It is a well-established principle of bankruptcy law that claims generally crystallize as of the bankruptcy petition date. Of course, section 506(b) of the bankruptcy code allows over-secured, secured creditors to recover post-petition interest and costs, including reasonable legal fees, if their documentation provides them with the right to recover these costs. But what about unsecured creditors – are post-petition legal fees incurred by an unsecured creditor whose contract with the debtor provides for reimbursement of legal fees allowed or not?
In a win for lenders, on March 18, the U.S. Bankruptcy Court for the Southern District of New York held that an unambiguous make-whole provision in a loan contract was enforceable under New York law, despite the fact that the lender had accelerated the loan. In re 1141 Realty Owner LLC, 2019 WL 1270818 (Bankr. S.D.N.Y. Mar. 18, 2019).
Background
The subject matter jurisdiction of bankruptcy courts causes confusion and can be hard to understand. In a recent decision, the United States Court of Appeals for the Eleventh Circuit clarified the meaning of the phrase “related to” in 28 U.S.C. §1334(b), the federal statute that governs the subject matter jurisdiction of bankruptcy courts.[1]
On April 23, 2019, Ropes & Gray, representing a large group of shareholder defendants, won a decision in the U.S. District Court for the Southern District of New York that provides potential fraudulent transfer protection for payments made to shareholders in leveraged buyouts, stock redemptions and other securities transactions.
Constructive Fraudulent Transfer Claims and the Securities Safe Harbor
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In a case of first impression, the Fifth Circuit held that a defendant is not required to plead as an affirmative defense under the Real Estate Settlement Procedures Act that it had complied with Section 1024.41 of the Code of Federal Regulations by responding properly to a borrower’s loss mitigation application. Germain v. US Bank National Association, — F. 3d — (2019 WL 146705, April 3, 2019). It affirmed the dismissal of the borrower’s RESPA claim on a summary judgment motion, based on the following facts.
In Popular Auto, Inc. v. Reyes-Colon (In re Reyes-Colon), Nos. 17-1971, 17-1972, 2019 WL 1785039 (1st Cir. April 24, 2019), the First Circuit recently ruled that “special circumstances” does not authorize a bankruptcy court to use its equitable powers to contravene the numerosity requirement for an involuntary petition under section 303(b)(1) of the Code. This twelve year dispute did not end well for the petitioning creditors.
Amendments to the Federal Rules of Bankruptcy Procedure became effective on December 1, 2017, which impose affirmative obligations on secured creditors to protect their rights to distributions in a bankruptcy case. Previously, Bankruptcy Rule 3002(a) required only unsecured creditors and equity security holders to file proofs of claim or proofs of interest in a bankruptcy. Although often recommended, it was not statutorily necessary for a secured creditor to file a proof of claim in order to protect its rights.
Whether a contract is executory is an often-litigated issue in bankruptcy because of the treatment afforded to such contracts. Although the Bankruptcy Code does not define the term “executory contract,” most courts follow a variation of the definition provided by Professor Vern Countryman in a 1973 law review article.
When a creditor is notified that a debtor has filed for bankruptcy, the creditor should be careful to determine whether it needs to file a Proof of Claim in the case to preserve its rights to receive payments from the bankrupt estate. This article goes over the importance of a creditor acting in a timely and proper fashion and preserving its rights in the bankruptcy process.
Cases Under Chapter 7 and 13