The Adelphia Creditors Committee filed an adversary proceeding against approximately 380 defendants, including bank lenders, investment banks and their agents, alleging wrongdoing in the defendants’ dealings with Adelphia’s former management who looted the company. The complaint asserted numerous claims for relief in connection with borrowing facilities under which Adelphia became liable to repay the banks for billions of dollars that went to the insiders.

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The U.S. Court of Appeals for the Third Circuit has ruled that a debtor may not reduce the number of votes required to confirm a chapter 11 plan of reorganization by purchasing certain claims. Such vote “gerrymandering” resulted in an unconfirmable plan, the court ruled. In re Machne Menachem, Inc., 233 Fed. Appex. 119, 2007 WL 1157015 (3d Cir. Apr. 19, 2007 (Pa.)).

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While Bankruptcy Code section 105 grants broad powers to issue injunctions, most bankruptcy courts are reluctant to enjoin litigation in other venues. A recent ruling by the U.S. Court of Appeals for the Ninth Circuit follows this trend, reversing a preliminary injunction issued by a bankruptcy court staying arbitration proceedings between two nondebtor parties.

However, the Ninth Circuit also articulated specific standards for when such a section 105 injunction may be obtained. In re Excel Innovations, Inc., 502 F.3d 1086, 2007 WL 2555941 (9th Cir. Sept. 7, 2007).

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For more than 10 years, the courts in New Jersey were split as to whether, under the Bankruptcy Code, a chapter 13 debtor’s right to cure a default on a mortgage loan secured by the debtor’s primary residence expired at the foreclosure sale, or at the time the deed to the foreclosed property was delivered to the purchaser. That split now has been resolved by the U.S. Court of Appeals for the Third Circuit in favor of the line of cases cutting off the right to cure at the time of the foreclosure sale. In re Connors, No. 06-3321 (3d Cir., Aug. 3, 2007).

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The United States Supreme Court has denied a petition for certiorari in a case in which the U.S. Court of Appeals for the Ninth Circuit had articulated when a bankruptcy court should stay arbitration proceedings between non-debtor parties. In re Excel Innovations, Inc., 502 F.3d 1086, (9th Cir. 2007), cert. den., __ U.S. __ (Dkt. No. 07-963, April 28, 2008).

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A recent bankruptcy court ruling is a reminder that bank accounts established for certain specific purposes may not be subject to general setoff rights.

Section 553 of the Bankruptcy Code preserves a creditor’s right of setoff under the Bankruptcy Code. To exercise this right, “mutuality” must exist—i.e., the debtor must owe an obligation to the creditor and the creditor a corresponding obligation to the debtor. Normally a straightforward analysis, determining whether mutuality is present becomes more difficult when there are more than two parties.

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The current liquidity drought is pushing more businesses toward some form of financial reorganization. As the restructurings become more frequent, two different trends–one in bankruptcy and the other in private equity–will intersect. The result may surprise dealmakers searching the detritus for investment opportunities.

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The “deepening insolvency” doctrine received another blow1 when a federal bankruptcy judge dismissed claims against the former directors and shareholders of a corporation for allegedly covering up massive fraud perpetuated by the business.

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Courts faced with the task of unraveling the results of the recent credit crisis are being called upon to scrutinize lending agreements—many of which are complex and often previously uninterpreted. The review of these agreements is a reminder to signatory parties of the importance of fully understanding their obligations upfront.

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The question, “Can we get them to agree not to file bankruptcy in the future?” must be near the top of the list of questions clients most commonly ask their transactions and workout lawyers.

Most lawyers fielding this question are likely to explain that such an agreement is not enforceable under bankruptcy law. Good lawyers then suggest that in certain situations, an agreement for the entry of an order lifting the automatic bankruptcy stay, or an agreement not to oppose a lift-stay motion if the other side files a bankruptcy petition, may be enforceable.

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