In a case involving a bankruptcy reorganization in which a trustee in bankruptcy was given the right to pursue claims of misappropriation or infringement (but not ownership of the bankrupt’s intellectual property), the U.S. Court of Appeals for the Federal Circuit reversed the district court finding that the no trustee had standing to bring suit. Morrow, et al. v. Microsoft Corp., Case Nos. 06-1512, -1518, -1537 (Fed. Cir., Sept. 19, 2007 (Moore, J.; Prost, J., dissenting).

With the recent decline in housing and real estate generally, companies in the homebuilding and construction markets face serious challenges. Some projects have already been forced into Chapter 11 and others will almost certainly require either a bankruptcy filing or out-of-court restructure. In the event a bankruptcy is filed, vendors, contractors, subcontractors and other interested parties should be aware of the impact of important bankruptcy code provisions on their relationship with troubled companies.

Automatic Stay

In 1991, a decision of the Delaware Chancery Court helped popularize the term "zone of insolvency.”[1] In the intervening 16 years, numerous courts and commentators have cited this decision as standing for the proposition that the directors of a Delaware corporation that is either insolvent or in the zone of insolvency owe fiduciary duties to the creditors, as well as to the shareholders, of the corporation.

In a recent decision, the United States Bankruptcy Court for the Southern District of New York found that the Statutory Committee of Unsecured Creditors (the “Committee”) of Iridium, a failed Motorola spin-off venture, was unable to prove that Iridium was insolvent or had unreasonably small capital during the four-year period prior to commencement of its bankruptcy case.

A recent federal district court appellate decision issued in the Enron chapter 11 case1 has ruled that the postpetition transfer of a prepetition bankruptcy claim from one party to another may insulate the transferred claim against certain types of attack based solely on conduct by a prior holder of the same claim. Whether a particular claim is protected depends upon how the claim was transferred.

The United States Bankruptcy Court for the Southern District of New York granted preliminary injunctions ordering a directors and officers liability insurer to advance defense costs, despite the fact that the insurer had denied coverage, and without adjudicating the coverage defense. Axis Reinsurance Co. v. Bennett et al., Adv. No. 07-01712 (S.D.N.Y. Bankr. Aug. 31, 2007); Grant v. Axis Reinsurance Co., Adv. No. 07-2005 (S.D.N.Y. Bankr. Sep. 11, 2007). The bankruptcy court applied New York law and relied heavily on the case In re WorldCom, Inc.

Thinking about investing in a distressed company? If the company declares bankruptcy, your investment may be subject to equitable subordination, whereby your claim is subordinated to the claims of other creditors. One of the most crucial factors in determining whether your claim is equitably subordinated is whether you are deemed an insider as an insider’s actions undergo significantly more scrutiny than those of non-insiders. Of course, when investing in a distressed company, the more control over the entity’s, the better, right?

Saddleback Valley Community Church v. El Toro Materials Company, Inc. 2007 U.S. App. LEXIS 22991 (October 1, 2007) Client Alert

In a decision that should provide comfort to landlords confronting insolvent tenants, the Ninth Circuit recently ruled that the Bankruptcy Code’s limitation on the amount of damages a landlord is entitled to recover upon termination of a lease does not limit the landlord’s right to recover damages which are not based upon the loss of future rental income.

Can a United States bankruptcy court deny recognition of a foreign insolvency proceeding even if no one opposes such recognition? In a recent decision, Judge Burton Lifland, a highly respected bankruptcy judge and one of the authors of Chapter 15 of the Bankruptcy Code, says yes.

Liquidators of Bear Stearns Funds Seek Relief under Chapter 15

A federal court in California recently has thrown its weight behind a majority rule that holds that letter of credit proceeds should be applied to damages resulting from the rejection of a lease of non-residential real property. In re Connectix Corp., No. 05-556848, 2007 WL 2137802 (Bankr. N.D. Cal. May 10, 2007). The court also addressed the formula the parties should employ to arrive at a damages figure.