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      Insolvency News and Analysis - Week Ending November 21, 2014
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    Insolvency News and Analysis – Week Ending November 21, 2014

    Friday, November 21st, 2014
    English: The Supreme Court of the United State...

    The Supreme Court of the United States. Washington, D.C. (Photo credit: Wikipedia)

    Trends

    Ch. 11s Fall 24 Percent in Week Ended Nov. 14 from Year Ago Pace

    Third Quarter Review

    Legislation and Rules

    A Dozen Reforms the ABI’s Bankruptcy Reform Commission Report Should Endorse

    Amendments Adopted by the Supreme Court to be Effective December 1, 2014

    Jurisdiction

    Thoughts on a New Age of Consent: What Does Consent Mean with Respect to Stern Claims?

    Secured Claims

    ‘Stripping Off’ Mortgage Cases Going To High Court

    Avoidance and Recovery

    NOLs – A Recoverable Transfer?

    Positive Health Of The Fraudulent Transferee’s Good Faith Defense

    Sales

    Buyer Beware: Payment On Assumed Debt In An Asset Sale Could Be An Avoidable Preference

    Confirmation

    Cramdown Hurdles Round 2: Confirmation Can Be An Elusive Prize

    Cross-Border

    Chapter 15 Bankruptcy: Game-Changer or False Dawn?

    Forty-Four Percent of Chapter 15s Filed in S.D.N.Y. in 2014

    Suntech Chapter 15: Moving COMI and Establishing Jurisdiction Held Legitimate and Not Improper Manipulation

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    Insolvency News and Analysis – Week of November 7, 2014

    Friday, November 7th, 2014
    English: The John Minor Wisdom U.S. Courthouse...

    English: The John Minor Wisdom U.S. Courthouse, home of the United States Court of Appeals for the Fifth Circuit, New Orleans, Louisiana. (Photo credit: Wikipedia)

    Trends

    Year-Over-Year Bankruptcy Filings Continue to Decline

    Current Developments

    Recent Developments in Bankruptcy Law

    Secured Claims

    Recent “Family Farmer” Case Shows How Secured Creditors Can Avoid Being Plowed Down By Unfair Cramdown Provisions

    The Bankruptcy Clause, the Fifth Amendment, and the Limited Rights of Secured Creditors in Bankruptcy

    Lenders take note of recent Fifth Circuit bankruptcy decision

    In re Motors Liquidation: No Intent Required for UCC-3 Termination Statement to be Effective

    Avoiding Collateral Damage: In re Motors Liquidation and the Effectiveness of UCC Termination Statements

    Administrative Claims

    In re World Imports: Court Denies Section 503(b)(9) Claims of Sellers Who Did Not Ship Goods Directly to the Debtor

    Proofs of Claim

    Think Twice: Signing Proofs of Claim for Clients

    Avoidance and Recovery

    Is this Harbor Safe? Second Circuit Set to Explore Limits of Bankruptcy Code Section 546(e)

    New Value Does Not Need to Remain Unpaid

    Give and Take: Delaware Bankruptcy Court Dismisses Trustee’s Turnover and Avoidance Claims Relating to Debtor’s Net Operating Losses

    Ordinary Course of Business Preference Defense Clarified in a Recent SDNY Bankruptcy Court Decision

    Sales

    Opportunistic Acquisitions: Buying Assets Through Bankruptcy

    Liquidations

    Stop in the Name of Equity: Second Circuit Affirms Dismissal of Appeals in Chapter 11 Liquidation Proceedings as Equitably Moot

    Reorganizations

    Momentive Postscript – Bankruptcy Rule 3018: Vote Changing on Chapter 11 Plans: You Can’t Have Your Cake and Eat It, Too

    Cross-Border

    Corporate Bankruptcy Tourists Land in U.S.

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    Insolvency News and Analysis – Week Ending October 10, 2014

    Friday, October 10th, 2014

    Current Events

    Commercial Restructuring and Bankruptcy News (ReedSmith, LLP)

    Venue

    The Short Case for Venue Reform

    Procedure

    Proposed Bankruptcy Rule and Official Form Changes

    Secured Claims

    Just When You Thought You Were Out, They Pull You Back In

    Credit bidding challenges in bankruptcy

    Administrative Claims

    When Are Goods “Received” by the Debtor? Establishing International Suppliers’ Entitlement to 503(b)(9) Administrative Expense Claim

    Executory Contracts, IP, and Licensing

    Questioning the Executoriness of Trademark Licenses in Integrated Agreements

    Avoidance and Recovery Actions

    Dilution Of Corporate Stock As A Fraudulent Transfer In Antonello

    R-E-C-O-V-E-R: Find Out What It Means to the Third Circuit

    Strong Arm Powers: What Can Be Done With An Avoided Lien?

    Uniform Voidable Transactions Act Approved by Uniform Law Commission to Replace UFTA

    Subordination and Recharacterization

    Focusing on Intent in Recharacterization Analysis, Delaware Bankruptcy Court Ruling Indicates that Creditors Seeking Derivative Standing Face High Hurdle

    Bankruptcy Sales

    Opportunistic Acquisitions: Buying Assets Through Bankruptcy

    Sales Free and Clear: What About Restrictive Covenants?

    Conversion and Dismissal

    Taking a Stand Where Few Have Trodden: Structured Dismissal Held Clearly Authorized by the Bankruptcy Code

    Cross-Border

    Brazilian Reorganization Plan: Fundamentally Fair or Wholesale Trampling of Creditors’ Rights?

    U.S. Causes of Action and Attorney Retainer Fund Sufficient Assets for Chapter 15 Recognition

    A “Second Bite” from the Second Circuit: Revisiting Section 363 Review of Transfers in Chapter 15 Bankruptcy Cases

    Second Circuit Holds That a Sale by a Chapter 15 Debtor in a Foreign Main Proceeding of a Claim Against an Obligor Located in the U.S. Must Be Reviewed by the U.S. Bankruptcy Court Under Section 363 of the Bankruptcy Code

    Related articles

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    Insolvency News and Analysis – June 20, 2014

    Friday, June 20th, 2014
    Alphabetical by Author

    Alphabetical by Author (Photo credit: woohoo_megoo)

     

     

     

     

     

     

     

     

     

     

     

    Bankruptcy and Insolvency News and Analysis – Week of June 16 – 20, 2014:

    Confirmation:

    Prevalence and Utility of Roadmap Decisions in Mega-Cases

    No Confirmation Without Representation: New Test Is Proposed for Approval of a Debtor’s Proposed Slate of Post-Confirmation Officers and Directors

    Bankruptcy Sales:

    Bankruptcy Sale: No Stay Pending Appeal, Then No Appeal?

    Secured Lending and Claims:

    An L of a Mess: Perfecting Against LLP’s

    Equity Begets Flexibility: Valuing a Secured Creditor’s Claim in Bankruptcy and Allocating Post-Petition Interest

    Avoidance Actions:

    Seventh Circuit Reads Bankruptcy Safe Harbor Broadly

    Defending Preference and Claw-Back Actions in the Wake of the Supreme Court’s Bellingham Decision

    Executory Contracts and Intellectual Property:

    Contract Remedies in the Face of Imminent Default – What Happens to State Law Adequate Assurance and Anticipatory Breach in Bankruptcy?

    Eighth Circuit reconsiders trademark licenses in bankruptcy

    Cross-Border:

    Comity and drama: current trends in cross-border insolvencies

    Jurisdiction and Bellingham Analysis:

    Supreme Court’s decision in Bellingham leaves key Stern v Marshall questions unanswered

    And Still More:

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    When a Good Deal . . . Isn’t.

    Monday, July 1st, 2013

    A very recent decision out of California’s Central District Bankruptcy Court highlights the boundaries of “commercial reason” and “diligence” where distressed asset sales are concerned.

    In re 1617 Westcliff, LLC (Case No. 8:12-bk-19326-MW) involved the court-approved sale of the debtor’s real property under a purchase agreement in which the debtor and the purchaser agreed to use their “commercially reasonable and diligent efforts” to obtain the approval of the debtor’s mortgage lender for the assumption of the mortgage debt by the buyer.  If the approval was not obtainable, the buyer had the right to terminate the transaction.  The buyer also had the right to terminate the deal if the assumption required payment of more than a 1% assumption fee.

    As is sometimes the case where due diligence remains while a deal is approved, things didn’t quite work out as planned.  Unfortunately, the bank proved less cooperative than the parties had anticipated.  More importantly, however, the buyer notified the debtor-seller 4 days prior to closing that it would not proceed with the transaction as structured, but might be willing to proceed if the transaction was framed as a tax deferred exchange.

    The debtor was, understandably, somewhat less than receptive to restructuring the deal at the 11th hour.  It insisted that the buyer proceed with the transaction as originally agreed and as approved by the court.  In response, the buyer effectively walked away.  The parties then made competing demands on the escrow company regarding the buyer’s $200,000 deposit, and filed cross-motions with Bankruptcy Judge Mark Wallace to enforce them.

    In a brief, 11-page decision, Judge Wallace found that the buyer’s renunciation of the deal 4 days before closing was a material breach of the buyer’s obligation to use “commercially reasonable and diligent efforts” to obtain assumption consent:

    The Purchase Agreement required [the buyer] to keep working in good faith for an assumption until the close of business on May 10, 2013, not to throw up its hands and to propose – at the eleventh hour – a wholesale restructuring of the purchase transaction in a manner completely foreign to the Purchase Agreement.  On [the date of the proposal] there were still four days left to reach agreement with the Bank, but [the buyer] chose (five months into the deal) to abandon the assumption.  It was not commercially reasonable nor was it diligent for [the buyer] to cease negotiations with the Bank relating to the assumption of the loan under these circumstances.
    Judge Wallace found that due to this breach the debtor was entitled to retain the $200,000 deposit.  He found further that the buyer, by offering to purchase the property in a restructured transaction, had failed to effectively terminate the deal.  Instead, the buyer had indicated that it was “eager to keep the Purchase Agreement in force (on terms other than those agreed to).”  Since the deal had not terminated, the buyer remained under a duty to continue to use reasonable efforts to obtain the bank’s consent.  Its failure to do so caused the loss of its deposit.

    Bill of sale sedan 1927

    Bill of sale sedan 1927 (Photo credit: dlofink)

    The 1617 Westcliff decision (the unpublished slip copy is available here) serves as a reminder to buyer’s counsel of the unique nature of distressed asset purchases.  The Bankruptcy Court which originally approved the purchase remains available and prepared to resolve any issues which may arise prior to closing, often at a fraction of what it would cost to get a Superior Court involved in connection with an unraveled private sale.  And conditions and contingencies to the sale must be carefully drafted and observed.  This applies even to common asset-purchase “boilerplate” such as “commercial reasonableness” and “diligence.”

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    Cherry Picking.

    Friday, June 14th, 2013

    In a 23-page memorandum decision issued yesterday, New York Bankruptcy Judge Stewart Bernstein ruled that the debtor and a third party were parties to a master agreement that allowed the debtor to issue purchase orders that the counter-party was required to fill.  Judge Bernstein held that the debtor could assume the master agreement but could reject individual purchase orders.  The purchase orders were divisible from the master agreement.

    English: Sketch of Richard Mentor Johnson free...

    English: Sketch of Richard Mentor Johnson freeing a man from debtors' prison. Johnson was an advocate of ending the practice of debt imprisonment throughout his political career. (Photo credit: Wikipedia)

    The decision (available here) provides a thorough analysis of when – and under what circumstances – an executory agreement may be “divisible” into separate, individual agreements . . . which can then be selectively assumed or rejected by a debtor or trustee.

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    A Formula for Confusion

    Monday, January 23rd, 2012
    Inc

    Image by Guudmorning! via Flickr

    Thanks to an active lobby in Congress, commercial landlords have historically enjoyed a number of lease protections under the Bankruptcy Code.  Even so, those same landlords nevertheless face limits on the damages they can assert whenever a tenant elects to reject a commercial lease.

    Section 502(b)(6) limits landlords’ lease rejection claims pursuant to a statutory formula, calculated as “the [non-accelerated] rent reserved by [the] lease . . . for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease . . . .”

    This complicated and somewhat ambiguous language leaves some question as to whether or not the phrase “rent reserved for . . . 15 percent . . . of the remaining term of such lease” is a reference to time or to money:  That is, does the specified 15 percent refer to the “rent reserved?”  Or to the “remaining term?”

    Many courts apply the formula with respect to the “rent reserved.”   See. e.g., In re USinternetworking, Inc., 291 B.R. 378, 380 (Bankr.D.Md.2003) (citing In re Today’s Woman of Florida, Inc., 195 B.R. 506 (Bankr.M.D.Fl.1996); In re Gantos, 176 B.R. 793 (Bankr.W.D.Mich.1995); In re Financial News Network, Inc., 149 B.R. 348 (Bankr.S.D.N.Y.1993); In re Communicall Cent., Inc., 106 B.R. 540 (Bankr.N.D.Ill.1989); In re McLean Enter., Inc., 105 B.R. 928 (Bank.W.D.Mo.1989)).  These courts calculate the amount of rent due over the remaining term of the lease and multiply that amount times 15%.

    Other courts calculate lease rejection damages based on 15% of the “remaining term” of the lease.  See, e.g., In re Iron–Oak Supply Corp., 169 B.R. 414, 419 n. 8 (Bankr.E.D.Cal.1994); In re Allegheny Intern., Inc., 145 B.R. 823 (W.D.Pa.1992); In re PPI Enterprises, Inc., 324 F.3d 197, 207 (3rd Cir.2003).

    For more mathematically-minded readers, the differently-applied formulas appear as follows:

    Rent-Based Formula: Maximum Rejection Damages = (Rent x Remaining Term) x 0.15
       
    Term-Based Formula: Maximum Rejection Damages = Rent x (Remaining Term x 0.15)

    Earlier this month, a Colorado bankruptcy judge, addressing the issue for the first time in that state, sided with those courts who read the statutory 15% in terms of time:

    “In practice, by reading the 15% limitation consistently with the remainder of § 502(b)(6)(A) as a reference to a period of time, any lease with a remaining term of 80 months or less is subject to a cap of one year of rent [i.e.,15% of 80 months equals 12 months] and any lease with a remaining term of 240 months or more will be subject to a cap of three years rent [i.e., 15% of 240 months equals 36 months].  Those in between are capped at the rent due for 15% of the remaining lease term.”

    In re Shane Co., 2012 WL 12700 (Bkrtcy. D.Colo., January 4, 2012).

    The decision also addresses a related question:  To what “rent” should the formula apply – the contractual rent applicable for the term?  Or the unpaid rent remaining after the landlord has mitigated its damages?  Under the statute, “rents reserved” refers to contractual rents, and not to those remaining unpaid after the landlord has found a new tenant or otherwise mitigated.

    Colorado Bankruptcy Judge Tallman’s decision, which cites a number of earlier cases on both sides of the formula, is available here.

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    “Collateral Damage”? Or “Credit to Whom Credit is Due”?

    Monday, December 19th, 2011
    Collateral Damage (film)

    Image via Wikipedia

    Outside of bankruptcy, a creditor whose loan is secured by collateral typically has the right to payment in full when that collateral is sold – or, if the collateral is sold at an auction, to “credit bid” the face amount of the debt against the auction price of the collateral.

    Inside bankruptcy, however, the right to “credit bid” is not always guaranteed.

    In July, this blog predicted Supreme Court review of a Seventh Circuit case addressing the question of whether a bankruptcy court may confirm a plan of reorganization that proposes to sell substantially all of the debtor’s assets without permitting secured creditors to bid with credit.  The courts of appeals are divided two to one over the question, with the Third and Fifth Circuits holding that creditors are not entitled to credit bid and the Seventh Circuit holding to the contrary (for a review of the more recent, Seventh Circuit decision, click here).

    The question is one of great significance for commercial restructuring practice, with several bankruptcy law scholars suggesting the answer “holds billions of dollars in the balance.”

    Apparently, the Supreme Court agrees.  Last week, the justices granted review of the Seventh Circuit decision.  For the petitioners’ brief, respondent’s opposition, and amicus briefs, click here.

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    What’s In a Name?

    Sunday, August 21st, 2011

    After a brief hiatus, we’re back – and just in time to discuss a recent decision of some import to trademark owners and licensors.

    Judge Richard Posner at Harvard University

    Image via Wikipedia

     

    For many years, insolvency practitioners have recognized the value of the Bankruptcy Code in permitting a reorganizing firm to assign contractual rights to a third party, even where the contract itself prohibits assignment.  That power is limited, however, where “applicable [non-bankruptcy] law” prohibits the assignment without the non-bankrupt party’s consent.

    In recent years, the “anti-assignment” provisions of federal copyright and patent law have limited the transfer of patent and copyright licenses through bankruptcy.   Whether the transfer of trademark licenses is likewise limited has been an open question, at least amongst the Circuit Courts of Appeal.

    Until now.

    In late July, the Seventh Circuit Court of Appeals found in In re XMH Corp. that trademarks were not assignable.

    XMH Corp. involved the former Hartmarx clothing company’s Chapter 11, along with the related filings of several subsidiaries.  XMH ultimately sold its assets and assigned contracts to a group of third-party purchasers.  Those assets included certain trademark licenses for jeans held by one of the XMH subsidiaries.  The trademarks were owned by a Canadian firm.

    The Canadian firm objected to the trademark assignment, and the bankruptcy court agreed.  The District Court reversed, and the licensor appealed to the Seventh Circuit.

    In a succinct, 15-page decision, Judge Posner found that where “applicable law” prohibits the assignment of a trademark, it cannot be assigned through a bankruptcy proceeding absent the trademark owner’s consent.

    Judge Posner apparently reached this decision despite a lack of either party to articulate which “applicable law” actually prohibited the assignment:

    Unfortunately the parties haven’t told us whether the applicable trademark law is federal or state, or if the latter which state’s law is applicable (the contract does not contain a choice of law provision)—or for that matter which nation’s, since [the licensor] is a Canadian firm. ([The licensee’s] headquarters are in the State of Washington.)  None of this matters, though, because as far as we’ve been able to determine, the universal rule is that trademark licenses are not assignable in the absence of a clause expressly authorizing assignment. Miller v. Glenn Miller Productions, Inc., 454 F.3d 975, 988 (9th Cir. 2006) (per curiam); In re N.C.P. Marketing Group, Inc., 337 B.R. 230, 235-36 (D. Nev. 2005); 3 McCarthy on Trademarks § 18:43, pp. 18-92 to 18-93 (4th ed. 2010).

    But the Seventh Circuit then turned to the question of whether the contract actually contained a valid trademark license – and found that though the agreement appeared to provide a relatively short-term license of the trademark, what remained at the time of the proposed assignment was merely a contract for services.

    Despite its brevity, XMH Corp. is instructive in two respects:

    • Trademarks cannot be assigned – at least not in the 7th Circuit.
    • Contract drafters and negotiators must be careful to identify and preserve the trademark rights at issue.
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    River Road Hotel Partners

    Sunday, July 10th, 2011

    One of the time-honored attractions of US bankruptcy practice is the set of tools provided for the purchase and sale of distressed firms, assets and real estate.  In recent years, the so-called “363 sale” has been a favorite mechanism for such transactions – its popularity owing primarily to the speed with which they can be accomplished, as well as to the comparatively limited liability which follows the assets through such sales.

    But “363 sales” have their limits:  In such a sale, a secured creditor is permitted to “credit bid” against the assets securing its lien – often permitting that creditor to obtain a “blocking” position with respect to sale of the assets.

    Seal of the United States Court of Appeals for...

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    Until very recently, many practitioners believed these “credit bid” protections also applied whenever assets were being sold through a Chapter 11 plan.  In 2009 and again in 2010, however, the Fifth and Third Circuit Courts of Appeal held, respectively, that a sale through a Chapter 11 Plan didn’t require credit bidding and could be approved over the objection of a secured lender, so long as the lienholder received the “indubitable equivalent” of its interest in the assets (for more on the meaning of “indubitable equivalence,” see this recent post).

    Lenders, understandably concerned about the implications of this rule for their bargaining positions vis a vis their collateral in bankruptcy, were relieved when, about 10 days ago, the Seventh Circuit Court of Appeals respectfully disagreed – and held that “credit bidding” protections still apply whenever a sale is proposed through a Chapter 11 Plan.

    The Circuit’s decision in In re River Road Hotel Partners (available here) sets up a split in the circuits – and the possibility of Supreme Court review.  In the meanwhile, lenders may rest a little easier, at least in the Seventh Circuit.

    Or can they?

    It has been observed that the Seventh Circuit’s River Road Hotel Partners decision and the Third Circuit’s earlier decision both involved competitive auctions – i.e., bidding – in which the only “bid” not permitted was the lender’s credit bid.  The Fifth Circuit’s earlier decision, however, involved a sale following a judicial valuation of the collateral at issue.

    Is it possible to accomplish a sale without credit bidding – even in the Seventh Circuit – so long as the sale does not involve an auction, and is instead preceded by a judicial valuation?

    Stay tuned.

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