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 … 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 … 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, … Continue Reading
On 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.… Continue Reading
On 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 … Continue Reading
Constitutional 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.… Continue Reading
Chapter 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 … Continue Reading
Following 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
Bankruptcy Code section 510(b) provides for mandatory subordination of any claims “arising from,” among other things, the purchase or sale of a security. It is an expansive provision that courts have interpreted broadly, causing some commentators to wonder: “Are there any limits to mandatory subordination under section 510(b)?”
In a decision entered last week in Khan v. Barton (In re Khan), No. 14-1021, 2014 WL 6972785 (B.A.P. 9th Cir. Dec. 9, 2014), the Bankruptcy Appellate Panel of the Ninth Circuit analyzed the objectives and policy considerations underlying mandatory subordination as well as the legislative history of section 510(b), and … Continue Reading
Focusing on the plain language provided in Bankruptcy Code section 546(e), the Court of Appeals for the Second Circuit this week held that customers of the now defunct Bernard Madoff Investment Securities LLC can retain funds they had withdrawn from their customer accounts before the Madoff firm was placed into liquidation. Irving Picard, the trustee appointed under the Securities Investor Protection Act of 1970 (SIPA) to liquidate the Madoff investment firm, had sought to “avoid” or unwind customers’ withdrawals of funds that exceeded the amounts that the customers had deposited with the investment firm–their “profits”. Avoiding these transfers would have … Continue Reading
Following up last week’s post on fiduciary duties, we review another bankruptcy decision, also in Delaware, that provides a good refresher on the fiduciary duties of directors and officers. In dismissing claims that officers and directors had breached fiduciary duties, the bankruptcy court in Lightsway Litigation Services, LLC v. Yung (In re Tropicana Entertainment, LLC) reminds creditors when they are entitled to assert breach of fiduciary duty claims and what they must demonstrate in connection with those claims.… Continue Reading
Corporate officers and directors who want to understand when a bankruptcy court may second-guess their decisions if their company fails need look no further than the Delaware bankruptcy court’s recent decision in Gavin v. Tousignant (In re Ultimate Escapes Holdings, LLC).
Failed Business, Failed Merger
Ultimate Escapes was formed in September 2009 to operate a “luxury destination club” that would provide its “members” with access to high-end vacation residences. Profits came from charging initiation fees, annual dues, and for al la carte services. By 2010, the company had approximately 1250 members.… Continue Reading
At times, United States courts have been reluctant to grant recognition to foreign proceedings involving offshore “exempted” companies under Chapter 15 of the Bankruptcy Code. For example, the United States Bankruptcy Court for the Southern District of New York denied a request for recognition of the Cayman Islands liquidation of certain Bear Stearns funds. Following the Second Circuit’s decision in In re Fairfield Sentry Ltd., 714 F.3d 127 (2d Cir. 2013), the New York bankruptcy court has granted recognition to foreign proceedings involving offshore exempted companies. Most recently, the United States Bankruptcy Court for the Southern District of New … Continue Reading
Insiders who support their business enterprises in the form of loans should take comfort in a recent decision by the Bankruptcy Court for the Western District of Virginia in which the bankruptcy court declined to recharacterize a member’s loans to a limited liability company as capital contributions. Financial transactions in which an insider advances money to its business are likely to be highly scrutinized by a court in a bankruptcy case and, in certain instances recharacterized as equity notwithstanding having been labeled as a loan. However, as this case demonstrates, not all transactions involving an insider warrant recharacterization.… Continue Reading
In a case of first impression, the Second Circuit recently held that the doctrine of equitable mootness is applicable in appeals arising from Chapter 11 liquidations and affirmed the decision of the Southern District of New York to dismiss the appeals of three decisions in the Chapter 11 liquidation proceedings of the former book retailer Borders.
A Primer on Equitable Mootness
The equitable mootness doctrine allows a district court to dismiss a bankruptcy appeal when the district court determines that although relief could be provided, implementation of the relief would be inequitable. In the Second Circuit, the appeal of a … Continue Reading
A recent decision by the Bankruptcy Court for the Southern District of New York in the In re Frontier Insurance Group cases examines the limitations on the deference bankruptcy courts are required to afford to state insurance laws and proceedings. The Frontier Insurance decision is the latest development in a lengthy dispute over the ownership of real property between a reorganized debtor emerged from bankruptcy and the New York State liquidator of the debtor’s wholly-owned insurance subsidiary.… Continue Reading
As a bankruptcy and financial restructuring lawyer, I am often told by businesspeople that they hope to never need my services. While I can understand the desire to avoid needing debtor’s counsel, the truth is that many companies will eventually (or perhaps inevitably) find themselves involved in a bankruptcy case as a creditor. And if a company received payments from a debtor in the 90 days before it filed for bankruptcy, it may find itself a defendant in a lawsuit brought by a trustee for a liquidating debtor.
The Bankruptcy Code permits a debtor to recover from creditors “preference” payments … Continue Reading
A recent decision in the Momentive cases explores the limitations of changing a vote pursuant to Bankruptcy Rule 3018. In that case, the first and 1.5 lien noteholders initially voted to reject the debtors’ proposed plan of reorganization in order to pursue their claim for recovery of a “make-whole” payment they argued they were entitled to under the relevant indentures. On the day that Judge Drain was scheduled to read a decision regarding confirmation of the plan and the viability of the noteholders’ make-whole claims from the bench, the noteholders indicated to the judge that they wished to change their … Continue Reading
The Bankruptcy Code gives broad avoidance powers to debtors, allowing them to “unwind” transactions occurring relatively shortly before the bankruptcy filing in order to recover funds for the benefit of the debtor’s creditors. Indeed, debtors may in certain circumstances recover from subsequent transferees of the initial transferee. These broad avoidance and recovery powers are generally intended to preserve assets of the estate, but they are not unlimited. For example, no recovery is permissible against a subsequent transferee who took for “value” in good faith and with no knowledge of the avoidability of the initial transfer. In a decision last week, … Continue Reading
Lenders should take comfort in a recent bankruptcy court decision in Maryland dismissing a creditor’s attempt to equitably subordinate a construction lender’s claim against their common debtor. See Atlantic Builders Group, Inc. v. Old Line Bank, et al. (In re Prince Frederick Investment, LLC), Bk. No. 12-20900-TJC, Adv. No. 13-00461, (Bankr. Md. September 9, 2014). The court’s decision is a good reminder that lenders who comply with the terms of their loan documentation are typically protected from lender liability or, in a bankruptcy case, from equitable subordination of their claims. Further, the court’s decision reflects judicial reluctance to … Continue Reading
As we previously discussed, the Supreme Court’s decision in Executive Benefits Insurance Agency v. Arkison, dodged the question of whether litigants can consent to final adjudication of “Stern problem” claims by a bankruptcy court. Two recent decisions in the Fifth and Ninth Circuit have revealed the scope of the uncertainty left in Arkison’s wake and ensure that a circuit split will remain until the Supreme Court revisits this issue.… Continue Reading
Pension holders and other creditors of the City of Stockton, California (“Stockton”), as well as other interested parties following Stockton’s bankruptcy case (No. 12-32118, Bankr. E.D. Ca.), must wait until October for a resolution of the dispute surrounding Stockton’s treatment of the California Public Employees’ Retirement System (“CalPERS”) pension plan in its plan of adjustment. During a hearing on Tuesday, July 8, 2014, Judge Christopher Klein shared his preliminary understandings of California’s Public Employees’ Retirement Law (“PERL”) and the status of CalPERS pension plan in bankruptcy. Judge Klein hinted that he might be persuaded that Stockton’s CalPERS pension … Continue Reading
On June 9, 2014, the Supreme Court handed down a decision in Executive Benefits Insurance Agency v. Arkison—a case that was expected to answer fundamental questions about the constitutional limits of bankruptcy courts. The case had the potential to either dramatically reshape, or strongly reaffirm existing fraudulent transfer litigation law and practice. Instead, in a brief opinion written by Justice Thomas on behalf of a unanimous court, SCOTUS affirmed the decision below on narrow statutory grounds, and explicitly declined to address any of the difficult constitutional questions that plague fraudulent transfer litigation.… Continue Reading