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Momentive Noteholders’ Request to Change Vote Denied – You can’t have your cake and eat it too.

Posted in US

Vote-487546457A 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

An Apparent Victory for Subsequent Transferees

Posted in US

Blog picThe 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

A Refresher on Lender Liability

Posted in US

Illustration_474763073Lenders 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

Circuit Split Deepens in Wake of Arkison

Posted in US

Sign_174561029As 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

Status of Stockton Pensions Still In Limbo

Posted in US

482438969Pension 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

Arkison: A Supreme Dodge

Posted in US

SupremeCourt_178740915_100dpiOn 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

Limiting the Right to Credit Bid: A New Trend?

Posted in US

478243863Earlier this month, in the In re The Free Lance-Star Publishing Co. bankruptcy cases, Judge Huennekens of the Bankruptcy Court for the Eastern District of Virginia issued a memorandum opinion which laid out the Court’s decision limiting the right of a secured creditor to credit bid.  The Court, pointing to a “perfect storm” of factors which required the “curtailment of . . . credit bid rights,” limited a loan purchaser’s asserted $39 million credit bid to $13.9 million.  The factors cited by the Court for limiting the bid included the creditor’s (i) less than fully-secured status; (ii) overly zealous loan-to-own … Continue Reading

Break-Up Fees Available to Lenders too?

Posted in US

139570838A break-up fee is typically used to encourage a party to act as the initial or “stalking horse” bidder in connection with a sale under section 363 of the Bankruptcy Code.  Under certain circumstances, a potential debtor may agree to pay a break-up fee to a prospective lender to entice the lender to provide the debtor with financing during its bankruptcy case.  Recently, the United States Bankruptcy Court for the District of Oregon analyzed whether a lender, who ultimately did not provide any financing to the debtor, was entitled to payment of its break-up fee in a chapter 11 case.  … Continue Reading

Carney v. CitiMortgage, Inc. — Not Everything is a Stern Problem

Posted in US

Books_92841092Since the Supreme Court of the United States shook up the bankruptcy litigation world with its decision in Stern v. Marshall, bankruptcy practitioners have been finding “Stern problems” everywhere they look.  A straightforward decision in Carney v. CitiMortgage, Inc., however, reminds us that, as broad as Stern may be, bankruptcy courts retain full authority to hear and consider “non-core” matters and to issue “proposed findings of fact and conclusions of law” for review by a district court.

 … Continue Reading

Recent Supreme Court Decisions Do Not Preclude Recharacterization Of Debt To Equity

Posted in US

handmoney_458058315A bankruptcy court, as a court of equity, is not bound by a party’s characterization of a transaction.  This is particularly true with respect to an insider’s advance to a debtor that, while nominally structured as loan, is in essence a disguised equity contribution.  In such cases, a bankruptcy court may acknowledge economic realities and recharacterize purported debt as equity.  Some have argued that a court’s ability to grant relief not expressly authorized under the Bankruptcy Code, such as debt recharacterization, has been severely limited, if not extinguished, by recent Supreme Court decisions.  That argument was recently rejected by the … Continue Reading

When Is “Good faith” Good Enough?

Posted in US

HandReach_184773918Under section 548(c) of the Bankruptcy Code, a “good faith” transferee may retain any interest received in an otherwise avoidable fraudulent transfer under the Bankruptcy Code “to the extent that such transferee … gave value to the debtor in exchange for such transfer.”  To successfully utilize this affirmative defense, a transferee must demonstrate that it (i) gave value to the debtor and (ii) took the transferred property in “good faith.”

While the Bankruptcy Code defines “value,” it does not define good faith, leaving the courts to determine what constitutes good faith without any Congressional guidance.  In response, courts have not … Continue Reading

In Pari Delicto Defense Bars Liquidating Trustee’s Aiding and Abetting Breach of Fiduciary Duty Claim

Posted in US

In the In re Mortgage Fund ’08 LLC case, the United States Bankruptcy Court for the Northern District of California dismissed a liquidating trustee’s adversary proceeding complaint alleging a claim for aiding and abetting breach of fiduciary duty against the lender to the debtor’s parent/manager.  The lender moved to dismiss the claim based on, among other things, the in pari delicto defense.  The in pari delicto defense bars one participant in an unlawful act from recovering damages from another participant in the unlawful act.   In dismissing the trustee’s complaint, the bankruptcy court rejected the liquidating trustee’s assertion that the … Continue Reading

Lehman Decision Highlights Quirk in Bankruptcy Code Subordination Provision

Posted in US

AA010878In a recent decision in the Lehman Brothers Inc. (LBI) SIPA proceeding, the bankruptcy court used Bankruptcy Code section 510(b) to subordinate a creditor’s claim – arguably a straight-forward matter of applying the statute’s language to the claim asserted. The statute, however, seems poorly equipped to address the scenario presented by creditor Claren Road and leads to a somewhat baffling result.

Consider the below:

Claren Road has a claim for breach of contract against LBI because LBI failed to buy, in its role as Claren Road’s broker, certain securities.

  • When those securities are bonds issued by LBI’s affiliate Lehman Brothers
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Creditors’ Trusts Continue to Sidestep the Section 546(e) Safe Harbor

Posted in US

CoinStack_154141152On the heels of the New York District Court’s decision in the Tribune Company fraudulent conveyance litigation, the New York Bankruptcy Court has similarly held that section 546(e) of the Bankruptcy Code, which protects settlement payments from fraudulent transfer claims brought by a bankruptcy trustee under the Bankruptcy Code, does not preclude individual creditors, or their designees, from recovering a fraudulent transfer under state law.  See Weisfelner v. Fund 1, Case No. 10-4609 (Bankr. S.D.N.Y. Jan. 14, 2014).  Accordingly, former shareholders may be required to return payments received on account of their equity holdings to creditors under state law, … Continue Reading

Foreign or Domestic, Licensees Have Rights Too

Posted in US

Patented_462446689In a United States bankruptcy case, licensees of intellectual property are granted certain protections under Bankruptcy Code section 365(n) if a debtor rejects (terminates) the license. These protections, however, are not guaranteed when the debtor licensor is subject to a foreign insolvency proceeding. Nevertheless, as previously reported in the February 2012 issue of the International Restructuring Newswire, the United States Bankruptcy Court for the Eastern District of Virginia awarded these section 365(n) protections on US patents licensed by a debtor whose German insolvency proceeding was recognized under Chapter 15. The Fourth Circuit recently affirmed the bankruptcy court’s decision, and … Continue Reading

Surprise! A Good Decision for Derivatives Counterparties in the Lehman Cases

Posted in US

Those active in the derivatives market may be familiar with the Bankruptcy Code’s “safe harbor” provisions. These provisions are intended to protect derivatives participants from some of the debtor-friendly effects of bankruptcy, all in the name of ensuring market stability if a large derivatives market firm were to fail. The safe harbor provisions have been put to the test in the Lehman bankruptcy cases, with several market-affecting decisions issued over the last four years. Last week, the bankruptcy court issued another important decision addressing the safe harbors. See Michigan State Housing Development Authority v. Lehman Brothers Derivative Prods. Inc., et Continue Reading

When is Cause, “Cause” Enough?

Posted in US

When companies file for bankruptcy, they receive the immediate protection of an “automatic stay,” which halts all creditors’ collection activity and lawsuits seeking to recover funds from the debtor. This automatic stay provides debtors with a much needed “breathing spell” to get themselves organized and on the way, if possible, to reorganization. However, creditors are not completely without recourse. If a creditor can show that “cause” exists to “lift” the stay as to its particular claim against the debtor, the bankruptcy court will lift the stay to allow the creditor to continue its action. “Cause” is not defined by the … Continue Reading

No Proof, No Claim: Delaware District Court Holds that Motion for Relief from Stay is Not an “Informal” Proof of Claim

Posted in US

160489343Those in the bankruptcy world know that proofs of claim are important. Most also know that the standards for proofs of claim are pretty low. The proof need not lay out all the intricacies of the creditor’s claim, but it instead must provide information sufficient to put the debtor on notice that a claim is being asserted against it, as well as the amount of the claim and the date such claim arose. Earlier this Fall, the Delaware courts reminded creditors that these proofs of claim standards, while low, do exist and cannot be ignored.… Continue Reading

In re Millard: An Example Of Recognition Under Chapter 15

Posted in US

Beach_76811912Chapter 15 of the Bankruptcy Code provides a relatively straightforward procedure to obtain recognition of a “foreign proceeding” in the United States. In particular, a foreign proceeding shall be recognized if (1) the foreign proceeding is a foreign main or foreign nonmain proceeding, (2) the petition for recognition was filed by a foreign representative and (3) the petition satisfies certain procedural requirements. Assuming the foregoing requirements are satisfied, a foreign proceeding shall be recognized, unless doing so would be “manifestly contrary to the public policy of the United States.” The United States Bankruptcy Court for the Southern District of New … Continue Reading

Buyer Beware: A Claim Purchased From A Potential Defendant To An Avoidance Action May Be Subject To Disallowance

Posted in US

Warning_183177566Section 502(d) of the Bankruptcy Code provides that “any claim of any entity from which property is recoverable” by a debtor’s estate shall be disallowed unless the entity has turned over such property to the estate. As we previously discussed in Can A Claims Purchaser Acquire Claims Free of Defects? in the International Restructuring Newswire (June 2012), the District Court for the Southern District of New York in Enron Corp. v. Springfield Associates, LLC (In re Enron Corp.), 379 B.R. 425 (S.D.N.Y. 2007) vacated an order of the bankruptcy court and held that a disability travels with a claim … Continue Reading

Sidestepping the Section 546(e) Safe Harbor

Posted in US

154228083A recent decision issued by the U.S. District Court for the Southern District of New York multi-district litigation In re Tribune Company may have altered the landscape for litigating avoidance actions and narrowed the Bankruptcy Code’s “safe harbor” protections against the avoidance of settlement or swap payments.

Section 546(e) of the Bankruptcy Code prevents a debtor from unwinding, or “avoiding,” certain securities and/or commodities transactions. This protection is referred to as a “safe harbor.” Most courts have interpreted this safe harbor broadly, protecting an ever-expanding scope of transactions. However, Tribune cuts against that trend, holding that individual creditors can sidestep … Continue Reading

Video Excerpts from Chadbourne Conference on Bankruptcy Examiners

Posted in Presentations, US

This past October, Chadbourne hosted a panel conversation among several bankruptcy experts on the topic of examiners in chapter 11 mega-cases.  We provided a synopsis of the program and its materials here.  Below is a selection of video clips from that program focusing on some of the key takeaways and panelist observations.  The panelists included in the videos are as follows:

  • Honorable Arthur J. Gonzalez, Senior Fellow at New York University School of Law, former Chief Judge of the Bankruptcy Court for the Southern District of New York and court-appointed examiner of Residential Capital, LLC;
  • David Dunn, Counsel, Distressed
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SCOTUS Will Hear Argument on Bankruptcy Court Authority in Fraudulent Transfer Litigation on January 14, 2014

Posted in US

As we discussed in a recent post on Executive Benefits Insurance Agency v. Arkison, the United States Supreme Court is preparing to address the constitutional limits on bankruptcy court authority in fraudulent transfer litigation. In granting certiorari in Arkison, the Supreme Court agreed to consider two questions:

  1. Can a bankruptcy court issue proposed findings of fact and conclusions of law in a “core” bankruptcy matter, such as a fraudulent transfer action under section 548 of the Bankruptcy Code?
  2. Can litigant conduct constitute “consent” to bankruptcy court jurisdiction on matters otherwise required to be decided by Article III courts?
Continue Reading

X Not Gon’ Give It To Ya: Recording Artist DMX Faces Conversion or Dismissal of Bankruptcy Proceeding

Posted in US

In today’s celebrity gossip section of the Zone of Insolvency blog, we are talking about recording artist and actor Earl Simmons, much more commonly known as DMX. DMX commenced a voluntary chapter 11 bankruptcy case on July 19, 2013. Since that time, according to pleadings filed by the U.S. Trustee for the Southern District of New York, DMX has consistently failed to provide required information or otherwise participate in his bankruptcy proceeding. This lack of cooperation has led the U.S. Trustee to seek the conversion of DMX’s chapter 11 case to chapter 7 or, alternatively, dismissal of DMX’s case.

The … Continue Reading