NOTABLE BUSINESS BANKRUPTCY DECISIONS OF 2014
ALLOWANCE/DISALLOWANCE/PRIORITY/DISCHARGE OF CLAIMS
Section 510(b) of the Bankruptcy Code provides a mechanism designed to preserve the creditor/shareholder risk allocation paradigm by categorically subordinating most types of claims asserted against a debtor by equity holders in respect of their equity holdings. However, courts do not always agree on the scope of this provision in undertaking to implement its underlying policy objectives. In In re Lehman Brothers Inc., 503 B.R. 778 (Bankr. S.D.N.Y. 2014), the bankruptcy court concluded that the provision is unambiguous, ruling that claims asserted against a debtor arising from securities issued by the debtor’s corporate parent are subject to subordination under section 510(b).
However, in In re Lehman Brothers Holdings Inc., 513 B.R. 624 (Bankr. S.D.N.Y. 2014), the court held that securities fraud claims relating to certain collateralized mortgage-backed securities (“MBS”) marketed by the debtors could not be subordinated under section 510(b) because the MBS were not securities “of the debtor or of an affiliate of the debtor.” Confronting an issue of first impression, the bankruptcy court wrote that “the court has endeavored here to retrofit a square peg, mortgage-backed securities, into a round hole, Section 510(b).” It ruled that “either under a plain reading of the statute or resorting to the stated purpose for enacting section 510(b) set forth in its legislative history, the MBS are not securities ‘of the debtor or of an affiliate of the debtor’ under Section 510(b) of the Bankruptcy Code.”
Prepayment, or “make-whole,” premiums have recently been a source of controversy in bankruptcy and appellate courts. In In re Denver Merchandise Mart, Inc., 740 F.3d 1052 (5th Cir. 2014), the Fifth Circuit ruled that a lender was not entitled to a make-whole premium because “[t]he plain language of the contract [did] not require the payment of the Prepayment Consideration in the event of mere acceleration.” According to the court, in the absence of clear contractual language stating otherwise, a lender’s voluntary decision to accelerate a loan generally acts as a waiver of any right to a makewhole premium.
In In re MPM Silicones, LLC, 2014 BL 250360 (Bankr. S.D.N.Y. Sept. 9, 2014) (memorializing bench ruling of Aug. 26, 2014), the court ruled that a default on prepetition notes triggered by a bankruptcy filing and automatic acceleration did not equate to prepayment of the notes and therefore, by the express terms of the indentures, the noteholders were not entitled to make-whole premiums. According to the court, although the parties could have contracted around this problem with clear and unambiguous language providing for the payment of a make-whole premium, even in the event of automatic acceleration due to a bankruptcy filing, such clear and unambiguous language was absent from the indentures. The court also denied the noteholders’ request to rescind the acceleration and thereby “resurrect the make-whole claim,” ruling that the automatic stay precluded deceleration.
In Davis v. Elliot Mgmt. Corp. (In re Lehman Bros. Holdings, Inc.), 508 B.R. 283 (S.D.N.Y. 2014), vacating In re Lehman Brothers Holdings Inc., 487 B.R. 181 (Bankr. S.D.N.Y. 2013), the district court vacated a bankruptcy court ruling that, despite the lack of explicit authority in section 503(b) of the Bankruptcy Code to pay the fees and expenses of individual official committee members as administrative expenses, such authority is provided by: (i) section 1123(b)(6), which provides that a chapter 11 plan may include any provision “not inconsistent” with applicable provisions of the Bankruptcy Code; and (ii) section 1129(a)(4), which provides that a court shall confirm a plan only if payments made under the plan for services or for costs and expenses in connection with a chapter 11 case are “reasonable.”
According to the district court, “§ 503(b)(3) and (4) glaringly exclude professional fee expenses for official committee members.” Moreover, the court ruled that the requirements of section 503(b) may not be circumvented by characterizing the payment of such fees as “permissive plan payments” authorized under sections 1123(b)(6) and 1129(a)(4). The court wrote that “neither the need for flexibility in bankruptcy cases, the consensual nature of [the plan provision] nor a bankruptcy court’s approval of a payment as ‘reasonable’ can justify a plan provision that is merely a backdoor to administrative expenses that § 503 has clearly excluded.”
In White v. Jacobs (In re New Century TRS Holdings, Inc.), 2014 BL 230334 (D. Del. Aug. 20, 2014), the Delaware district court vacated a bankruptcy court order approving the constitutional sufficiency of notice of the proof-of-claim filing deadline, or “bar date,” to unknown creditors by publication in The Wall Street
Journal and the Orange County Register. In so ruling, the district court concluded that: (i) notice in those publications was not reasonably calculated to apprise “less than sophisticated, focused readers” of the bar date; and (ii) 39 days’ notice was inadequate under the circumstances.
In In re Franklin Bank Corp., 2014 BL 200948 (D. Del. July 21, 2014), a Delaware district court confronted the apparent conflict between the priorities established by section 726(a) of the Bankruptcy Code for late-filed claims and a prepetition subordination agreement, the terms of which are ordinarily enforced in bankruptcy pursuant to section 510(a). The court vacated and remanded a bankruptcy court ruling that: (i) by filing its claims years after the claims bar date, a creditor waived its right to enforce the terms of prepetition subordination agreements; or, in the alternative, (ii) the late filings justified equitable subordination of the tardy creditor’s claims. According to the district court, the creditor’s failure to act in a timely manner did not rise to the level of a “clear manifestation of intent to relinquish a contractual protection,” and there was evidence of neither inequitable conduct nor harm to other creditors that would warrant equitable subordination of the late-filed claims.
Addressing what some would consider an inviolate bankruptcy right—a debtor’s right to the protections of the automatic stay under section 362 of the Bankruptcy Code—the bankruptcy court in In re Triple A&R Capital Investment, Inc., 2014 BL 283893 (Bankr. D.P.R. Oct. 9, 2014), ruled that a secured lender was entitled to relief from the stay because the debtor, in a court-approved cash collateral stipulation, generally ratified prepetition forbearance agreements between the parties that included a stay waiver provision. Notably, the court did not address the absence of language in the cash collateral stipulation unequivocally manifesting the debtor’s knowing and specific waiver of the stay.
AVOIDANCE ACTIONS/TRUSTEE’S AVOIDANCE AND STRONGARM POWERS
Not every payment made by a debtor on the eve of bankruptcy can be avoided merely because it appears to be preferential. Section 547 of the Bankruptcy Code provides several statutory defenses to preference liability. The Eighth Circuit addressed one such defense to preference avoidance—the “subsequent new value” exception—in Stoebner v. San Diego
Gas & Electric Co. (In re LGI Energy Solutions, Inc.), 746 F.3d 350 (8th Cir. 2014). In a matter of first impression, the court ruled that “new value” (either contemporaneous or subsequent) for purposes of section 547(c) can be provided by an entity other than the transferee.
An important defense in fraudulent transfer avoidance litigation is that the recipient provided value in exchange for the transfer and acted in “good faith.” Because the Bankruptcy Code does not define “good faith,” courts assessing the viability of a good-faith defense typically examine whether, on the basis of the specific circumstances, a transferee knew or should have known that a transfer was actually or constructively fraudulent. Although most courts agree that this test is an objective one, the Fourth Circuit’s ruling in Gold v. First Tenn. Bank N.A. (In re Taneja), 743 F.3d 423 (4th Cir. 2014), may have introduced an element of subjectivity into the analysis. The court held in a split decision that: (i) the same standard applies in assessing good faith under sections 548(c) and 550(b) of the Bankruptcy Code (both of which protect goodfaith transferees who provide “value” in exchange for a transfer or obligation); and (ii) a transferee bank met its burden of demonstrating good faith without introducing evidence of standard practices in the mortgage warehousing industry.
In Williams v. Federal Deposit Insurance Corp. (In re Positive Health Management), 769 F.3d 899 (5th Cir. 2014), the Fifth Circuit ruled that a “good faith transferee” in fraudulent transfer litigation “is entitled” to keep what it received “only to the extent” it gave “value.” The court reversed lower court rulings in part, narrowing their conclusion that the debtor had “received reasonably equivalent value in exchange for the debtor’s cash transfers.” In so ruling, the court of appeals disregarded the value of indirect economic benefits that had been relied upon by a good-faith lender as an affirmative defense to the trustee’s fraudulent transfer claim. Significantly, the Fifth Circuit rejected the reasoning of other lower courts which have ruled that the term “value” in section 548(c) means “reasonably equivalent value.” According to the Fifth Circuit, the two terms have “distinct meanings” and “[i]t is unlikely that the drafters of the Bankruptcy Code intended ‘value’ under section 548(c) to mean ‘reasonably equivalent value’ when the latter term is explicitly used in another subsection of the same statute (section 548(a)’s provision for constructive fraudulent transfers).”
The meaning of “unreasonably small capital” in the context of constructively fraudulent transfer avoidance litigation is not spelled out in the Bankruptcy Code. As a result, bankruptcy courts have been called upon to fashion their own definitions of the term. Nonetheless, the courts that have considered the issue have mostly settled on some general concepts in fashioning such a definition. In Whyte ex rel. SemGroup Litig. Trust v. Ritchie SG Holdings, LLC (In re SemCrude, LP), 2014 BL 272343 (D. Del. Sept. 30, 2014), a Delaware district court reaffirmed two such guiding principles: (i) a debtor can have unreasonably small capital even if it is solvent; and (ii) a “reasonable foreseeability” standard should be applied in assessing whether capitalization is adequate.
BANKRUPTCY ASSET SALES
In In re Fisker Automotive Holdings, Inc., 510 B.R. 55 (Bankr.
D. Del.), leave to app. denied, 2014 BL 33749 (D. Del. Feb. 7, 2014), certification denied, 2014 BL 37766 (D. Del. Feb. 12, 2014), a Delaware bankruptcy court limited a creditor’s ability to credit bid its debt in connection with the sale of the debtor’s assets. Although the court limited the amount of the credit bid to the distressed purchase price actually paid for the debt, the court focused on the prospect that the credit bid would chill bidding and the fact that the full scope of the underlying lien was as yet undetermined. The court also expressed concern as to the expedited nature of the sale, which in the court’s view was never satisfactorily explained.
In In re The Free Lance-Star Publishing Co. of Fredericksburg, Va., 512 B.R. 798 (Bankr. E.D. Va.), leave to app. denied, 512
B.R. 808 (E.D. Va. 2014), the court found “cause” under section 363(k) to limit a credit bid by an entity that purchased
$39 million in face amount of debt with the intention of acquiring ownership of the debtors. The court limited the credit bid in connection with a sale of the debtors’ assets under section 363(b) on the basis of its findings that: (i) the creditor’s liens on a portion of the assets to be sold had been improperly perfected; (ii) the creditor engaged in inequitable conduct by forcing the debtor into bankruptcy and an expedited section 363 sale process in pursuing its clearly identified “loan-to-own” strategy; and (iii) the creditor actively “frustrate[d] the competitive bidding process” and attempted “to depress the sales price of the Debtors’ assets.” The court accordingly limited the debt purchaser’s credit bid
to $14 million, the approximate value of the collateral that was subject to the creditor’s valid and perfected liens.
In In re Charles Street African Methodist Episcopal Church of Boston, 510 B.R. 453 (Bankr. D. Mass. 2014), the court denied in part a chapter 11 debtor’s motion to limit a credit bid on the basis that the secured creditor’s claims were subject to bona fide dispute because the debtor had filed counterclaims against the creditor which, by way of setoff, could have reduced the amount of the claims to zero. In finding that “cause” to limit the credit bid was lacking under section 363(k), the court explained that: (i) despite the debtor’s counterclaims, which did not relate to the validity of the secured creditor’s claims or liens, the creditor’s claims were “allowed” (a designation that the debtor did not dispute); and (ii) the claims were not likely to be exhausted entirely in a credit bid for the assets. The court rejected the debtor’s argument that “credit risk” associated with collecting on its counterclaims was a valid reason under the circumstances to limit credit-bidding rights. According to the court, “[The debtor] would be using a denial of credit bidding as, in essence, a form of prejudgment security, a purpose that I doubt it was intended to serve.”
In In re New Energy Corp., 739 F.3d 1077 (7th Cir. 2014), the Seventh Circuit ruled that a potential purchaser who considered buying, but ultimately did not bid on, a chapter 11 debtor’s assets, lacked standing to argue that the proposed sale was tainted by collusive bidding in violation of section 363(n) of the Bankruptcy Code. Among other things, that section authorizes a bankruptcy trustee to avoid collusive bankruptcy asset sales. The court reasoned that the potential bidder lacked standing to object to the sale because it did not ultimately bid on the debtor’s assets, it was not a creditor, and it was not harmed or impaired by the proposed sale. According to the court, the would-be bidder was more akin to a “public-inspired observer.”
Courts disagree as to whether the rights of a nondebtor lessee under section 365(h)(1) of the Bankruptcy Code to remain in possession upon rejection of the lease are effectively extinguished if the leased real property is sold free and clear of any “interest” under section 363(f). For example, in In re Spanish Peaks Holdings II, LLC, 2014 BL 64226 (Bankr. D. Mont. Mar. 10, 2014), the court concluded that a case-by-case, fact-intensive, totality-of-the-circumstances approach, rather than a bright-line rule, governs whether section 363(f) or section 365(h) should
prevail in any given situation. It ruled that, under the circumstances before it—involving well under-market leases between insiders without any effort by the lessees to protect themselves by seeking a nondisturbance agreement or by establishing a case for adequate protection—the free and clear sale eliminated the lessees’ section 365(h) rights.
In Dishi & Sons v. Bay Condos LLC, 510 B.R. 696 (S.D.N.Y. 2014), the bankruptcy court had adopted the majority rule, holding that the lessee’s rights under section 365(h) trump the right to sell the leased property free and clear under section 363(f). Alternatively, the bankruptcy court held that even if section 363(f) permits such a sale, the lessee is entitled to continued possession as “adequate protection” of its interest under section 363(e).
On appeal, the district court reached the same result but declined to endorse the majority interpretation. It ruled that section 365(h) does not give the nondebtor lessee absolute rights which take precedence over the trustee’s right to sell free and clear of interests. Rather, the court wrote that “[section 365(h)] clarifies that the lessee may retain its appurtenant rights notwithstanding the trustee’s rejection of the lease” and “[s]ection 363(f), in turn, authorizes the trustee to extinguish the lessee’s appurtenant rights—like any other interest in property—but only if one of five conditions [in section 363(f)] is satisfied with respect thereto.” The district court concluded that the bankruptcy court did not abuse its discretion in holding that the lessee was entitled to continued possession as adequate protection of its interest.
BANKRUPTCY COURT POWERS AND JURISDICTION
The U.S. Supreme Court’s 201 1 ruling in Stern v. Marshall, 132
S. Ct. 56 (2011), continues to complicate the day-to-day operation of bankruptcy courts scrambling to deal with a deluge of challenges—strategic or otherwise—to the scope of their “core” authority to issue final orders and judgments on a wide range of disputes. In Stern, the court ruled that, to the extent that 28
U.S.C. § 157(b)(2)(C) purports to confer authority on a bankruptcy court to finally adjudicate a bankruptcy estate’s state law counterclaim against a creditor who filed a proof of claim, the provision is constitutionally invalid.
In Executive Benefits Insurance Agency v. Arkison, 134 S. Ct. 2165 (2014), the Supreme Court attempted to address certain questions it had left unanswered in Stern concerning a bankruptcy
judge’s jurisdictional authority. A unanimous court held that, when a bankruptcy court is confronted with a claim which is statutorily denominated as “core” but is not constitutionally determinable by a bankruptcy judge under Article III of the
U.S. Constitution, the bankruptcy judge should treat such a claim as a non-core “related to” matter that the district court reviews anew. The ruling eliminates any supposed “statutory gap” created by Stern, but it leaves many potentially larger jurisdictional and constitutional questions unanswered.
“Structured dismissal” of a chapter 11 case following a sale of substantially all of the debtor’s assets has become increasingly common as a way to minimize cost and maximize creditor recoveries. However, only a handful of rulings have been issued on the subject, perhaps because bankruptcy courts are unclear as to whether the Bankruptcy Code authorizes the remedy. A Texas bankruptcy court added to this slim body of jurisprudence in In re Buffet Partners, L.P., 2014 BL 207602 (Bankr. N.D. Tex. July 28, 2014). The court ruled that sections 105(a) and 1112(b) of the Bankruptcy Code provide authority for such a structured dismissal, noting that the remedy “is clearly within the sphere of authority Congress intended to grant to bankruptcy courts in the context of dismissing chapter 11 cases.” The court in In re Biolitec, Inc., 2014 BL 355529 (Bankr. D.N.J. Dec. 16, 2014), ruled to the contrary, denying a motion for approval of a structured dismissal due to concerns regarding a court’s authority to grant such relief and the absence of certain protections otherwise provided in connection with dismissal or conversion of a case or confirmation of a chapter 11 plan.
CHAPTER 11 PLANS
In In re MPM Silicones, LLC, 2014 BL 250360, 43 (Bankr.
S.D.N.Y. Sept. 9, 2014) (memorializing bench ruling of Aug. 26, 2014), the bankruptcy court held that, based in part on the U.S. Supreme Court’s plurality opinion in Till v. SCS Credit Corp., 541 U.S. 465 (2004), the chapter 1 1 cram-down rules set forth in section 1 129(b)(2) of the Bankruptcy Code are satisfied by a plan which provides a secured creditor with a replacement note bearing interest at a risk-free base rate plus a risk premium that reflects the repayment risk associated with the debtors (but excluding any profits, costs, or fees). The court discounted the argument that a market rate of interest should be applied to the replacement notes, not-
ing that the Supreme Court had expressly rejected such an approach in Till. Moreover, the bankruptcy court was critical of courts that have read Till to endorse a market-rate approach in chapter 11 cases, where, unlike in Till (a chapter 13 case), an efficient debtor-in-possession (“DIP”) financing market exists. The MPM Silicones court emphasized that voluntary DIP loans and cram-down loans forced on unwilling creditors are completely different.
In determining whether nondebtor, third-party releases may be included in a chapter 11 plan, many courts examine the six factors enumerated in Class Five Nevada Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d 648 (6th Cir. 2002). These factors are: (1) there is an identity of interests between the debtor and the third party; (2) the nondebtor has contributed substantial assets to the reorganization;
(3) the release is essential to reorganization; (4) impacted classes have overwhelmingly voted to accept the plan; (5) the plan provides a mechanism to pay all, or substantially all, of the claims in the class or classes affected by the release; and (6) the plan provides an opportunity for those claimants who choose not to accept the releases to recover in full.
In In re National Heritage Foundation, Inc., 2014 BL 180181 (4th Cir. June 27, 2014), the Fourth Circuit ruled that a bankruptcy court did not err in concluding that third-party plan releases were unenforceable if they covered, among others, the debtor; the creditors’ committee; committee members; and any officers, directors, or employees of the debtor. According to the Fourth Circuit, the debtor failed to demonstrate that the facts and circumstances warranted third-party relief, which should be “cautious and infrequent.” Of the six Dow Corning factors, the bankruptcy court found that only one applied—an identity of interests between the debtor and the related parties.
In In re Genco Shipping & Trading Ltd., 513 B.R. 233 (Bankr.
S.D.N.Y. 2014), the bankruptcy court emphasized that nondebtor releases and exculpations “are permissible under some circumstances, but not as a routine matter” and that such releases are “proper only in rare cases.” In accordance with the Second Circuit’s ruling in Deutsche Bank AG
v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136 (2d Cir. 2005), the Genco court
explained, such provisions are permissible where: (i) they are important features of a chapter 11 plan; (ii) claims are “channeled” to a settlement fund, rather than extinguished; (iii) enjoined claims would indirectly impact the reorganization by way of indemnity or contribution; (iv) the released party provides substantial consideration; (v) the plan otherwise provides for full payment of released claims; or (vi) creditors consent. The Genco court approved thirdparty releases and exculpations in a chapter 11 plan by creditors who consented to the provisions and for third parties who provided substantial consideration to the reorganization.
In In re Lower Bucks Hosp., 2014 BL 186680 (3d Cir. July 3, 2014), the bankruptcy court had denied approval of a chapter 11 plan release provision that would have prohibited a class of bondholders from suing their trustee. The Third Circuit affirmed. Explaining that it had previously identified the “hallmarks” of permissible nonconsensual third-party releases as “fairness, necessity to the reorganization, and specific factual findings to support these conclusions,” the court of appeals ruled that, because the release provision was not adequately disclosed in the disclosure statement to the creditors who would have been affected by it, “we cannot conclude that the Release was exchanged for adequate consideration or was otherwise fair to the Bondholders.”
After a creditor or equity security holder casts its vote to accept or reject a chapter 1 1 plan, the vote can be changed or withdrawn “[f]or cause shown” in accordance with Rule 3018(a) of the Federal Rules of Bankruptcy Procedure. However, “cause” is not defined in Rule 3018(a), and relatively few courts have addressed the meaning of the term in this context in reported decisions. In In re MPM Silicones, LLC, 2014 BL 258176 (Bankr.
S.D.N.Y. Sept. 17, 2014), the court denied a motion filed by secured noteholders to change their votes that had been cast against the debtors’ chapter 11 plan. The court found that there was not sufficient “cause” to authorize the change in votes because it was “crystal clear that the requested vote change [was] not, in effect, a consensual settlement” and “[was] seeking to undo a choice that had originally been made” by sophisticated creditors after due deliberation.
In BOKF, N. A . v. JPMorgan Chase Bank, N. A . (In re MPM Silicones, LLC), 518 B.R. 740 (Bankr. S.D.N.Y. 2014), the court dismissed a lawsuit by senior-lien creditors alleging that junior-lien
creditors had breached an intercreditor agreement (the “ICA”) on shared collateral by taking and supporting certain actions adverse to the senior-lien creditors. The debtors’ chapter 1 1 plan provided that new equity would be distributed to juniorlien creditors, while senior-lien creditors would receive new debt secured by the same collateral. Because the seniors objected to the proposed treatment, the debtors sought a cram-down confirmation. The juniors supported the plan and objected to the payment of a make-whole premium to the seniors. The seniors sued the juniors for breaching the ICA by taking positions that were adverse to the seniors. Among other things, the court dismissed with prejudice the claim that the juniors’ opposition to the make-whole premium, as well as support for a cram-down plan, constituted taking action adverse to the senior-lien creditors in contravention of the ICA.
In In re Coastal Broadcasting Sys., Inc., 570 Fed. App’x 188, 2014 BL 174597 (3d Cir. June 23, 2014), the Third Circuit affirmed lower court rulings confirming a chapter 11 plan that had been approved, in part, with votes cast by a senior creditor on behalf of a junior creditor. The two creditors were party to a prepetition subordination and intercreditor agreement that provided for, among other things, assignment to the senior creditor of the subordinated creditor’s right to vote on a chapter 11 plan. Like the bankruptcy and district courts, the Third Circuit found that the subordination agreement “plainly allow[ed]” the senior creditor to vote the subordinated creditor’s debt in a chapter 11 liquidation or reorganization. “To argue otherwise,” the court wrote, “is a word warp of clear contract language.”
In In re Bay Club Partners-472, LLC, 2014 BL 125871 (Bankr. D. Or. May 6, 2014), the court held that a creditor possessed standing to seek dismissal of a chapter 11 case on the basis that the debtor—a limited liability company established as a special purpose entity—was not properly authorized to file for bankruptcy. The court went on to rule, however, that a restrictive covenant added at the creditor’s insistence to the debtor’s operating agreement prohibiting a bankruptcy filing was unenforceable and that the debtor accordingly was duly authorized to file for chapter 11 protection.
In In re Optim Energy, LLC, 2014 BL 132735 (Bankr. D. Del. May 13, 2014), the court denied a creditor’s motion for “derivative standing” to assert recharacterization, equitable subordination, and breach-of-fiduciary-duty claims against claimants that were senior secured lenders to, and holders of equity in, the debtors.
In assessing whether the underlying claims were colorable, the court declined to apply the prevailing multifactor test to determine whether recharacterization of debt as equity is appropriate. Instead, the court relied on recent Third Circuit precedent in adopting an intent-based approach.
CROSS-BORDER BANKRUPTCY CASES
The Second Circuit held as a matter of first impression in Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013), that section 109(a) of the Bankruptcy Code, which requires a debtor “under this title” to have a domicile, a place of business, or property in the U.S., applies in cases under chapter 15 of the Bankruptcy Code. The Second Circuit accordingly vacated and remanded a bankruptcy court order granting recognition under chapter 15 to a debtor’s Australian liquidation proceeding, concluding that the bankruptcy court erred in ruling that section 109(a) does not apply in chapter 15 cases and that it improperly recognized the debtor’s Australian liquidation proceeding in the absence of any evidence that the debtor had a domicile, a place of business, or property in the U.S.
On remand, the bankruptcy court ruled in In re Octaviar Administration Pty Ltd., 51 1 B.R. 361 (Bankr. S.D.N.Y. 2014), that the requirement of property in the U.S. should be interpreted broadly. Because the Australian debtor had causes of action governed under U.S. law against parties in the U.S. and also had an undrawn retainer maintained in the U.S., the court concluded that the debtor satisfied chapter 15’s U.S. property requirement.
In In re Suntech Power Holdings Co., Ltd., 2014 BL 322350 (Bankr. S.D.N.Y. Nov. 17, 2014), the bankruptcy court cited Octaviar in holding that even a quasi-bank account—an account owned by a third party which could be used to receive the foreign debtor’s funds—was sufficient to create “property of the debtor” in the U.S. and thus qualify the debtor for chapter 15 eligibility.
In In re Fairfield Sentry Limited, 484 B.R. 615 (Bankr. S.D.N.Y. 2013), the bankruptcy court ruled that it was not required to review a proposed sale of claims by a chapter 15 debtor brought against a debtor in a U.S. proceeding under the Securities Investor Protection Act (“SIPA”) because: (i) the sale
did not involve property “within the territorial jurisdiction of the United States,” such that it would be subject to review under section 363 of the Bankruptcy Code (in accordance with the rule for chapter 15 cases established by section 1520(a)(2)); and (ii) comity dictated deference to a foreign court’s judgment approving the sale. The district court affirmed on appeal, holding that “[i]t is not clear that Section 363 . . . applies,” but that, even if it did, the bankruptcy court’s denial of the motion challenging the sale was proper because “[c]ourts should be loath to interfere with corporate decisions absent a showing of bad faith, self-interest, or gross negligence.” See Krys v. Farnum Place, LLC (In re Fairfield Sentry Ltd.), 2013 BL 370732 (S.D.N.Y. July 3, 2013).
The Second Circuit reversed those rulings in Krys v. Farnum Place, LLC (In re Fairfield Sentry Ltd.), 768 F.3d 239 (2d Cir. 2014). According to the court of appeals, the sale of the SIPA claims was a “transfer of an interest of the debtor in property that is within the territorial jurisdiction of the United States” and therefore subject to review under sections 363 and 1520(a)(2), because the claim “is subject to attachment or garnishment and may be properly seized by an action in a Federal or State court in the United States.” Moreover, the Second Circuit held, the bankruptcy court erred when it gave deference to the foreign court’s approval of the sale of the claim because section 1520(a)(2) obligates a U.S. bankruptcy court to review such a sale under section 363. On January 13, 2015, the Second Circuit denied a motion by one of the purchasers of the claims for a rehearing en banc of the appeal.
EXECUTORY CONTRACTS AND UNEXPIRED LEASES
In A&F Enters., Inc. II v. Int’l House of Pancakes Franchising LLC (In re A&F Enters., Inc. II), 742 F.3d 763 (7th Cir. 2014), the Seventh Circuit examined, among other things, a franchiseelessee’s likelihood of success on the merits in considering a motion for a stay pending appeal of an order determining that its franchise agreement expired when a related nonresidential real property lease was deemed rejected pursuant to section 365(d)(4) of the Bankruptcy Code. In granting the stay, the Seventh Circuit wrote that “[t]here are powerful arguments in favor” of the franchisee’s argument that the later plan confirmation assumption or rejection deadline stated in section 365(d)(2) for most executor contracts and unexpired leases should apply to the related contracts.
In Lewis Bros. Bakeries, Inc. v. Interstate Brands Corp. (In re Interstate Bakeries Corp.), 751 F.3d 955 (8th Cir. 2014), the Eighth Circuit held that a trademark license agreement was not executory and thus could not be assumed or rejected because the license was part of a larger, integrated agreement which had been substantially performed by the debtor prior to filing for bankruptcy.
In In re Crumbs Bake Shop, Inc., 2014 BL 309030 (Bankr. D.N.J. Oct. 31, 2014), the court ruled that trademark licensees are entitled to the protections of section 365(n), notwithstanding the omission of “trademarks” from the Bankruptcy Code definition of “intellectual property.” The court also held that a sale of assets “free and clear” under section 363(f) does not trump or extinguish the rights of a third-party licensee under section 365(n), unless the licensee consents. A detailed discussion of the ruling can be found elsewhere in this issue of the Business Restructuring Review.
FINANCIAL CONTRACTS AND SETOFFS
In Weisfelner v. Fund 1 (In re Lyondell Chem. Co.), 503 B.R. 348 (Bankr. S.D.N.Y. 2014), the bankruptcy court held that the “safe harbor” under section 546(e) of the Bankruptcy Code for settlement payments does not preclude claims brought by a chapter 11 plan litigation trustee under state law to avoid as fraudulent transfers pre-bankruptcy payments to shareholders in a leveraged buyout of the debtor. By its ruling, the court contributed to a split among the courts in the Southern District of New York, aligning itself with the district court in In re Tribune Co. Fraudulent Conveyance Litig., 499 B.R. 310 (S.D.N.Y. 2013), and against the district court in Whyte v. Barclays Bank PLC, 494 B.R. 196 (S.D.N.Y. 2013).
In Grede v. FCStone, LLC, 746 F.3d 244 (7th Cir. 2014), the Seventh Circuit confirmed courts’ expansive view of the 546(e) safe harbor when it overruled a district court’s “equitable” approach to creditor distributions. The Seventh Circuit held that a trustee could not avoid a prepetition transfer to a favored customer (an investor in one of the debtor’s securities investment portfolios) as a constructively fraudulent transfer because the transferred funds came from the debtor’s sale of securities. The court reasoned that the distribution to the customer from its investment account, like the payment made by the purchaser to the debtor for securities the proceeds of which were deposited into the account, qualified as a “settlement payment” and was made “in connection with a securities contract.”
LITIGATION AND APPELLATE ISSUES
In TMT Procurement Corp. v. Vantage Drilling Co. (In re TMT Procurement Corp.), 764 F.3d 512 (5th Cir. 2014), reh’g denied, No. 13-20622 (5th Cir. Oct. 23, 2014), the Fifth Circuit vacated DIP financing orders of the bankruptcy court and district court, notwithstanding express findings by the lower courts that the lender had acted in good faith. Such findings ordinarily would have mooted any appeal in the absence of a stay pending appeal. The Fifth Circuit ruled that: (i) the appeals were not statutorily moot because, having been aware of an adverse claim to stock that was pledged as collateral for the DIP loan, the DIP lender lacked “good faith”; and (ii) the lower courts lacked subject-matter jurisdiction to enter the DIP financing orders.
In Beeman v. BGI Creditors’ Liquidating Trust (In re BGI, Inc.), 772 F.3d 102 (2d Cir. 2014), the Second Circuit considered, as a matter of first impression, whether the doctrine of “equitable mootness” applies to appeals impacting plan confirmation orders in both liquidating and reorganizing chapter 11 cases. The court ruled that it does and affirmed a lower court ruling dismissing an appeal because the appellants failed to overcome the presumption of mootness triggered by “substantial consummation” of a liquidating chapter 11 plan. A detailed discussion of the ruling can be found elsewhere in this issue of the Business Restructuring Review.
In In re City of Stockton, California, No. 2:12-bk-321 18 (Bankr.
E.D. Cal. Oct. 1, 2014), the bankruptcy court ruled that claims asserted by the California Public Employees’ Retirement System (CalPERS) for pension obligations could be impaired under a chapter 9 plan of adjustment for Stockton. According to the court, the bankruptcy clause of the U.S. Constitution (U.S. Const. art. I § 8, cl. 4) authorizes Congress to make laws that impair contracts. Therefore, while a state cannot make a law impairing the obligation of contract, Congress has properly done so in the Bankruptcy Code under the Constitution’s contracts clause (U.S. Const. art. I § 10, cl. 1). Even if Stockton’s retirees held vested property interests, the court wrote, “the shield of the Contracts Clause crumbles in the bankruptcy arena.” However, on October 30, 2014, the court confirmed a plan of adjustment for Stockton that left pension obligations unimpaired (because Stockton was not terminating its pension plans) but provided almost no recovery to certain other unsecured creditors.