Zone of Insolvency

Zone of Insolvency

SCOTUS Determines That 546(e) Safe Harbor Does Not Protect Transfers Where Financial Institution Is A Mere Conduit

Posted in Bankruptcy

In a decision significantly impacting the ability of a plaintiff to prosecute avoidance actions, the United States Supreme Court, in Merit Management Group, LP v. FTI Consulting, Inc., 583 U.S. ___ (2018), unanimously held that a transfer of funds, where a financial institution served as a mere conduit, does not entitle the recipient of the transfer to avail itself of the “safe harbor” defense provided for in section 546(e) of the Bankruptcy Code. Focusing on the construction and plain meaning of the statutory language, the Court’s ruling resolved the current split among circuits interpreting and applying section 546(e). Continue Reading

Chapter 11 Plan for a Group of Debtors May Be Confirmed if Approved by Creditors of a Single Debtor

Posted in Bankruptcy


In a matter of first impression at the Circuit level, the United States Court of Appeals for the Ninth Circuit held that a court may confirm a plan filed on behalf of multiple debtors that has been approved by an impaired class of creditors of only one of the debtors. JPMCC 2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Properties Inc. (In re Transwest Resort Properties, Inc.), 881 F.3d 724 (9th Cir. 2018). This ruling is in contrast with the Delaware bankruptcy court’s ruling in the Tribune Company Chapter 11 case, where as successfully advocated by Norton Rose Fulbright attorneys, the court held that a plan must be approved by an impaired class of creditors of each of the debtors party to the plan. The following is a brief description of the case background and the court’s analysis. Continue Reading

First Circuit Weighs in on Scope of Intellectual Property Protected by Bankruptcy Code Section 365(n)

Posted in Bankruptcy

In a decision last month, the First Circuit maintained the relatively narrow scope of protection provided to intellectual property licensees upon rejection of a license in bankruptcy. Focusing on the statute’s language, the court of appeals held that Bankruptcy Code section 365(n) fails to protect either a trademark license or exclusive distribution rights of a debtor’s trademarked goods, even when the trademark-related rights are incorporated into a license containing other protected intellectual property. See Mission Product Holdings, Inc. v. Tempnology LLC, No. 16-9016 (1st Cir. January 16, 2018). The First Circuit’s decision deepens a split among the circuits regarding the rights of trademark licensees when a licensor-debtor rejects a license in bankruptcy. Continue Reading

Contract Provisions Do Not Override Distribution Provision of an Italian Restructuring Plan

Posted in Bankruptcy

U.S. companies that engage in business in multiple jurisdictions should be mindful of a recent decision by the United States Bankruptcy Court for the District of Delaware. In the Chapter 15 case of Energy Coal S.P.A., the bankruptcy court held that U.S. choice of law and forum selection provisions in a contract with a non-U.S. company did not override the terms of a foreign restructuring plan that was approved by a foreign court. The court stated that it is “appropriate to expect U.S. creditors to file and litigate their claims in a foreign main bankruptcy case.” See In re Energy Coal S.P.A., Case No. 15-12048 (Bankr. D. Del. Jan. 02, 2018). Continue Reading

So. Cal. Luxury Real Estate Developer Woodbridge Group Files Chapter 11 Case

Posted in Bankruptcy

Woodbridge Group of Companies, a luxury real-estate developer, filed for chapter 11 reorganization on December 4, 2017.  Woodbridge and its 200-plus affiliates operated a sprawling, complex real estate enterprise that focused on the acquisition and development of high-end properties.

Although the company estimates the value of its properties to be nearly $1 billion, it asserts it was forced to seek chapter 11 protection due to increasing operational and regulatory costs combined with an inability to access new capital.  Woodbridge’s inability to recapitalize outside of chapter 11 is due, at least in part, to questionable capital-raising practices and the attendant regulatory scrutiny.

 Woodbridge’s Private Fundraising Practices Questioned By Regulators

Woodbridge historically raised capital through a “private fundraising operation” that has spawned more than 20 inquiries by state regulators and an ongoing investigation by the U.S. Securities and Exchange Commission (which is seeking information from Woodbridge, its affiliates, and its insiders).  Since 2012, Woodbridge and its affiliates had financed their expansion by offering short-term notes to individual investors promising substantial returns.  Typically, the notes were issued by a Woodbridge affiliate and were described as being ultimately secured by a first-priority lien on valuable real property.  More than $750 million of these notes—held by nearly 9,000 investors—were outstanding when Woodbridge filed for bankruptcy.

Woodbridge Noteholders Under Fire in Chapter 11

Woodbridge’s bankruptcy court filings assert that the noteholders failed to take the steps needed to properly “perfect” their security interests, and that the noteholders are therefore only unsecured creditors.  Woodbridge’s attorneys have promised to quickly file suit against the noteholders to strip them of their secured status.  Within the next few weeks, Woodbridge also plans to seek the bankruptcy court’s approval of a $100 million debtor-in-possession financing facility from Hankey Capital secured by “priming” liens on 28 of Woodbridge’s most valuable properties.  Woodbridge’s thousands of noteholders and the challenges to their claims are certain to dominate the early stages of the reorganization case.

Woodbridge’s Former Chief Executive Nets Consulting Deal

Woodbridge’s former chief executive, Robert Shapiro, could be a potential litigation target.  Although the SEC has not filed any charges as of today, Mr. Shapiro ceded control over Woodbridge to an independent management team to guide the company through its bankruptcy.  Mr. Shapiro will stay on as a “consultant” in exchange for $175,000 in monthly compensation and other benefits agreed to by the Woodbridge debtors.  That arrangement will also attract close scrutiny by the unsecured creditors’ committee that will be formed on December 14th and the bankruptcy court.  The SEC has informed the bankruptcy court that it has “serious concerns” about Woodbridge and that its Chapter 11 filing may force the agency to “make some decisions quickly.”

Official Committee of Unsecured Creditors Formation Meeting

The United States Trustee has scheduled a meeting of creditors to form an official committee of unsecured creditors on December 14, 2017 at 10:00 a.m. (ET) at The Doubletree Hotel, 700 King Street, Wilmington, Delaware 19081.

For more information about Woodbridge’s Chapter 11 case, please contact David LeMay at or 212.408.5112.

Woodbridge’s and certain of its affiliates’ Chapter 11 cases are pending in the United States Bankruptcy Court for the District of Delaware and are being jointly administered under Case No. 17-12560 (KJC).

Second Circuit Adopts “Efficient Market” Approach to Calculate Cramdown Interest

Posted in Bankruptcy

Last week, the Second Circuit established an “efficient market”-based approach for calculating cramdown interest rates. Adopting a test established by the Sixth Circuit, the Second Circuit held that courts must apply a market interest rate where an efficient market exists. See Momentive Performance Materials Inc. v. BOKF, NA (In the Matter of: MPM Silicones, L.L.C.), — F.3d —-, 2017 WL 4700314, No. 15-1682, (2d Cir. Oct. 20, 2017).  The decision will be welcomed by secured creditors (and distressed investors) who previously could be forced to accept replacement debt with below-market interest rates under a chapter 11 plan. Lower “formula”-based interest rates are still possible in the Second Circuit, but only where a market does not exist for comparable new debt.

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Restructuring Newswire Fall 2017

Posted in Presentations

Norton Rose Fulbright released its Restructuring Newswire for the Fall 2017.  Find the following topics in this issue:

  • Supreme Court to decide scope of safe harbor protections against avoidance claims
  • Extraterritoriality and the Bankruptcy Code: the uncertain reach of the US avoiding powers
  • Sales of inventory:  Third Circuit clarifies the meaning of “received” under section 503(b)(9) of the Bankruptcy Code
  • Chapter 15 developments:  United States enforce Canadian restructuring plans

To read the Newswire, click here.

Good News/Bad News in Keeping Affiliates out of Bankruptcy

Posted in Bankruptcy

A bankruptcy filing by one company does not necessarily mean that its affiliates will also file for bankruptcy. It is common for a financially distressed company to file for bankruptcy while its financially sound affiliates continue business operations in the ordinary course. The bad news, however, is that a court may disregard a company’s decision not to file for bankruptcy in connection with an affiliate bankruptcy filing if the company is managed and operated in a manner that disregards the corporate separateness between it and affiliates(s) that have filed for bankruptcy. Consequently, the assets of a non-debtor company may be made available to satisfy creditors of affiliates in the bankruptcy cases of those affiliates. However, the good news is that while such “substantive consolidation” of non-debtors with debtors is possible, it is generally unlikely. Indeed, if a single creditor of the non-debtor company will be harmed by the substantive consolidation of such company with affiliates in bankruptcy, the risk of such substantive consolidation becomes relatively remote. This scenario recently played out in a case pending in the Western District of Oklahoma. See In re Stewart, Adv. No. 16-1117, Doc. No. 163 (Bankr. W.D. Okla. Aug. 17, 2017). Continue Reading

Lenders Beware: Diligence Needed to Protect that Guarantee Claim From Substantive Consolidation in Bankruptcy

Posted in Bankruptcy

Last month, the Bankruptcy Court for the Southern District Of New York overruled an objection to proposed substantive consolidation provisions included in the plan of reorganization for Republic Airways Holdings Inc. See In re Republic Airways Holdings Inc., 565 B.R. 710 (Bankr S.D.N.Y. 2017). The bankruptcy court’s ruling provides a good refresher on the requirements of substantive consolidation in the Second Circuit. More importantly, the decision shows the importance that diligence plays not only at the time a lender/creditor enters into a transaction with its borrower, but also later on if both the borrower and the borrower’s guarantor end up in bankruptcy. Continue Reading

SCOTUS Ends Structured Dismissals that Circumvent Priority Rules

Posted in Bankruptcy

TruckPhoto_WEBEarlier today, in Czyzewski v. Jevic Holding Corp., the Supreme Court put an end to “structured dismissals” that allow a debtor to leave bankruptcy while circumventing the Bankruptcy Code’s creditor payment priority scheme.

A Chapter 11 debtor generally has three options for exiting bankruptcy: (1) a confirmed plan of reorganization (or liquidation); (2) conversion to Chapter 7 and liquidation of the debtor’s estate; or (3) dismissal of the bankruptcy case entirely. Chapters 11 and 7 both broadly require the debtor’s estate to make distributions to creditors in accordance with a statutorily mandated order of priorities (although Chapter 11 provides more flexibility than Chapter 7 in this respect). Continue Reading