Thursday, December 13, 2012

Stern v. Marshall Circuit Split

As recently posted, the Sixth Circuit Court of Appeals held that Stern vs. Marshall’s limitations on the jurisdiction of bankruptcy courts were not waivable.  On December 4, 2012, the Ninth Circuit Court of Appeals ruled to the contrary. Executive Benefits Insurance Agency v. Arkison (In re Bellingham Insurance Agency, Inc., Debtor).

In Bellingham, EBIA was sued by Trustee Arkinson, alleging various fraudulent transfers and also alter-ego and successor-liability claims.  EBIA initially moved to withdraw the reference on the grounds that it was entitled to a jury trial, but stayed consideration of its motion to permit the Bankruptcy Court to adjudicate the Trustee’s Motion for Summary Judgment.  After the Bankruptcy Court ruled against it, EBIA abandoned the Motion to Withdraw, the District Court dismissed that action and EBIA appealed the summary judgment ruling to the District Court.  EBIA did not raise any objections to subject matter jurisdiction or the power of the Bankruptcy Court to act until the matter reached the Ninth Circuit.

Saturday, November 24, 2012

Sixth Circuit Court of Appeals
Revisits Stern v. Marshall

In a recent Sixth Circuit Decision, Waldman v. Stone, decided October 26, 2012, the Court may have significantly expanded the intended reach of a 2011 Supreme Court decision, Stern v. Marshall, 131 S.C.T. 2594 (2011).

In Stern v. Marshall, the Supreme Court held that Bankruptcy Court Judges, as Article I Judges and not Article III Judges under the United States Constitution, could not exercise Article III judicial power to decide state law cause of action even where such state cause of action was arguably a core proceeding under 28 U.S.C. §157.  Under 28 U.S.C. §157 bankruptcy judges can enter final judgments in core proceedings but can only make recommendations to the District Court in non-core proceedings unless the parties consent.

Bankruptcy Court Opinion Makes It Virtually Impossible
for Individual Chapter 11 Debtors to Confirm a Plan
over Objection by an Undersecured Lender

The United States Bankruptcy Court for the District of Puerto Rico, in a case of first impression in this district, on November 9, 2012, issued an opinion and order, concluding that the absolute priority rule applies to individual Chapter 11 debtors.   In re Lee Min Ho Chen, Case No. 11-08170 (BKT), Docket No. 211.

The absolute priority rule of Section 1129(b) of the Bankruptcy Code is a fundamental creditor protection in a Chapter 11 bankruptcy case. In general terms, the rule provides that if a class of unsecured creditors rejects a debtor’s reorganization plan and is not paid in full, junior creditors and equity interestholders may not receive or retain any property under the plan. The rule thus implements the general state-law principle that creditors are entitled to payment before shareholders, unless creditors agree to a different result. Recent litigation in the federal courts nationwide has raised the issue and created a split among courts as to whether the absolute priority rule still applies in Chapter 11 cases filed by individuals.

7th Circuit Decision Should Minimize Disruption
Licensor Bankruptcy Has on Trademark Licensee’s
Ongoing Business and Use of Licensed Mark

The U.S. Court of Appeals for the Seventh Circuit in Chicago has issued a decision with significant implications for licensees of trademarks whose licensors become debtors in bankruptcy.  In Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, the Court considered whether rejection of a trademark license in bankruptcy deprives the licensee of the right to use the licensed mark.[1]   Disagreeing with the holding of the Court of Appeals for the Fourth Circuit in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc.,[2]  the Court concluded that a licensee could continue to use the licensed mark notwithstanding the rejection of the license agreement.  The decision may have important implications also for other types of intellectual property licenses and, indeed, all other kinds of contracts, licenses and leases as well.

Monday, August 13, 2012

Fifth Circuit Holds State Agency Proceedings Exempt from Automatic Stay Pursuant to Section 362(b)(4) of the Bankruptcy Code

On June 18, 2012, the Fifth Circuit issued its opinion in Halo Wireless, Inc. v. Alenco Communications, Inc., et al., unanimously affirming an order by the Eastern District of Texas Bankruptcy Court that various state public utility commission proceedings initiated against Halo could proceed despite Halo’s subsequent Chapter 11 bankruptcy under the exception to the automatic stay provided by section 362(b)(4) of the Bankruptcy Code.  See Case No. 12-40122, 2012 WL 2212429 (5th Cir. June 18, 2012). Section 362(b)(4) is commonly known as the “police power exemption” and excepts from the automatic stay “the commencement or continuation of an action or proceeding by a governmental unit . . . to enforce such governmental unit’s or organization’s police and regulatory power . . . .” 11 U.S.C. § 362(b)(4).

Friday, August 3, 2012

BAPCPA Fails to Live Up to Its Advance Billing

Let’s call a spade a spade.  No matter how you look at it, the Bankruptcy Abuse Prevention and Consumer Protection Act, or BAPCPA, has been a spectacular failure.  With an acronym like that, it’s no wonder.  Passed in 2005, the law has not prevented bankruptcy abuse – and certainly has not protected consumers.  BAPCPA was supposed to accomplish several goals in connection with consumer bankruptcies:

  • It was supposed to reduce the number of people filing bankruptcy; 
  • It was supposed to force more people into Chapter 13 (repayment plan) rather than have them file a Chapter 7 (liquidation) bankruptcy; and
  • It was supposed to provide for more payment to unsecured creditors. 

Thursday, July 5, 2012

In re McNeal: The Eleventh Circuit Lets
Debtors Strip Off Second Mortgages

In a recent opinion, the Eleventh Circuit Court of Appeal held that second-priority mortgage liens may be eliminated completely (“stripped off”) in chapter 7 bankruptcy proceedings when the underlying collateral is worth less than the amount of the first-priority mortgage. In re McNeal, Case No. 11-11352, 2012 WL 1649853 (11th Cir. 2012). This ruling represents a significant change in Eleventh Circuit precedent and is in conflict with three other federal circuit court decisions. See, e.g., id. at *2; Ryan v. Homecomings Financial Network, 253 F.3d 778 (4th Cir. 2001); Talbert v. City Mortgage Services, 344 F.3d 555 (6th Cir. 2003); Laskin v. First National Bank of Keystone, 222 B.R. 872 (9th Cir. 1998). 

The significance of this ruling can hardly be understated, as practitioners are well aware that numerous properties subject to multiple mortgage liens are worth less than the amount of the first-priority mortgage. Given this state of affairs, debtors in chapter 7 proceedings are likely to vigorously contest collateral valuation in order to potentially eliminate second-priority mortgage liens altogether. Creditors must plan accordingly to protect second-priority liens in valuation proceedings in the Eleventh Circuit. 

Thursday, June 21, 2012

Do We See a Precedent Here?

On May 24, 2012, Judge McMahon of the United States District Court for the Southern District of New York rendered a decision in the Coudert Brothers, LLP bankruptcy case holding that, in the absence of a partnership agreement provision to the contrary, upon dissolution of a law firm partnership, unfinished business, specifically hourly billed client representations still in progress, constitutes an asset of the partnership and partners who took that business with them to other law firms, and those other law firms, must account for the profits realized in finishing that work.  Further, in calculating the profit realized from work in progress, the partners who complete the work at another law firm would not be entitled to compensation.  The Court also held it would not use a quantum meruit analytic to measure the profit which would have compensated the law firms for the work performed.

Tuesday, June 5, 2012

Supreme Court Upholds Right to Credit Bid in Cramdowns

In what Justice Scalia termed “an easy case,” the United States Supreme Court has ruled 8-0 that a debtor cannot strip a secured creditor’s right to credit bid under 11 U.S.C. § 1129(b)(2)(A)(ii).  RadLAX Gateway Hotel, LLC, et al. v. Amalgamated Bank, NO. 11-166. The Court granted certiorari in this case to resolve a split in the circuits between the Seventh Circuit, on one hand, and the Third and Fifth Circuits, on the other, as to the ability of a debtor to prevent a secured creditor from credit bidding at a sale pursuant to a plan of reorganization. 

Under clause (i) of 11 U.S.C. § 1129(b)(2)(A), the secured lender retains its lien on its collateral and receives deferred cash payments.  Clause (ii) provides for the sale of the collateral free and clear of a security interest so long as the secured creditor can credit bid at the sale.  Clause (iii), on the other hand, provides for confirmation so long as the secured creditor receives the “indubitable equivalent.”

Temporary Bankruptcy Judgeships Reauthorized

This month, Congress finally passed the Temporary Bankruptcy Judgeship Extension Act of 2011 (H.R. 1021 and S. 1821) (the “Extension Act”) and on May 25, 2012, President Obama signed the Extension Act into law.  The law will go into effect on November 21, 2012.  This bill provides for the extension of thirty temporary bankruptcy judgeships in nineteen districts for five years.  The Extension Act was in response to what some commentators had deemed a “crisis” due to the expiration of temporary judgeships created in the wake of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”).  These BAPCPA temporary judgeships expired five years after their creation and could not be filled after a judge in that district retires.  This led some observers to note that, in the coming years, the number of bankruptcy judges would decline by approximately 8%.  This loss of bankruptcy judgeships, combined with an overall increase in filings, led many to fear bankruptcy courts would be overwhelmed.

Wednesday, May 30, 2012

Tousa: A Cautionary Tale for Lenders

On May 15, 2012, the Eleventh Circuit Court of Appeals issued its long-awaited decision in the In re: Tousa, Inc.  fraudulent transfer litigation.  The Court affirmed the Bankruptcy Court holding that the “Transeastern Lenders” received fraudulent transfers when Tousa, Inc., the parent company paid a settlement of $421 million dollars to the Transeastern Lenders which was funded by a loan from “the New Lenders” secured primarily by the assets of several Tousa subsidiaries, “Conveying Subsidiaries,” who were not themselves legally obligated to the Transeastern Lenders.

The Tousa decision is a cautionary tale.  Companies that are dealing with troubled debtors who are receiving repayment of substantial debts will have to be wary and exercise due diligence and consider their potential exposures for fraudulent transfers after this decision.

Tuesday, May 29, 2012

How Safe Is Safe Harbor?

In the run-up to the spectacular Lehman Brothers Holdings Inc. bankruptcy case and the immediate aftermath of the filing, JP Morgan Chase (“JPMC”) received over $8.6 billion dollars from the Lehman entities.  As a result of those transfers the Lehman entities and their Official Committee of Unsecured Creditors brought suit against JPMC to recover the transfers.

On April 19, 2012, the Honorable James M. Peck entered his opinion granting in part and denying in part JPMC’s motion to dismiss.  The extensive and lengthy decision contains three broad groups of holdings.  First, the Court held that the transfers could not be avoided as either preferences or constructively fraudulent transfers because the safe harbor of 11 U.S.C. §546(e) immunizes the transfers from avoidance under those provisions as they constituted settlement payments made by a covered entity for the benefit of a financial institution in connection with a securities contract.  While the Court noted that the occurrence of obligations was not immunized, that was a “pyrrhic victory” for the plaintiffs as the transfers themselves would still be exempt from avoidance (slip op at 45).

Friday, May 25, 2012

Stern v. Marshall: Second Circuit Finds Holding "Narrow"

The United States Court of Appeals for the Second Circuit recently weighed in on the scope of the United States Supreme Court’s influential opinion in Stern v. Marshall, 564 U.S. 2 (2011).  The case before the Second Circuit, In re Quigley Co., 2012 U.S. App. LEXIS 7167 (2d Cir. Apr. 10, 2012), didn't require the Second Circuit to analyze the "precise contours of Stern."  But, significantly, the Second Circuit observed that Stern's holding was "narrow."

In re Nortel Networks: An Update

Updated from previous post.

On April 20, 2012, the Nortel Networks UK Pension Trust Limited (the “Trustee”), as Trustee of Nortel Networks UK Pension Plan, and the Board of the Pension Protection Fund (the “Board,” together with the Trustee, the “Petitioners”) petitioned the United States Supreme Court to review the Third Circuit’s ruling in In re Nortel Networks Inc., 669 F.3d 128 (3d Cir. 2011), that the “police power” exception to the automatic stay as set forth in Section 362(b)(4) of Bankruptcy Code did not apply to the situation at hand.  The Third Circuit’s opinion can be found here.

Tuesday, May 8, 2012

Cross-border Insolvency: The European Court of
Justice on Determining the Centre of Main Interests

The European Court of Justice (“ECJ”) in Interedil Srl (in liquidation) vFallimento Interedil Srl, Intesa Gestione Crediti SpA has provided further guidance on determining a debtor company’s centre of main interests and on interpreting the term “establishment” under the Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings (“Regulation”). The court reiterated that the company’s place of registration is not always the right jurisdiction in which to issue insolvency proceedings.  

Monday, May 7, 2012

A Director's Worst Nightmare

If you serve as an officer or director you probably assume that if things go badly you will be protected by directors and officers insurance.  But if things go very badly and bankruptcy ensues, you may not have the protection you thought you had.

Single Asset Real Estate Cases

“The court recognizes the difficulties presented by § 1129(b)(2)(A) for real estate developers trying to reorganize, but Congress has decided that debtors must bear the risk of reorganization by contributing additional capital and/or pledging additional collateral to their undersecured creditors before debtors may enjoy the benefits of a confirmed plan.”

                                                       In re Saguaro Ranch Development Corporation,
                                                      2011 WL 2182416 (Bankr. D. Ariz. June 1, 2011)

Saturday, May 5, 2012

Assigning the Unassignable: Creating an Asbestos
Liability Trust by Rewriting Contracts

Normally bankruptcy does not expand pre-petition contracts or impose different risks on contracting parties, but it appears that when the courts are firmly convinced of the public good of creating an asbestos trust, insurance contracts at least can be re-written.

Monday, April 23, 2012

Bankruptcy Sales:
Not So Free and Clear

Denise Frederico was injured October 15, 2008, when the FedEx truck she was driving hit a telephone pole, allegedly because the truck was defective.  The truck was manufactured in 1994 by Grumman Olson Industries, Inc. (“Grumman”).  In 2009, Ms. Frederico and her husband brought suit in New Jersey Superior Court and subsequently amended the complaint to assert that Morgan Olson, LLC (“Morgan”) was liable under the doctrine of product-line successor liability because Morgan continued Grumman’s product line.

Wednesday, April 11, 2012

Student Loan Relief:
Is Change on the Horizon?

Student-loan relief has recently become a hot topic.  Several studies suggest that student-loan debt now exceeds $1 trillion – or what the National Association of Consumer Bankruptcy Attorneys calls, the next “debt bomb.” 

Wednesday, April 4, 2012

9th Circuit Bankruptcy Appellate Panel Permits
Separate Classification of Lender’s Unsecured
Deficiency Claim for Plan Voting Purposes

When a debtor wishes to confirm a Chapter 11 plan, it is required to obtain the acceptance of at least one class of creditors holding impaired claims. In deciding which creditors should be in which classes it is generally required that similarly situated creditors be in the same class for voting purposes. This is a huge issue in real estate bankruptcy cases because, if the secured lender is substantially under-secured with a large unsecured deficiency claim, and if that claim is placed in the same class as the general unsecured creditors, a lender could vote against the plan and insure there is no class of creditors that actually accepts the plan.

U.S. Supreme Court to Hear
Argument on Credit Bid Case

On April 23, 2012, the United States Supreme Court is scheduled to hear oral argument in RadLAX Gateway Hotel v. Amalgamated Bank, Case No. 11-166. At issue is the interpretation of 11 U.S.C. § 1129(b)(2)(A) and whether a debtor can prevent a secured creditor from credit bidding in connection with a chapter 11 plan that proposed to sell the secured creditor’s collateral free and clear of any liens.

Tuesday, March 27, 2012

2nd Circuit Holds “Mandatory Abstention”
Appropriate Under Section 1334(c)(2)

The Second Circuit Court of Appeals recently issued an opinion on mandatory abstention in Parmalat Capital Fin. Ltd. v. Bank of Am., Corp., No. 09-4302, 2012 U.S. App. LEXIS 3391  (2d Cir. Feb. 21, 2012), where the Court explained the factors to be considered when determining whether mandatory abstention is appropriate.

German Provisions on Subordination of
Shareholder Loans Apply to Foreign Companies

The Federal Court of Justice ruled that the provisions of section 39 (1) no. 5 in conjunction with (4) and (5) German Insolvency Act, according to which all loans provided by a shareholder to a corporation (Kapitalgesellschaft) are subordinated, must also be applied to any corporation formed in an EU member state, if the “centre of the debtor’s main interests” [Articles 3 (1), 4 (1) Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings] is in Germany.

Cross-border Insolvency: German Insolvency
Administrators and Their Rights under English Law

The High Court of England and Wales recently confirmed that courts have an inherent common law jurisdiction to permit the statutory power under the English Insolvency Act 1986 (“Act”) to be applied to foreign insolvency administrators not falling within the express scope of the Act.

3rd Circuit Decides “Police Power” Exception to
Automatic Stay Applies Only in Limited Circumstances

Click here for updated post.

The Third Circuit Court of Appeals recently handed down its decision in In re Nortel Networks, Inc., No. 11-1895, 2011 U.S. App. LEXIS 25929 (3d. Cir. Dec. 29, 2011), where it clarified the exception to the automatic stay under 11 U.S.C. § 362(d)(4), commonly known as the “police power” exception, and  cemented the fact that the automatic stay will bar a party who has submitted to the jurisdiction of a United States Bankruptcy Court from participating in an international proceeding, the outcome of which would affect a U.S. debtor, unless the “police power” exception applies.