of Delaware dismissed Derma Pen, LLC’s (“Derma Pen”) chapter 11 case because it lacked a good faith attempt to reorganize or preserve value for creditors and instead was being used as a litigation tactic.

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Determining the Cramdown Interest Rate: The Burden is on the Creditor

Posted in Bankruptcy

177437418Following Judge Drain’s decision in Momentive, many in the bankruptcy world have written about and discussed the issue of how to determine the appropriate interest rate that should be paid to secured creditors in the context of a Chapter 11 cramdown (the so-called “cramdown interest rate”). While many questions have been asked and remain unanswered, two recent decisions have confirmed that regardless of the approach used to determine the cramdown interest rate, the burden is on the creditor to provide evidence that the debtor’s proposed cramdown interest rate is too low. Continue Reading