Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“WSRCPA”) represents Congress’ attempt to address companies considered “too big to fail.” The statute creates a new “orderly liquidation authority” (“OLA”), which allows the Federal Deposit Insurance Corporation (“FDIC”) to seize control of a financial company1 whose imminent collapse is determined to threaten the financial system as a whole. Commencement of a receivership under the OLA would preempt any proceedings under the Bankruptcy Code.
On December 5, 2013, the U.S. Bankruptcy Court for the Eastern District of Michigan released its 143 page decision upholding the City of Detroit’s eligibility to be a debtor under chapter 9 of the United States Bankruptcy Code. In re City of Detroit, Michigan, Case No. 13-53846 (Bankr. E.D. Mich. Dec.
The comprehensive financial reform bill recently passed by the Senate1 creates a new “orderly liquidation authority” (“OLA”) that would allow the Federal Deposit Insurance Corporation (“FDIC”) to seize control of a financial company2 whose imminent collapse is determined to threaten the financial system as a whole.
On October 16, 2013, the U.S. Bankruptcy Court for the Central District of California ruled that the City of San Bernardino is eligible for protection under chapter 9 of the Bankruptcy Code. In re City of San Bernardino, Cal., Case No. 12-28006, 2013 WL 5645560 (Bankr. C.D. Cal. Oct. 16, 2013).
The United States District Court for the District of Delaware recently affirmed a Bankruptcy Court decision that invalidated the use by creditors of so-called “triangular”, or non-mutual, setoffs in which obligations are offset among not only the parties to a bilateral contract but also their affiliates. In re SemCrude, L.P., 2010 U.S. Dist. LEXIS 42477 (D. Del.
On September 26, 2013, Judge Steven W. Rhodes of the U.S. Bankruptcy Court for the Eastern District of Michigan denied the Official Committee of Retirees’ (the “Committee”) motion to stay all eligibility proceedings pending its motion to withdraw the reference. In re City of Detroit, Michigan, Case No. 13-53846, ECF No. 1039 (Bankr. E.D. Mich. Sept.
On May 5, 2009, Judge James Peck, the Bankruptcy Judge in the Lehman Brothers bankruptcy cases, held that the safe harbor provisions of the Bankruptcy Code do not override the mutuality requirements for setoff under section 553(a) of the Bankruptcy Code. As a consequence, the Bankruptcy Court prohibited Swedbank, a non-debtor counter party to a swap agreement, from setting off pre-petition claims against Lehman against funds collected for Lehman’s account postpetition. See In re Lehman Bros. Holdings Inc., Bankr. Case No. 08-13555 (JMP) (Bankr. S.D.N.Y.
On July 24, 2013, Judge Steven W. Rhodes of the Bankruptcy Court for the Eastern District of Michigan approved the City of Detroit’s motion to extend the automatic stay to various non-debtor parties, including certain state officials. The Court’s ruling effectively stays all pending litigation against the City, allows the City to continue to move forward with its chapter 9 case, and paves the way for a dispute over the City’s eligibility to file for chapter 9.
The Chapter 9 Filing and the State Court Litigation
On January 25, 2010, Judge James M. Peck of the United States Bankruptcy Court for the Southern District of New York ruled that provisions in a CDO indenture subordinating payments due to Lehman Brothers Special Financing Inc., as swap provider, constituted unenforceable ipso facto clauses under the facts and circumstances of this case. The Court also held that, because the payment priority provisions were not contained in the four corners of a swap agreement, the Bankruptcy Code’s safe harbor protections, which generally permit the operation of ipso facto clauses, did not apply.
On the afternoon of July 18, 2013, the City of Detroit filed its highly anticipated petition for relief under Chapter 9 of the Bankruptcy Code in the Bankruptcy Court for the Eastern District of Michigan. This marks the largest municipal bankruptcy filing in United States history.1As a result of the Chapter 9 filing, all actions by creditors to collect prepetition claims against the City are enjoined through the imposition of an automatic stay, except for the application of special revenues pledged to indebtedness.