In January 2021 the Supreme Court held that a creditor in possession of a debtor's property does not violate the automatic stay, specifically Section 362(a)(3) of the Bankruptcy Code, by retaining the property after the filing of a bankruptcy petition. The court's decision provides important guidance to bankruptcy courts, practitioners and parties on the scope of the automatic stay's requirements.
In the latest chapter of more than a decade of litigation involving efforts to recover fictitious profits paid to certain customers of Bernard Madoff's defunct brokerage firm as part of the largest Ponzi scheme in history, the US Court of Appeals for the Second Circuit has held that the customers did not have a defence to avoidance and recovery because they received the payments "for value".
In 2019 the large business bankruptcy landscape was generally shaped by economic, market and leverage factors, with notable exceptions for disastrous wildfires, liabilities arising from the opioid crisis, price-fixing fallout and corporate restructuring shenanigans. The year 2020 was a different story altogether. The COVID-19 pandemic may not have been responsible for every reversal of corporate fortune, but it weighed heavily on the scale.
A basic tenet of bankruptcy law, premised on the legal separateness of a debtor prior to filing for bankruptcy and the estate created on a bankruptcy filing, is that prepetition debts are generally treated differently to debts incurred by the estate, which are generally treated as priority administrative expenses. However, as demonstrated by a recent US District Court for the District of Delaware decision, this seemingly straightforward principle is sometimes difficult to apply.
Courts sometimes disagree over whether provisions in a borrower's organisational documents designed to prevent it from filing for bankruptcy are enforceable as a matter of federal public policy or applicable state law. A handful of court rulings have addressed this issue in recent years, with mixed results. Most recently, the Delaware bankruptcy court overseeing the Chapter 11 cases of Pace Industries, LLC and affiliates denied on public policy grounds a motion to dismiss the cases filed by a preferred stockholder.
The US Bankruptcy Court for the Southern District of New York recently added some weight to the majority rule on a hot-button issue for claims traders. In In re Firestar Diamond, Inc, the court ruled that a transferred claim can be disallowed under Section 502(d) of the Bankruptcy Code even if the entity holding the claim is not the recipient of a voidable transfer. According to the court, claim disallowance under Section 502(d) "rests on the claim and not the claim holder".
The practice of conferring 'derivative standing' on official creditors' committees to assert claims on behalf of a bankruptcy estate where the debtor or a bankruptcy trustee is unwilling or unable to do so is a well-established means of generating value for the estate from litigation recoveries. However, the Delaware bankruptcy courts have limited the practice in cases where applicable non-bankruptcy state law provides that creditors have no standing to bring claims on behalf of certain entities.
'Cramdown' Chapter 11 plans, under which a bankruptcy court confirms a plan over the objection of a class of creditors, are relatively common. Less common are the subset of cramdown plans known as 'cram-up' Chapter 11 plans. These plans are referred to as such because they typically involve plans of reorganisation that are accepted by junior creditors and then 'crammed up' to bind objecting senior creditors.
Safe harbours in the Bankruptcy Code designed to insulate non-debtor parties to financial contracts from the consequences that normally ensue when a counterparty files for bankruptcy have been the focus of a considerable amount of scrutiny as part of evolving developments in the pandemic-driven downturn. One of the most recent developments was a US Court of Appeals for the Second Circuit ruling concerning the landmark Chapter 11 cases of Lehman Brothers Holdings Inc and its affiliates.
The ability of a bankruptcy trustee or Chapter 11 debtor-in-possession to sell assets of the bankruptcy estate free and clear of any interest in the property asserted by a non-debtor is an important tool designed to maximise the value of the estate for the benefit of all stakeholders. The US Bankruptcy Court for the Central District of California recently examined whether such interests include successor liability claims that might otherwise be asserted against the purchaser of a debtor's assets.
Depending on the context, bankruptcy courts rely on a wide variety of standards to value estate assets, including retail, wholesale, liquidation, forced-sale, going-concern or reorganisation value. However, certain assets may be especially difficult to value because valuation depends on factors that may be difficult to quantify, such as the likelihood of success in litigating estate causes of action. The First Circuit Court of Appeals recently addressed this issue in MMA Railway.
Set-off rights created by contract or applicable non-bankruptcy law are important creditor protections. The Bankruptcy Code preserves those rights and permits creditors to exercise them under appropriate circumstances. However, as illustrated by the ruling in Rogers Morris, courts disagree as to whether confirmation of a plan extinguishes set-off rights.
The ability of a bankruptcy trustee or a Chapter 11 debtor in possession to use cash collateral during the course of a bankruptcy case may be vital to the debtor's prospects for a successful reorganisation. However, because of the unique nature of cash collateral, the Bankruptcy Code sets out special rules that apply to the non-consensual use of such collateral to protect the interests of the secured creditor involved.