The Supreme Court's decision in Merit Management construes Section 546(e) of the Bankruptcy Code more narrowly than most lower courts have done before. Often referred to as the securities 'safe harbour', this provision prevents a bankruptcy trustee from unwinding settlement payments or other transfers made in connection with securities contracts if the payments or transfers were "made by or to (or for the benefit of)" certain kinds of market participant, including any stockbroker or financial institution.
The Supreme Court recently held that Section 546(e) of the Bankruptcy Code does not apply to transfers in which financial institutions are mere intermediaries. This decision plainly rejects what was, in many judicial circuits, a long-held interpretation of Section 546(e) and leaves certain transactions previously thought to be inviolate vulnerable to later being unwound if one of the parties files for bankruptcy within the relevant statutory period.
The First Circuit Court of Appeals recently held that Section 1109(b) of the Bankruptcy Code provides a creditors' committee with an "unconditional right to intervene" in an adversary proceeding. This decision further bolsters the right of creditors' committees to intervene in and be heard on all matters within a bankruptcy case and positions the First Circuit in line with the Second and Third Circuits, which both have similarly concluded that the code affords an unconditional right to intervene.
In an upcoming case, the Supreme Court will address the question of whether the Bankruptcy Code bars a bankruptcy trustee from avoiding a debtor's constructively fraudulent pre-petition securities transactions merely because the deal was executed through a financial intermediary with no stake of its own in the transaction. The issue turns on the meaning of Section 546(e) of the Bankruptcy Code.
Recognition of a foreign proceeding opens the door to mandatory or discretionary relief from the bankruptcy court, depending on whether the foreign proceeding is a foreign main proceeding or a foreign non-main proceeding. Two threshold requirements for obtaining recognition under Chapter 15 of the Bankruptcy Code, which took effect 11 years ago, are the existence of a duly designated foreign representative and a foreign proceeding.
Following a Chapter 15 petition to recognise Korean insolvency proceedings as foreign main proceedings, the Bankruptcy Court for the District of New Jersey recently granted an order of provisional relief that includes application of the automatic stay to block the enforcement of maritime liens and the seizure of shipping company Hanjin's vessels. The case demonstrates how essential provisional relief can be for foreign debtors to preserve the status quo and maintain business operations before a recognition ruling.
Chapter 15 of the Bankruptcy Code, which deals with cross-border insolvency cases, took effect nearly 11 years ago. Congress enacted Chapter 15 in 2005 to replace Section 304 of the code, which previously addressed transnational insolvencies. Chapter 15 largely incorporates the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency.
The Supreme Court will soon consider whether a Chapter 11 debtor in dire straits can settle claims of the bankruptcy estate, receive court approval to distribute the settlement proceeds to junior creditors without paying priority claims and then obtain dismissal of the bankruptcy case on terms that leave the priority-skipping settlement intact, or whether such a resolution violates essential aspects of the Bankruptcy Code.
The Supreme Court has ruled that the US Bankruptcy Code pre-empts the Recovery Act, which Puerto Rico enacted in 2014 to address its mounting debt crisis. The question before the Supreme Court was whether the pre-emption provision contained in Chapter 9 applied to bar Puerto Rico from enacting its own bankruptcy scheme for restructuring the debts of its municipalities and public utilities.
In a world of free-ranging capital and cross-border transactions, the question of whether US courts will apply US law to transactions taking place in other countries is important. It is therefore a matter of both interest and concern that judges in the Southern District of New York have reached opposite conclusions when asked to give extraterritorial effect to the avoidance or 'clawback' provisions of the Bankruptcy Code.
The US Court of Appeals recently decided in In re Tribune Co Fraudulent Conveyance Litigation that Section 546(e) of the Bankruptcy Code impliedly pre-empts state fraudulent conveyance laws that creditors might otherwise use to unwind payments made by a corporate debtor to public shareholders in a pre-bankruptcy leveraged buy-out. The court so held even though Section 546(e) in terms applies to claims only by a bankruptcy 'trustee'.
The US Court of Appeals for the Seventh Circuit recently reviewed a bankruptcy court's denial of a trustee's motion for a temporary injunction staying litigation between non-debtors. The court accepted the premise that the bankruptcy proceeding and the lenders' suits did not involve "the same claims". However, it held that the lower courts had construed too narrowly the equitable powers conferred by Section 105(a) of the Bankruptcy Code.
The recent decision in Banco Centrale makes clear that the Second Circuit will strictly interpret and apply any waivers of sovereign immunity. The Second Circuit established a high bar for creditors seeking to prove that state-owned instrumentalities are the alter egos of their states, and sets clear limits on the types of activity that will permit application of the commercial activity exception.
The US Court of Appeals for the First Circuit has held that Chapter 9 of the US Bankruptcy Code pre-empts an insolvency law enacted by Puerto Rico designed to provide a path for the restructuring of financially distressed municipalities and public utilities in Puerto Rico. The action was initiated by two groups of investors which collectively hold nearly $2 billion worth of bonds issued by one of Puerto Rico's distressed public utilities.
In a recent unanimous decision the Supreme Court held that a bankruptcy court order denying confirmation of a debtor's repayment plan, but leaving the debtor free to propose another plan, was not a final order that could be appealed immediately as of right. The decision closes off an avenue that would have allowed debtors to obtain immediate appellate review of such a decision, thereby delaying the conclusion of the bankruptcy case.
In Bank of America NA v Caulkett the Supreme Court considered whether debtors in a Chapter 7 bankruptcy liquidation could invoke Section 506(d) of the Bankruptcy Code to void or 'strip off' the junior mortgage liens on their homes when the senior mortgage debt exceeded their homes' current value. In a unanimous opinion the court has reversed the US Court of Appeals for the Eleventh Circuit and held that the debtors could not strip off the junior mortgage liens.
In a recent decision the Supreme Court held that parties may consent to bankruptcy courts entering final judgment on so-called 'Stern claims'. The decision is significant: a decision that litigants could not consent to adjudication in a bankruptcy court would have required already overburdened district courts to take over a large portion of the bankruptcy docket.
The Supreme Court recently heard oral argument in Bank of America v Caulkett, considering whether the US Bankruptcy Code permits a Chapter 7 debtor to 'strip off' a junior mortgage lien in its entirety when the outstanding debt owed to a senior lienholder exceeds the current value of the collateral (ie, when the property is 'underwater'). The court is expected to issue a decision before the end of June.
In the Fairfield Sentry Limited cross-border insolvency case, the US Court of Appeals for the Second Circuit held that US bankruptcy law governed the sale of intangible property of a foreign debtor in liquidation proceedings in the British Virgin Islands. The decision shows that despite being a governing concept, the doctrine of international comity is not without limit in Chapter 15 cases.
The US Court of Appeals for the Second Circuit recently handed down a remarkable decision concerning Section 546(e) of the Bankruptcy Code in Madoff. Relying on the statute's broad wording, the court extended the safe harbour to shield payments carrying only the veneer of a securities-related transaction from recovery, even though the payments were not related to any actual transactions in securities.