Recent Developments in Bankruptcy Law, April 2016 (Covering cases reported through 545 B.R. 785 and 810 F.3d 860) RICHARD LEVIN Partner +1 (212) 891-1601 firstname.lastname@example.org © Copyright 2016 Jenner & Block LLP. 353 North Clark Street Chicago, IL 60654-3456. Jenner & Block is an Illinois Limited Liability Partnership including professional corporations. Attorney Advertising. Prior results do not guarantee a similar outcome. This update relates to general information only and does not constitute legal advice. Facts and circumstances vary. We make no undertaking to advise recipients of any legal changes or developments. Recent Developments in Bankruptcy Law, April 2016 TABLE OF CONTENTS 1. AUTOMATIC STAY ...................................1 1.1 Covered Activities ..............................1 1.2 Effect of Stay......................................1 1.3 Remedies ...........................................1 2. AVOIDING POWERS ................................1 2.1 Fraudulent Transfers..........................1 2.2 Preferences ........................................3 2.3 Postpetition Transfers ........................3 2.4 Setoff ..................................................4 2.5 Statutory Liens ...................................4 2.6 Strong-arm Power ..............................4 2.7 Recovery ............................................4 3. BANKRUPTCY RULES.............................4 4. CASE COMMENCEMENT AND ELIGIBILITY ..............................................4 4.1 Eligibility .............................................4 4.2 Involuntary Petitions...........................5 4.3 Dismissal............................................5 5. CHAPTER 11.............................................5 5.1 Officers and Adminisration .................5 5.2 Exclusivity...........................................6 5.3 Classification ......................................6 5.4 Disclosure Statement and Voting.......6 5.5 Confirmation, Absolute Priority...........6 6. CLAIMS AND PRIORITIES .......................7 6.1 Claims ................................................7 6.2 Priorities .............................................8 7. CRIMES .....................................................8 8. DISCHARGE..............................................8 8.1 General...............................................8 8.2 Third-Party Releases .........................8 8.3 Environmental and Mass Tort Liabilities ............................................8 9. EXECUTORY CONTRACTS..................... 8 10. INDIVIDUAL DEBTORS............................ 9 10.1 Chapter 13 ......................................... 9 10.2 Dischargeability.................................. 9 10.3 Exemptions ........................................ 9 10.4 Reaffirmations and Redemption ........ 9 11. JURISDICTION AND POWERS OF THE COURT ...................................................... 9 11.1 Jurisdiction ......................................... 9 11.2 Sanctions ......................................... 10 11.3 Appeals ............................................ 10 11.4 Sovereign Immunity ......................... 11 12. PROPERTY OF THE ESTATE................ 11 12.1 Property of the Estate ...................... 11 12.2 Turnover........................................... 11 12.3 Sales ................................................ 11 13. TRUSTEES, COMMITTEES, AND PROFESSIONALS.................................. 11 13.1 Trustees ........................................... 11 13.2 Attorneys.......................................... 12 13.3 Committees...................................... 13 13.4 Other Professionals ......................... 13 13.5 United States Trustee ...................... 13 14. TAXES..................................................... 13 15. CHAPTER 15—CROSS-BORDER INSOLVENCIES...................................... 13 Recent Developments in Bankruptcy Law, April 2016 1. AUTOMATIC STAY 1.1 Covered Activities 1.2 Effect of Stay 1.2.a Section 108(c) tolls period for enforcement of a time-limited judicial lien. After obtaining a California state court judgment, the creditor obtained from the court an Order to Appear for Examination (“ORAP”). Under California law, service on the debtor of the ORAP creates a judicial lien on all the debtor’s personal property. The lien expires after one year unless the state court renews it. Using the ORAP lien, the creditor executed on some of the debtor’s assets. Before the one-year period expired, the debtor filed a bankruptcy petition. The trustee eventually took possession of the liened assets. More than one year after the creditor served the ORAP, the trustee sought to avoid the lien, asserting it had expired. Section 108(c) provides, “if applicable nonbankruptcy law … fixes a period for commencing or continuing a civil action … and such period has not expired before the date of the filing of the petition, the such period does not expire … until 30 days after notice of the termination or expiration of the stay under section 362.” Enforcement of a judgment is a continuation of the civil action that led to the judgment. The automatic stay prevents the creditor from taking the liened property. Therefore, section 108(c) applies, and the creditor does not need to renew its lien while the automatic stay is in effect. Good v. Daff (In re Swintek), 543 B.R. 303 (9th Cir. B.A.P. 2015). 1.3 Remedies 1.3.a Trustee is not liable to secured creditor who did not request adequate protection for property’s decrease in value. The bank had an undersecured lien on the debtor’s manufacturing facility. So as not to deplete unencumbered assets for the secured creditor’s benefit and with the secured creditor’s consent, the trustee determined not to purchase property insurance or to provide physical security to the property. Over the period of several years the trustee retained the property, scrappers took most of the metals from the facility, leaving it in serious disrepair. The trustee then abandoned the property. The purchaser of the secured claim sued the trustee for failing to protect and preserve property of the estate. A trustee is not required to expend unencumbered assets for a secured creditor’s benefit, and a secured creditor is not entitled to adequate protection against decrease in collateral value unless the creditor timely requests protection. Therefore, the trustee is not liable to the claim purchaser for any decrease in value of the property. New Prods. Corp. v. Tibble (In re Modern Plastics Corp.), 543 B.R. 818 (Bankr. W.D. Mich. 2016). 2. AVOIDING POWERS 2.1 Fraudulent Transfers 2.1.a Section 546(e) preempts state fraudulent transfer law as applied to settlement payments through a financial institution. The debtor failed shortly after a leveraged buyout. The debtor in possession pursued actual fraudulent transfer claims arising from the LBO against former shareholders but did not pursue constructive fraudulent transfer claims because of section 546(e), which prohibits “the trustee” from avoiding under section 544 or section 548 (other than section 548(a)(1)(A)—actual fraudulent transfer) a settlement payment made through a financial institution. After section 546(a)’s two-year avoiding power statute of limitation expired, creditors obtained stay relief and sued former shareholders in non-bankruptcy courts under state fraudulent transfer laws. Federal law impliedly preempts state law when “state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” There is a presumption against implied preemption where Congress legislates in an area recognized as traditionally one of state law. Congress has plenary authority over bankruptcy and related creditors’ rights. The Bankruptcy Code and the bankruptcy courts control all aspects of a bankruptcy case’s conduct, including stay relief to permit creditors to bring state law fraudulent 1 Recent Developments in Bankruptcy Law, April 2016 transfer claims. Therefore, the presumption against implied preemption does not apply. Creditors’ fraudulent transfer claims vest in the trustee under section 544(b). The avoiding power statute of limitation’s expiration does not indicate any intention to revest the claims in the creditors, nor does the imposition of the automatic stay suggest that section 544(b)’s vesting of the claims in the trustee causes the claims to revert to the creditors when the stay terminates. The vesting of the claims in the trustee is intended to concentrate and simplify proceedings; revesting claims in creditors would unwind that effect. Moreover, in the context of section 546(e) claims, permitting the trustee to pursue actual fraudulent transfer claims and the creditors to puruse constructive fraudulent transfer claims would create conflict. These issues dispel a clear textual basis for section 546(e) not to restrict post-bankruptcy creditor state law fraudulent transfer claims and make the scope of section 546(e)’s language ambiguous, permitting resort to legislative history and purpose to contrue it. Congress enacted section 546(e) to protect securities markets by bringing stability, certainty and finality to securities transactions. Permitting post-bankruptcy creditor state law fraudulent transfer actions prohibited to the trustee under section 546(e) would undermine that purpose. Therefore, section 546(e) prohibits such actions. In re Tribune Co. Fraudulent Conveyance Litigation, ___ F.3d ___, 2016 U.S. App. LEXIS 5787 (2d Cir. Mar. 29, 2016). 2.1.b Stay relief resolved any conflict between creditor state law fraudulent transfer actions and the trustee’s similar claims against the same defendants. The debtor failed shortly after a leveraged buyout. The debtor in possession pursued actual fraudulent transfer claims arising from the LBO against former shareholders but did not pursue constructive fraudulent transfer claims because of section 546(e), which prohibits “the trustee” from avoiding under section 544 or section 548 (other than section 548(a)(1)(A)—actual fraudulent transfer) a settlement payment made through a financial institution. After section 546(a)’s two-year avoiding power statute of limitation expired, creditors sued former shareholders in non-bankruptcy courts under state fraudulent transfer laws. Without resolving the question of whether the creditors had regained the right to prosecute such actions, the bankruptcy court granted stay relief to permit them to do so, and the confirmed plan authorized them to pursue the actions. Whether or not the automatic stay prohibited the creditors from bringing the state law fraudulent transfer actions while the debtor in possession (and a liquidating trust under the plan) pursued federal actual fraudulent transfer claims, the bankruptcy court’s order granting stay relief and the plan provision authorizing the creditors to bring the actions removed any prohibition on their doing so. The stay relief order resolved any concern that their action would interfere with the litigation trustee’s action. In re Tribune Co. Fraudulent Conveyance Litigation, ___ F.3d ___, 2016 U.S. App. LEXIS 5787 (2d Cir. Mar. 29, 2016). 2.1.c Section 548(a)(1) applies to a Belgian company’s dividend to its Lxembourg shareholder. The debtor was formed through a Belgian company’s leveraged buyout of a U.S. company. After the companies signed the acquisition agreement but about two weeks before closing the acquisition, the Belgian acquirer dividended substantial funds to its Luxembourg shareholder, under the direction of its ultimate shareholder, an individual operating in and conducting the business from the United States. The trustee of the liquidating trust that was created under the debtor’s chapter 11 plan sued to avoid and recover the dividend from the Belgian company’ shareholder as a fraudulent transfer. A court must first determine whether a complaint attempts to apply a statute extraterritorially and then whether Congress intended the statute to apply extraterritorially. In the first step, the court focuses on the specific area of Congressional concern in enacting the statute. In this context, the focus is on the nature of the transfer. A court shold not consider a transfer to be domestic solely based on some connection with the United States or its territory. Here, though the direction to make the transfer ultimately originated in the United States, was connected to an acquisition of a U.S. company and had an effect in the United States of rendering a U.S. company insolvent, those connections are insufficient to make the transfer domestic. Section 548(a)(1) permits the trustee to avoid a transfer of an inerest of the debtor in property. Section 541(a)(1) includes in property of the estate all interests of the debtor in property, wherever located. Congress’ clear intent in including within property of the estate an interest in property located outside the United States implies that Congress similarly intended that section 2 Recent Developments in Bankruptcy Law, April 2016 548(a) reach transfers of property outside the United States. Therefore, section 548(a)(1) applies extraterritorially in this case to permit the trustee to avoid the Belgian company’s dividend to its Luxembourg shareholder. Weisfelner v. Blavatnik (In re Lyondell Chemical Co.), 543 B.R. 127 (Bankr. S.D.N.Y. 2016). 2.1.d A lease termination is a transfer. Before its chapter 11 case, the debtor terminated two profitable store leases without any consideration, returning the properties to the landlord. In the chapter 11 case, the creditors committee sued the landlord to avoid the transfers as preferences or fraudulent transfers and to recover the leases’ value. In the meantime, the landlord relet the properties to a new tenant. The Code defines “transfer” to include “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with (i) property; or (ii) an interest in property.” A leasehold is an interest in property. Therefore, the lease terminations were transfers that are subject to avoidance under sections 547 and 548. Section 365(c)(3) prohibits assumption or assignment of an unexpired lease that was terminated before the order for relief. This provision does not restrict the committee’s authority to avoid the lease terminations, because the committee’s action seeks recovery of the leases’ value, not recovery of the leases to assume or assign them. Official Committee of Unsecured Creditors v. T.D. Investments I, LLP (In re Great Lakes Quick Lube LP), ___ F.3d ___, 2016 U.S. App. LEXIS 4560 (7th Cir. Mar. 11, 2016). 2.2 Preferences 2.2.a Terminated executive is not an insider. The debtor’s board told its president it was terminating his service on February 1 but for public relations reasons asked him to resign. He did not have an employment or severance agreement. That night, he sent an email from his office with his proposal of what the company should pay upon his resignation, he cleaned out his office and he never returned. The next day, his successor began performing his duties. The board agreed to most of his requests and embodied the agreement in a document signed February 13 and modified in May. The agreement stated his resignation date was March 1. Over the next year, the debtor made numerous payments under the agreement. The debtor filed its bankruptcy petition on February 15 of the next year. Section 548(a)(1)(B)(ii)(IV) permits recovery of certain transfers made or incurred to or for the benefit of an insider. Section 101(31) defines “insider” to include an officer or person in control of the debtor (statutory), and the courts have included anyone who has a sufficiently close relationship such that his conduct should be subject to greater scrutiny (nonstatutory). The debtor’s informing the president that it wished to terminate him and its request for his resignation, combined with his exit that day, terminated his role as an officer. His initial proposal of separation terms did not render him a person in control, even though the board accepted most of the terms. Therefore, he was neither a statutory nor a nonstatutory insider when the agreement was reached or when he received the payments. Weinman v. Walker (In re Adam Aircraft Indus., Inc.), 805 F.3d 888 (10th Cir. 2015). 2.3 Postpetition Transfers 2.3.a Retroactive substantive consolidation without notice does not permit avoidance of preconsolidation transfer. An individual debtor managed and sold assets of his LLC in an arms’-length transaction during the debtor’s chapter 12 case. The case was later converted to chapter 7. Without notice to the asset purchaser, the trustee successfully moved for substantive consolidation of the debtor’s estate with the LLC, retroactive to the petition date. The trustee sought to avoid the sale under section 549(a), which permits the ttrustee to avoid a transfer of property of the estate that was made without court approval. Section 549(a) does not include a good faith exception for personal property transfers, as it does for some real property transfers. A party who did not receive notice of an order that affects him may later challenge the order. And substantive consolidation is an equitable doctrine, so one seeking to enforce it must do equity by at least giving notice to one whose rights could be affected by the retroactive consolidation order. Under the circumstances, it would be inequitable and a denial of due process to allow the trustee to avoid the assets sale. Gugino v. Kerslake (In re Clark), 543 B.R. 16 (Bankr. D. Ida. 2015). 3 Recent Developments in Bankruptcy Law, April 2016 2.4 Setoff 2.5 Statutory Liens 2.6 Strong-arm Power 2.7 Recovery 3. BANKRUPTCY RULES 3.1.a Bankruptcy Rules apply to withdrawn proceeding in the district court. The bankruptcy court dismissed an involuntary petition but retained jurisdiction to hear claims under section 303(i)(1) for costs and attorneys' fees and section 303(i)(2) for actual and punitive damages. The alleged debtor filed an adversary proceeding in the bankruptcy court under both provisions against the petitioning creditor, who demanded a jury trial in the district court and moved to withdraw the reference. The district court withdrew the section 303(i)(2) claim for damages, but not the section 303(i) claim for costs and fees. The bankruptcy court awarded damages, and in a separate jury trial, the jury found the petitioning creditor liable for emotional distress, loss of reputation and loss of wages damages and for punitive damages. The petitioning creditor filed a motion under Fed. R. Civ. Proc 50(b) for judgment as a matter of law 28 days after the district court entered a final judgment. Rule 50(b) allows the movant 28 days after entry of judgment to file the motion; Bankruptcy Rule 9015 makes Rule 50(b) apply "in cases and proceeding, except [any motion] shall be filed no later than 14 days after the entry of judgment.” Bankruptcy Rule 1001 provides the Bankruptcy Rules "govern procedure in cases under title 11.” The Advisory Committee Note confirms that they apply in proceedings in the district court. Therefore, the Rule 50(b) motion was untimely. The bifurcation of the adversary proceeding by the withdrawal of the reference only as to the damages portion severs the two proceedings, so the district court's action was independent of the bankruptcy court's action. As a result, the petitioning creditor could not rely on the bankruptcy court's later entry of judgment in the costs and fees proceeding as a trigger date for the Rule 50(b) motion. Rosenberg v. DVI Receivables XIV, LLC, ___ F.3d ___, 2016 U.S. App. LEXIS 6433 (11th Cir. Apr. 8, 2016). 4. CASE COMMENCEMENT AND ELIGIBILITY 4.1 Eligibility 4.1.a LLC operating agreement authorizing bank member to veto bankruptcy petition is unenforceable. After the single asset real estate LLC defaulted on its bank loan, the bank required it to amend its operating agreement to designate the bank itself as a “Special Member” of the LLC without any economic interest or voting rights except as to a “Material Action,” which included authorizing a bankruptcy petition. Authorizing a Material Action required a unanimous member vote, including the consent of the Special Member, which it could deny solely in its own interest and without regard to any fiduciary duty to the borrower LLC. When the LLC defaulted again, the remaining members authorized a chapter 11 petition, and the LLC filed. State law governs what authorization is necessary to file a bankruptcy petition. If the petition is not properly authorized, the bankruptcy court will dismiss. But bankruptcy law will not enforce a contract, even a a corporate control document, by which a debtor waives its right to file a bankruptcy petition, because such an agreement is against public policy. A bankruptcy remote structure requiring the consent of a special director (or LLC member) to the filing of a petition is enforceable if the director is bound by a fiduciary duty to the corporate entity. Here, however, the Special Member was not so bound but was authorized to act contrary to the LLC’s interest. As such, the provision amounted to an unenfroceable contractual prohibition on a bankruptcy petition. The court denies the bank’s motion to dismiss the case. In re Lake Mich. Beach Pottawattamie Resort LLC, ___ B.R. ___, 2016 Bankr. LEXIS 1107 (Bankr. N.D. Ill. Apr. 5, 2016). 4 Recent Developments in Bankruptcy Law, April 2016 4.2 Involuntary Petitions 4.2.a Court may dismiss one-creditor involuntary case for bad faith. The debtor’s single creditor held a judgment against the debtor. The debtor’s sole asset was an apartment he owed in tenancy by the entirety with his wife. The creditor filed a single-creditor involuntary case with the express purpose of using the trustee’s power to sell entireties property to collect the judgment, which is a remedy not available under state law. A court may dismiss a case, whether voluntary or involuntary, if it is filed in bad faith or for “unenumerated cause.” Here, there was only a single creditor in this two-party dispute. The creditor had ordinary remedies in state court under state law. The case implicated none of the collective action purposes and principles central to creditors’ rights in bankruptcy, and no other creditors needed bankruptcy protection. A creditor may not use the bankruptcy court as “a rented battlefield” to continue pursuit of enforcement of a judgment. Under the circumstances, the court dismisses the case either for bad faith or for unenumerated cause. In re Murray, 543 B.R. 484 (Bankr. S.D.N.Y. 2016). 4.3 Dismissal 5. CHAPTER 11 5.1 Officers and Adminisration 5.1.a Debtor in possession may modify Coal Act-governed retiree benefits in a liquidating case. The debtor operated coal mines with union labor. The 1992 Coal Act established vehicles for retiree benefit payments and governed their operation. In its chapter 11 case, the debtor in possession unsuccessfully sought an internal reorganization. It then put its mines up for sale. The only bidder required the debtor in possession to reject its collective bargaining agreements and its retiree benefits. After reaching agreement on a sale of all assets that would continue in operation, the debtor in possession moved for approval of its rejection of the retiree benefits. Section 1114 permits a debtor in possession to modify retiree benefits if, among other things, the “modification is necessary to permit the reorganization of the debtor.” Liquidation is not limited to chapter 7; chapter 11 permits a liquidating plan. As a result, courts interpret “reorganization” to include any form of debt adjustment, including a going concern sale of the estate’s assets. Courts apply section 1113 “contextually” rather than literally where the debtor must pursue a going concern sale, consistent with Congressional intent that section 1114 serve a rehabilitative purpose. The Coal Act requires payment of retiree benefits. Section 1114 applies to statutory as well as contractual retiree benefits. It is a narrow exception to the Coal Act’s broad goals and applicability. Therefore, the debtor in possession may modify retiree benefits otherwise protected by the Coal Act if all other section 1114 requirements are met. In re Walter Energy, Inc., 542 B.R. 859 (Bankr. N.D. Ala. 2015). 5.1.b Environmental parties do not have standing to object to an estate’s envrionmental settlement. The debtor coal mining company had self-bonded its reclamation obligations. Shortly before the debtor’s chapter 11 filing, the state environmental department revoked the debtor’s self-bonding authority and threatened to revoke its mining permits. The debtor in possession and the state negotiated a settlement under which the estate posted collateral equal to about 10% of the prior self-bonded amount to secure the reclamation obligations and sought court approval of the settlement. Several environmental organizations, who did not have claims against the debtor, objected to the settlement’s approval. To object to a settlement, an entity must have either Article III or section 1109(b) standing. Article III standing requires a showing of a concrete and particularized injury in fact. The environmental parties showed no such injury, at least in part because the debtor had not yet failed to comply with its reclamation obligations. Section 1109(b) permits a party in interest to raise and be heard on an issue in the case. A party in interest is an entity whose pecuniary interests are directly affected by the case. Because the envionrmental parties did not have any claims and could not show any other means by which the case affected their pecuniary interests, they are not parties in interest and do not have standing to object to the settlement. In re Alpha Nat. Res., Inc., 544 B.R. 848 (Bankr. E.D. Va. 2016). 5 Recent Developments in Bankruptcy Law, April 2016 5.2 Exclusivity 5.3 Classification 5.4 Disclosure Statement and Voting 5.4.a A claim transfer from an insider does not confer insider status on the transferee. The real estate LLC debtor had two principal creditors, a secured creditor and its managing member, which held a $2.76 million unsecured claim. After bankruptcy, one of the five managing member directors approached a close personal and business friend and offered on behalf of the managing member to sell its claim to him for $5,000. The claim buyer did not live or share expenses with his director friend, and neither controlled the other in their business relationships. Before the purchase, the buyer had no relationship with the managing member or its other directors and knew little of its business. After the sale, the debtor proposed a plan that distributed $30,000 on the unsecured claim. The buyer did not know the plan’s terms before his purchase, which he made as a speculative investment. The buyer accepted the plan, creating an impaired accepting class; the secured creditor did not accept and objected to confirmation. Section 1129(a)(10) requires as a confirmation condition that at least one impaired class accept the plan, not counting any insider’s acceptances. Section 101(31) defines insider to include persons with certain defined formal relations with the debtor, generally one with a sufficiently close formal relationship to warrant special treatment or scrutiny. A non-statutory insider is one who has any other sufficiently close relationship to fall within the purpose of the definition. “Insider” is a noun that describes a person, not an adjective that describes a claim. Insider status applies only to specified persons and does not accompany a claim when transferred from an insider to another. Here, the close personal relationship between the director and the buyer did not bring the buyer within the nonstatutory insider concept, because the purchase transaction was at arms’ length, and neither party controlled the other. Therefore, the court may count buyer’s acceptance in applying section 1129(a)(10). U.S. Bank N.A. v. The Village at Lakeridge, LLC (In re The Village at Lakeridge, LLC), ___ F.3d ___, 2016 U.S. App. LEXIS 2307 (9th Cir. Feb. 8, 2016). 5.5 Confirmation, Absolute Priority 5.5.a Artificial impairment constitutes bad faith. The debtor owned a single apartment building subject to an undersecured $8.6 million mortgage. Its only other creditors were its former lawyer and accountant, owed a total of $2,400. The secured lender offered to pay them in cash in full, but both refused payment. Its plan proposed payment of the “minor creditors” over 60 days, on the grounds that its cash flow could not safely pay them off on the effective date, even though its projections showed over $71,000 net income per month. The secured creditor did not accept the plan and objected to confirmation. The minor creditors class accepted. Section 1124(1) provides that a class is impaired if the plan alters the holders’ legal, equitable, or contractual rights. Section 1124 does not consider motive, only result. Section 1129(a)(3) requires as a confirmation condition that a plan be proposed in good faith. A court should examine motive under section 1129(a)(3), not section 1124. Here, the debtor’s inconsistent position on its payment ability, the minor creditors’ refusal to accept full payment immediately from the secured creditors and their close relationship with the debtor support a finding that the artifical impairment was “an artifice to circumvent the purposes of section 1129(a)(1) (one impaired accepting class) and that the debtor did not propose the plan in good faith. Village Green I, GP v. Fed. Nat’l Mortgage Assoc. (In re Village Green I, GP), 811 F.3d 816 (6th Cir. 2016). 5.5.b Section 506(a) requires use in a plan of foreclosure value if higher than the value under the debtor's proposed use. The debtor developed an affordable housing project. HUD guaranteed its $8.5 million first mortgage loan but imposed restrictions to require the project be used for affordable housing. The debtor obtained second and third mortgage loans from local and state governments, which imposed similar restrictions. The deed noted the restrictions, and they "ran with the land," but they also provided that a senior mortgagee's foreclosure sale would pass title free of the restrictions. After default, HUD paid the first mortgage lender, acquired the loan and sold the loan without the deed restrictions. The loan buyer began foreclosure proceedings, but the debtor stayed them with a chapter 11 petition. The debtor proposed a reorganization plan 6 Recent Developments in Bankruptcy Law, April 2016 based on a new investment of $1.2 million from an unrelated third party. The bankruptcy court valued the property at $3.9 million with the restrictions. Evidence suggested the value without the restrictions would be about $7.5 million. Section 506(a) requires the court to value property based on the proposed use or disposition of the property. Associates Commercial Corporation v. Rash, 520 U.S. 953 (1997), requires use of replacement or going concern value rather than foreclosure value, which is typically lower, if the debtor retains and uses the property under the plan. Rash interpreted "use" to mean the alternative to "surrender;" it did not suggest that the debtor's voluntary restrictions on post-reorganization use should limit the property's valuation. In addition, here, use value is less than foreclosure value and substantially less than replacement value. For these reasons, the court should value the property free of the restrictions that would be released upon foreclosure and should therefore deny confirmation based on the lower restricted use value. First Southern Nat'l Bank v. Sunnyslope Housing Ltd. P'shp (In re Sunnyslope Housing Ltd. P'shp), ___ F.3d ___, 2016 U.S. App. LEXIS 6429 (9th Cir. Apr. 8, 2016). 5.5.c Plan that uses “rising tide” distribution method does not meet section 1129 confirmation requirements. The debtor conducted a Ponzi scheme. The trustee proposed a plan that allowed all Ponzi investors’ claims that had not already been allowed by settlement or judgment at their net investment amounts (cash invested minus actual prepetition distributions, whether or not characterized as return of principal) and placed all those claims in the same class. The plan proposed a “rising tide” distribution formula for claims in that class: creditors would recover the same percentage of their original investments with the debtor regardless of when they received payments, whether prepetition by return of principal or under the plan. Three Ponzi investors rejected the plan, and the Creditors Committee objected to confirmation. Section 1123(a)(4) requires that a plan provide equal treatment for all claims in a class, unless a holder accepts a less favorable treatment. Treatment is equal based on the allowed claim amount and whether the distribution is under the plan. Equalizing based on prepetition distributions does not satisfy the requirement. Section 1129(a)(7) requires that each creditor receive or retain under the plan at least as much as the creditor would receive or retain in a chapter 7 case on account of its allowed claim. A creditor with a net investment loss who received more prepetition than the “tide level” would receive nothing under a rising tide plan but would receive a distribution in a chapter 7 case, and what the creditor “retains” in its prepetition distribution is not on account of its allowed claim. Therefore, the rising tide plan does not satisfy the liquidation value test for any non-accepting creditor. Accordingly, the court denies confirmation. In re The Vaughn Co., Realtors, 543 B.R. 325 (Bankr. D.N.M. 2015). 6. CLAIMS AND PRIORITIES 6.1 Claims 6.1.a Pendency interest on an oversecured claim is presumptively at the default rate. The debtor’s mortgage loan provided for interest after default at a higher rate. The loan matured prepetition. The property was worth more than the loan amount. The debtor proposed a plan that would allow the claim at the petition date amount plus interest accrued at the non-default rate during the case and would pay the claim over five years. Because the plan did not propose cure and reinstatement, case law that permits a cure to reset matters as they were before the default and therefore pay the pre-default interest rate does not apply. Instead, section 506(a) applies. It allows postpetition interest on a secured claim to the extent the collateral is worth more than the debt, but it does not specify the rate. State law generally governs creditor entitlements in bankruptcy, subject to any qualifying or contrary Bankruptcy Code provisions. Nothing in section 506(a) suggests any qualification or contrary result, so to the extent the default rate is enforceable under applicable nonbankruptcy law, it applies in determining the allowable claim amount under section 506(a), subject only to rebuttal based on equitable considerations. The debtor showed none here. Therefore, the claim is allowed with pendency interest at the default rate, and plan confirmation standards apply to that amount. Wells Fargo Bank, N.A. v. Beltway 7 Recent Developments in Bankruptcy Law, April 2016 One Dev. Group, LLC (In re Beltway One Dev. Group, LLC), ___ B.R. ___, 2016 Bankr. LEXIS 1080 (9th Cir. B.A.P. Mar. 31, 2016). 6.1.b Intercreditor Agreement does not address adequate protection payments or plan distributions. Several creditors shared a first lien against the debtors’ assets, but their claims accrued interest at different rates. An intercreditor agreement required pro rata sharing, based on amounts due and owing as of the payment date, among all first lien creditors of collateral or its proceeds “ received in connection with the sale or other disposition of, or collection on, such Collateral  upon the exercise of remedies …  by the Collateral Agent.” A cash collateral order provided for adequate protection payments directly to the creditors (bank agent, indenture trustee and swap counterparty) to the extent of any diminution in collateral value in an amount equal to interest at a single rate on the petition date principal balance of first lien claims. A confirmed plan provided for the debtors to contribute their assets to a new entity and for distribution to first lien creditors of stock of the new entity and of the debtors’ cash (including cash from an exit financing), among other things. Stock received upon conversion of debt to equity is not proceeds of the debtor’s assets; the different means of issuing the equity here does not require a different result. The debtor’s cash on hand and exit financing proceeds do not fall within the intercreditor agreement’s “proceeds” definition as “(i) consideration received from the sale/disposition of assets, (ii) value received as a consequence of possessing the Collateral, or (iii) insurance proceeds.” Similarly, adequate protection payments are intended to protect against decrease in value and therefore are not “proceeds.” The adequate protection payments and the plan proceeds do not result from or in connection with a sale or other disposition of, or collection on the collateral, because they are proceeds of an internal reorganization. Therefore, the reorganized debtor’s stock and the cash are not proceeds of the debtor’s assets that served as collateral. In addition, the adequate protection payments are not received by the Collateral Agent, because they were paid directly to the creditors. Finally, the plan distribution is not an exercise of remedies, such as a foreclosure, because the collateral agent never sought stay relief or took any other enforcement action. Therefore, the adequate protection payments and the plan distributions are not subject to the intercreditor agreement’s sharing and waterfall provision, with the result that they are to be distributed based on petition date amounts, without regard to the differential accrual of postpetition interest. Delaware Trust Co v. Wilmington Trust, N.A. (In re Energy Future Holdings Corp.), ___ B.R. ___, 2016 Bankr. LEXIS 771 (Bankr. D. Del. Mar. 11, 2016). 6.2 Priorities 7. CRIMES 8. DISCHARGE 8.1 General 8.2 Third-Party Releases 8.3 Environmental and Mass Tort Liabilities 9. EXECUTORY CONTRACTS 9.1.a Debtor in possession may reject midstream oil & gas gathering agreement, which does not run with the land. The debtor had entered into an agreement with a midstream gas processor. Under the agreement, the debtor “dedicated” to the agreement’s performance all the gas it produced from a designated area and agreed to deliver the gas to the processor. The processor agreed to gather, treat and re-deliver the gas to the debtor using a facility the processor agreed to construct on a mutually agreed tract of land the debtor transferred under a separate conveyance. The debtor agreed to make monthly payments and to deliver a minimum amount of gas or make 8 Recent Developments in Bankruptcy Law, April 2016 deficiency payments. The gathering agreement stated the debtor’s dedication to the processor of the gas to the agreement’s performance and its obligation to pay the gathering fee were covenants running with the land. The debtor in possession moved to reject the gathering agreement as an executory contract. A debtor in possession may not reject a covenant running with the land, because the covenant is part of the real property conveyance. For a covenant to run with the land, it must, among other requirements, result from “horizontal privity” and touch and concern the land. Horizontal privity requires simultaneous existing interests or mutual privity between the original parties to a conveyance. A covenant touches and concerns the land if it affects the nature, quality or value of the estate in the land or reduces the promisor’s legal rights in the land and increases the value of the promisee’s interest as owner of the land. The debtor’s obligations here did not arise from its conveyance to the processor, did not reserve any rights in the land in a conveyance and did not convey any real property rights to the processor. The processor’s rights are only in the gas extracted from the land; extracted minerals are not real property under applicable state law. The debtor’s dedication of the gas to the processor affects only the minerals extracted from the land, not the land itself. Therefore, the debtor’s obligations under the gathering agreement are not covenants running with the land. (The court issues its ruling only as a prelminary ruling for the parties’ guidance, because a determination of property rights under an executory contract or of disputed facts requires an adversary proceeding.) In re Sabine Oil & Gas Corp., ___ B.R. ___, 2016 Bankr. LEXIS 720 (Bankr. S.D.N.Y. Mar. 8, 2016). 10. INDIVIDUAL DEBTORS 10.1 Chapter 13 10.2 Dischargeability 10.2.a State bar-ordered fee repayment obligation is dischargeable. The debtor took advance fees from a client in violation of a state bar rule. The client demanded repayment. When the debtor did not comply, the client filed a state bar complaint. The state bar ordered repayment and suspended the debtor from practice until the fee was repaid. After making a few payments, the debtor filed a chapter 7 case. The state bar refused to reinstate her, despite section 525(a), arguing that the repayment obligation was nondischargeable under section 523(a)(7), which applies to “a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss.” Although the debt does not qualifies under this test, Kelly v. Robinson, 479 U.S. 36 (1986), held that a criminal restitution obligation payable to and for the benefit of the crime victim qualified in part because the obligation was a fine or penalty and was for benefit of the state’s interest in rehabilitation and punishment rather than primarily for the victim’s compensation. Kelly has spawned conflicting decisions about its reach, especially in dealing with state bar sanctions. In this case, however, the obligation was solely to compensate the victim, not a fine or penalty. Therefore, it is dischargeable. Scheer v. State Bar (In re Scheer), ___ F.3d ___ (9th Cir. April 14, 2016). 10.3 Exemptions 10.4 Reaffirmations and Redemption 11. JURISDICTION AND POWERS OF THE COURT 11.1 Jurisdiction 11.1.a A BAP may not issue or deny a petition for a writ of mandamus. The bankruptcy court denied the debtor’s third attempt to sanction a creditor for a stay violation. The debtor sought mandamus from the BAP, which the BAP denied before the creditor even expressed a consent or objection to the appeal to the BAP. Section 1651(a) of title 28, the All Writs Act, authorizes “all courts established by Act of Congress [to] issue all writs necessary or appropriate in aid of their respective jurisdictions.” Section 158(b) of title 28 states the “judicial council of a circuit shall 9 Recent Developments in Bankruptcy Law, April 2016 establish a bankruptcy appellate panel service … to hear and determine, with the consent of all the parties, appeals [from bankruptcy court orders] unless the judicial council finds” otherwise, based on specified statutory standards. Based on section 158(b), bankruptcy appellate panels are temporary panels subject to the judicial council’s determination and are neither courts nor established by Act of Congress. Therefore, the BAP did not have authority under the All Writs Act to issue a writ of mandamus. In addition, the BAP did not yet have jurisdiction, because a BAP’s jurisdiction arises only by the parties’ consent, so any writ it issued would not have been in aid of its jurisdiciton. The court vacates the BAP’s denial of the writ. Judge Bybee “emphatically” dissents. Ozenne v. Chase Manhattan Bank (In re Ozenne), ___ F.3d ___, 2016 U.S. App. LEXIS 5602 (9th Cir. Mar. 25, 2016). 11.2 Sanctions 11.3 Appeals 11.3.a Appeal from unstayed confirmation order in simple case is not equitably moot. The debtor had one secured creditor with a claim of $100,000 secured by assets worth about $200,000, 17 unsecured creditors, one with a $9.4 million judgment and the remainder with less than $1.3 million in claims, and a single shareholder. The plan provided for a single private investor to acquire the reorganized company for a $200,000 investment and for unsecured creditors to be paid $1.25 million over seven years. The large unsecured creditor unsuccessfully objected to confirmation and appealed but did not obtain a stay pending appeal. The debtor consummated the plan, began distributions and entered into various routine transactions in the conduct of its business, including hiring new employees. An appeal from an unstayed confirmation order is equitably moot if the plan is substantially consummated and granting appellate relief will either fatally scramble the plan or significantly harm third parties who justifiably relied on the plan. The doctrine must be construed narrowly and applied only where reveresal would upset complex restructurings involving widespread third parties, such as new public investors, because of the federal courts’ unflagging obligation to hear cases within their jurisdiction and the right of objecting creditors to appeal. Here, the plan did not involve an intricate or public transaction, and the debtor did not show that the plan would be difficult to unravel. The reorganized debtor’s postconsummation transactions were routine and would likely occur after any plan’s consummation and need not be unwound upon reversal. Third party reliance and harm to third parties are minimal and would be present in nearly all cases. Therefore, the appeal is not equitably moot. Judge Krause writes a lengthy concurrence arguing that the Third Circuit should revisit and reject the equitable mootness doctrine. In re One2One Communications, LLC, 805 F.3d 428 (3d Cir. 2015). 11.3.b Appeal from order confirming real estate debtor's plan funded by a new investor is not equitably moot. The debtor developed an affordable housing project. The mortgagee began foreclosure proceedings, but the debtor stayed them with a chapter 11 petition. The debtor proposed a reorganization plan based on a new investment of $1.2 million from an unrelated third party. The bankruptcy court confirmed the plan over the mortgagee's valuation objection. The bankruptcy court and the district court denied the mortgagee's motions for a stay pending appeal, the district court affirmed, and the debtor and investor consummated the plan. If the confirmation order were reversed and the plan unwound, the investor would lose its investment and suffer related adverse tax consequences. An appellate court will dismiss an appeal from a confirmation order as equitably moot based on four factors: whether the appellant sought a stay, whether the plan was substantially consummated, what effect an appellate remedy would have on third parties not before the court and whether the remedy would knock the props out from under the plan and create an uncontrollable situation. Here , the appellant made clear its intent to appeal and sought a stay, and the plan was consummated. The denial of a stay and consummation should not prevent otherwise available appellate relief. The new investor was intimately involved in the case, participated actively in the confirmation proceedings and knew of the appellate risk. It is not the kind of innocent third party that the equitable mootness rule is designed to protect. Finally, the transaction was not overly complex and could be unwound, even though it would harm the new investor. Considering all the factors, the appeal is not equitably moot. First 10 Recent Developments in Bankruptcy Law, April 2016 Southern Nat'l Bank v. Sunnyslope Housing Ltd. P'shp (In re Sunnyslope Housing Ltd. P'shp), ___ F.3d ___, 2016 U.S. App. LEXIS 6429 (9th Cir. Apr. 8, 2016). 11.3.c District court does not have jurisdiction over an interlocutory appeal without an express grant of leave to appeal. The bankruptcy court appointed special counsel to represent the estate for PACA matters. Counsel filed two interim fee applications and one final fee application, which the bankruptcy court granted. One PACA creditor appealed all the bankruptcy court’s fee orders to the district court, which reversed them without addressing whether they were interlocutory or final orders and without granting leave to appeal. Section 158(a) grants the district courts jurisdiction over appeals from bankruptcy court final orders and jurisdiction with leave over appeals from interlocutory orders. The district court may treat a notice of appeal from an interlocutory order as an application for leave to appeal. But the district court does not have jurisdiction to hear the interlocutory appeal unless it expressly grants leave. An order ruling on the appeal by itself is not an implied grant of leave to appeal. An interim fee order is an interlocutory order. Therefore, the district court did not have jurisdiction to hear the appeals from the two interim fee orders. Kingdom Fresh Produce, Inc. v. Stokes Law Office, L.L.P. (In re Delta Produce, L.P.), ___ F.3d ___, 2016 U.S. App. LEXIS 4584 (5th Cir. Mar. 11, 2016). 11.4 Sovereign Immunity 12. PROPERTY OF THE ESTATE 12.1 Property of the Estate 12.1.a Officer is self-interested if her employment and compensation is subject to control by one whose interests are adverse to the corporation. The debtor’s controlling shareholder proposed that the debtor acquire another company the shareholder owned. A committee of independent directors approved the acquisition, after which the controlling shareholder appointed a junior target company employee as the debtor’s chief financial officer and ultimately controlled her continued employment and compensation. The shareholder later proposed that the debtor pay an annual management fee to another of the shareholder’s companies for work it performed for the debtor. The independent directors committee approved the first year’s payment. On the debtor’s CFO’s recommendation, the committee approved the second year’s payment, subject to year-end review of actual expenses the affiliate incurred. At the review, the CFO advocated for payment of a substantial increase over the first year’s fee. The Committee approved the increase without independent adviser review or advice. An officer owes a fiduciary duty of due care and loyalty to the corporation. The business judgment rule protects the officer from a claim for breach of the duty of due care if the officer was not self-interested in connection with the action. Self-interest may arise not only from a direct financial interest in the action but also where the officer’s employment and compensation are subject to the control of a person whose interests are adverse to the corporation. Because the CFO’s employment and compensation were subject to the ultimate shareholder’s control, her advocacy of the increased management fee payment was selfinterested, and she was not entitled to the benefit of the business judgment rule. Spizz v. Eluz (In re Ampal American-Israel Corp.), 543 B.R. 464 (Bankr. S.D.N.Y. 2016). 12.2 Turnover 12.3 Sales 13. TRUSTEES, COMMITTEES, AND PROFESSIONALS 13.1 Trustees 13.1.a A chapter 7 trustee’s fee in excess of the distribution to unsecured creditors is not per se extraordinary circumstances to deny the statutory commission. The trustee administered only a single asset in the debtor’s chapter 7 case, yielding a payment to the secured creditor and 11 Recent Developments in Bankruptcy Law, April 2016 a small surplus. The trustee’s final report proposed to use about 75% of the surplus to pay the trustee a fee that was less than the statuotry commission amount and about 25% to make a 5.7% distribution to general unsecured creditors. Section 326(a) provides a formula to determine a chapter 7 trustee’s maximum compensation, which the court should award in the absence of extraordinary circumstances. A fee greater than the distribution to unsecured creditors does not per se constitute extraordinary circumstances. Fear v. U.S. Trustee (In re Ruiz), 541 B.R. 892 (9th Cir. B.A.P. 2015). 13.1.b Joint effort does not preclude fee enhancement. The chapter 11 trustee achieved an extraordinary result in a case that appeared at the outset to be admiinnstratively insolvent, collecting over $200 million for distribution to hundreds of tort creditors. The outcome resulted from the efforts of numerous professionals, who cooperated in achieving the recoveries, though the trustee played a leading role. The trustee sought a fee that was more than compensation at the trustee’s ordinary hourly rate but less than the commission section 326(a) allows. Courts consider numerous factors in determining whether to award a fee more than the “lodestar,” which in this case was the trustee’s hourly fee. However, being solely responsible for the case’s successful outcome should not be a factor. If it were, professionals might be discouraged to cooperate, which would more likely harm the estate. The court awards an enhancement even though the trustee was not solely responsible for the favorable results. In re New England Compounding Pharmacy, Inc., 544 B.R. 724 (Bankr. D. Mass. 2016). 13.2 Attorneys 13.2.a Attorney may not contract under section 328 for fees for defense of a fee application. Following the Supreme Court’s decision in Baker Botts L.L.P. v. ASARCO LLC, 135 S. Ct. 2158 (2015), counsel for an unsecured creditors committee sought approval under section 328(a) of a provision in its engagement agreement that would allow it fees for defense of its fee application. Section 330(a) permits the court to award reasonable fees. Baker Botts held the American Rule, under which each side bears its own fees unless a statute or contract provides otherwise, prohibits allowance of fees under section 330(a) for an estate’s counsel’s defense of its fee application. Section 328(a) is an exception to section 330(a) and permits the court to approve any reasonable terms and conditions of employment. But section 328(a) is not a specific statutory exception to the American Rule. Baker Botts does not preclude a contractual exception to the American Rule, and counsel’s employment agreement is a contract, but it is not a contract with the estate, which would be liable for the fee-defense fees, and the fee-defense provision is not a reasonable term or condition of employment. Although some caselaw has permitted courts to look to the market to determine section 328(a) reasonableness and approved fee-defense fee provisions, the caselaw predated Baker Botts, which now prohibits such a provision. Therefore, the court denies approval of committee counsel’s fee defense provision. In re Boomerang Tube, Inc., ___ B.R. ___, 2016 Bankr. LEXIS 273 (Bankr. D. Del. Jan. 29, 2016). 13.2.b Filing of an employment application and plan confirmation limit the period for which the court may approve compensation for debtor’s counsel in a chapter 11 case. Due to the press of first-day motions, the debtor in possession filed its counsel’s employment application one month after the petition date and did not seek retroactive approval until three months later. The court confirmed a liquidating plan that transferred all the estate’s assets to a liquidating trust. Counsel sought approval of fees for work during the case from the petition date and after confirmation. Section 327(a) requires the court’s approval of a debtor in possession’s employment of counsel. Any work performed before approval is as a volunteer; the estate may not compensate counsel for such work. Caselaw prohibits retroactive approval in the absence of extraordinary circumstances. The demands on counsel from first-day papers is not an extraordinary circumstance, as it happens in many cases. Therefore, the court may not award fees for services rendered before the application date. A debtor is a debtor in possession unless a trustee has been appointed and is serving in the case. A debtor in possession remains in possession of the debtor’s prepetition assets and administers them for the benefit of the estate. Confirmation of a liqiudating plan that vests assets in a liquidating trust divests the estate of the 12 Recent Developments in Bankruptcy Law, April 2016 assets and the debtor of possession of the assets. The debtor is no longer a debtor in possession after confirmation. The court may not award compensation to counsel for the debtor in possession for the period after the debtor ceases to be a debtor in possession. Mark J. Lazzo, P.A. v. Rose Hill Bank (In re Schupback Invs., L.L.C.), 808 F.3d 1215 (10th Cir. 2015). 13.2.c PACA trust funds may not be used to pay special PACA counsel without PACA creditor’s consent. The bankruptcy court appointed special counsel to represent the estate for PACA matters, with authority to determine which assets were PACA trust assets, examine PACA claims, collect receivables, and liquidate PACA trust assets. Counsel applied for allowance of fees from the PACA trust. One PACA creditor objected; the other PACA creditors either consented or were silent. PACA requires agricultural commodity purchasers to hold the commodities and their proceeds in trust until full payment of the sellers. Because the seller beneficiaries of the trust are entitled to a fixed sum rather than just whatever the trust holds, the trustee may not receive payment from the trust funds until the beneficiaries are paid in full. However, individual beneficiaries may waive their entitlement or direct the proceeds to counsel. Counsel’s role here was tantamount to a trustee’s. Therefore, counsel could not be paid the pro rata portion allocable to the objecting PACA creditor from the PACA trust funds. Kingdom Fresh Produce, Inc. v. Stokes Law Office, L.L.P. (In re Delta Produce, L.P.), ___ F.3d ___, 2016 U.S. App. LEXIS 4584 (5th Cir. Mar. 11, 2016). 13.3 Committees 13.4 Other Professionals 13.5 United States Trustee 14. TAXES 15. CHAPTER 15—CROSS-BORDER INSOLVENCIES 13
Register now for your free, tailored, daily legal newsfeed service.
Questions? Please contact email@example.comRegister
Recent Developments In Bankruptcy Law Update April 2016
Popular articles from this firm
If you would like to learn how Lexology can drive your content marketing strategy forward, please email firstname.lastname@example.org.
Related topic hubs
Senior Legal Counsel, Bankwest Business
Bank of Western Australia Ltd
"Lexology is one of the few newsfeeds that I do actually look over as and when it comes in - the information is current; has good descriptive headings so I can see quickly what the articles relate to and is not too long."