|The South Bay Law Firm Law Blog highlights developing trends in bankruptcy law and practice. Our aim is to provide general commentary on this evolving practice specialty.|
Executory Contracts, IP, and Licensing
Avoidance and Recovery Actions
Subordination and Recharacterization
Conversion and Dismissal
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
Bankruptcy and Insolvency News and Analysis – Week of June 16 – 20, 2014:
Secured Lending and Claims:
Executory Contracts and Intellectual Property:
Jurisdiction and Bellingham Analysis:
And Still More:
Some of the week’s top bankruptcy and restructuring headlines:
And Still More:
“The humorist Douglas Adams was fond of saying, ‘I love deadlines. I love the whooshing sound they make as they fly by.’ But the law more often follows Benjamin Franklin’s stern admonition: ‘You may delay, but time will not.’ To paraphrase Émile Zola, deadlines are often the terrible anvil on which a legal result is forged.”
With these words, Ninth Circuit Court of Appeals last week declined to retroactively extend Federal Rule of Bankruptcy Procedure 4007(c)’s deadline to file a non-dischargeability complaint. That deadline permits creditors only 60 days following an individual debtor’s initial meeting of creditors (otherwise known as the debtor’s “section 341(a) meeting”) to file a complaint to have certain types of debt determined non-dischargeable, unless a request for extension of the deadline is filed within the same, initial 60-day period.
The case before the 3-judge panel involved a creditor who had, in fact, previously obtained an extension to file a non-dischargeability complaint – but who, due to internal word-processing difficulties with conversion to the “Portable Document Format” (*.pdf) format now required for electronic filings with federal bankruptcy courts, missed the extended deadline by less than an hour.
The brief, 14-page decision (available here) upheld prior rulings in the same matter by both the Bankruptcy Court and the District Court. It raised, but did not answer, the question of what happens when a missed deadline is due to external problems (e.g., technical difficulties with the Bankruptcy Court’s filing system), rather than problems with counsel’s IT configuration or office procedures. But it also declined to recognize an “equitable exception” to the rule in the absence of a Supreme Court directive to the contrary:
We acknowledge that the U.S. Supreme Court has not expressly addressed whether FRBP 4007(c)’s filing deadline admits of any equitable exceptions and that lower courts are divided on the issue. See Kontrick v. Ryan, 540 U.S. 443, 457 & nn.11–12 (2004) (declining to decide question and noting circuit split). We need not, and do not, reach the question of whether external forces that prevented any filings—such as emergency situations, the loss of the court’s own electronic filing capacity, or the court’s affirmative misleading of a party—would warrant such an exception. See, e.g., In re Kennerley, 995 F.2d at 147–48; see also Ticknor v. Choice Hotels Intern., Inc., 275 F.3d 1164, 1165 (9th Cir. 2002). . . . In short, absent unique and exceptional circumstances not present here, we do not inquire into the reason a party failed to file on time in assessing whether she is entitled to an equitable exception from FRBP 4007(c)’s filing deadline; under the plain language of the rules and our controlling precedent, there is no such exception.
When a retailer becomes insolvent, suppliers or vendors who have recently provided goods on credit typically have the ability to assert “reclamation” rights for the return of those goods. Retailers may respond to these rights by seeking the protection the federal bankruptcy laws – and, in particular, the automatic stay.
When a retailer files for bankruptcy while holding goods which are subject to creditors’ “reclamation” rights, what should “reclamation” creditors do?
The Bankruptcy Code itself provides some protection for “reclamation” creditors by providing such creditors additional time in which to assert their claims, and by affording administrative priority for a certain portion for such claims even when they are not formally asserted.
But is merely asserting a reclamation claim under the Bankruptcy Code sufficient to protect a supplier once a retailer is in bankruptcy? A recent appellate decision from Virginia’s Eastern District serves as a reminder that merely speaking up about a reclamation claim isn’t enough.
When Circuit City sought bankruptcy protection in 2009, Paramount Home Entertainment was stuck with the tab for more than $11 million in goods. Though it didn’t object to blanket liens on Circuit City’s merchandise which came with the retailer’s debtor-in-possession financing, and stood by quietly while Circuit City later liquidated its merchandise throug a going-out-of-business sale, Paramount did file a timely reclamation demand as required by the Bankruptcy Code. It also complied with what it understood to be the Bankruptcy Court’s orders regarding administrative procedures for processing its reclamation claims in Circuit City’s case. It was therefore unpleasantly surprised when Circuit City objected to Paramount’s reclamation claim – and when the Bankruptcy Court sustained that objection – on the grounds that Paramount hadn’t done enough to establish or preserve its reclamation rights.
Paramount appealed the Bankruptcy Court’s ruling, claiming that it complied with what it understood to have been the Bankruptcy Court’s administrative procedures for processing reclamation claims. Paramount argued that to have done more (i.e., to have sought relief from the automatic stay to take back its goods or commenced litigation to preserve its rights to the proceeds of such goods) would have disrupted Circuit City’s bankruptcy case.
In affirming the Bankruptcy Court, US District Judge James Spencer held that the Bankruptcy Code, while protecting a creditor’s reclamation rights, doesn’t impose them on the debtor. Instead, a reclaiming creditor must take further steps consistent with the Bankruptcy Code and state law to preserve the remedies which reclamation claims afford. Merely asserting a reclamation claim under the Bankruptcy Code – or under a Bankruptcy Court’s administrative procedure – isn’t enough:
Let the seller beware.
One of the most effective vehicles for the rescue and revitalization of troubled business and real estate to emerge in recent years of Chapter 11 practice has been the “363 sale.”
Named for the Bankruptcy Code section where it is found, the “363 sale” essentially provides for the sale to a proposed purchaser, free and clear of any liens, claims, and other interests, of distressed assets and land.
The section has been used widely in bankruptcy courts in several jurisdictions to authorize property sales for “fair market value” . . . even when that value is below the “face value” of the liens encumbering the property.
In the Ninth Circuit, however, such sales are not permitted – unless (pursuant to Section 363(f)(5)) the lien holder “could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.”
A recent decision issued early this year by the Ninth Circuit Bankruptcy Panel and available here) provides a glimpse of how California bankruptcy court are employing this statutory exception to approve “363 sales.”
East Airport Development (EAD) was a residential development project in San Luis Obispo which, due to the downturn of the housing market, never came completely to fruition.
Originally financed with a $9.7 million construction and development loan in 2006, EAD’s obligation was refinanced at $10.6 million in mid-2009. By February 2010, the project found itself in Chapter 11 in order to stave off foreclosure.
A mere two weeks after its Chapter 11 filing, EAD’s management requested court authorization to sell 2 of the 26 lots in the project free and clear of the bank’s lien, then to use the excess proceeds of the sale as cash collateral.
In support of this request, EAD claimed the parties had previously negotiated a pre-petition release price agreement. EAD argued the release price agreement was a “binding agreement that may be enforced by non-bankruptcy law, which would compel [the bank] to accept a money satisfaction,” and also that the bank had consented to the sale of the lots. A spreadsheet setting forth the release prices was appended to the motion. The motion stated EAD’s intention to use the proceeds of sale to pay the bank the release prices and use any surplus funds to pay other costs of the case (including, inter alia, completion of a sewer system).
The bank objected strenuously to the sale. It argued there was no such agreement – and EAD’s attachment of spreadsheets and e-mails from bank personnel referencing such release prices ought to be excluded on various evidentiary grounds.
The bankruptcy court approved the sale and cash collateral use over these objections. The bank appealed.
On review, the Ninth Circuit Bankruptcy Appellant Panel found, first, that the bankruptcy court was within the purview of its discretion to find that, in fact, a release price agreement did exist – and second, that such agreement was fully enforceable in California:
The Ninth Circuit Bankruptcy Appellate Panel‘s East Airport decision provides an example of how bankruptcy courts in the Ninth Circuit are creatively finding ways around legal hurdles to getting “363 sales” approved in a very difficult California real estate market. It likewise demonstrates the level of care which lenders’ counsel must exercise in negotiating the work-out of troubled real estate projects.
Title II of the Dodd-Frank Act provides “the necessary authority to liquidate failing financial companies that pose a systemic risk to the financial stability of the United States in a manner that mitigates such risk and minimizes moral hazard.”
Under this authority, the government would have had the requisite authority to structure a resolution of Lehman Brothers Holdings Inc. – which, as readers are aware, was one of the marquis bankruptcy filings of the 2008 – 2009 financial crisis.
Readers are also aware that Dodd-Frank is an significant piece of legislation, designed to implement extensive reforms to the banking industry. But would it have done any better job of resolving Lehman’s difficulties than did Lehman’s Chapter 11?
Predictably, the FDIC is convinced that a government rescue would have been more beneficial – and in “The Orderly Liquidation of Lehman Brothers Holdings Inc. under the Dodd-Frank Act” (forthcoming in Vol. 5 of the FDIC Quarterly), FDIC staff explain why this is so.
The 19-page paper boils down to the following comparison between Chapter 11 and a hypothetical resolution under Dodd-Frank:
By contrast, under Dodd-Frank:
Convinced? You decide.
Jones Day’s Charles Oellerman and Mark Douglas have just issued The Year in Bankruptcy: 2010. It is a (relatively) concise, thorough (81 pages), and useful compendium of bankruptcy statistics, trend analyses, case law highlights, and legislative updates for the year.
What to expect for 2011? According to the authors: