Deal structure matters, particularly in bankruptcy. The Third Circuit recently ruled that a creditor’s right to future royalty payments in a non-executory contract could be discharged in the counterparty-debtor’s bankruptcy. The decision highlights the importance of properly structuring M&A, earn-out, and royalty-based transactions to ensure creditors receive the benefit of their bargain — even (or especially) if their counterparty later encounters financial distress.

Background

Until recently, courts in the Ninth Circuit have generally followed the minority view that non-debtor releases in a bankruptcy plan are prohibited by Bankruptcy Code Section 524(e), which provides that the “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.” In the summer of 2020, the Ninth Circuit hinted that its prohibition against non-debtor releases was not absolute, when the court issued its decision in Blixseth v. Credit Suisse, 961 F.3d 1074 (9th Cir.

If a creditor is holding property of a party that files bankruptcy, is it “exercising control over” such property (and violating the automatic stay) by refusing the debtor’s turnover demands? According to the Supreme Court, the answer is no – instead, the stay under Section 362(a)(3) of the Bankruptcy Code only applies to affirmative acts that disturb the status quo as of the filing date. In other words, the mere retention of property of a debtor after the filing of a bankruptcy case does not violate the automatic stay.

Leveraged loans continue to be a topic of interest in the current environment, particularly when they are pooled and securitized as collateralized loan obligations. A recent decision sheds light on whether and when leveraged loans and similar instruments may be classified as securities and, therefore, be subject to securities laws.

Before ingesting too much holiday cheer, we encourage you to consider a recent opinion from the United States Court of Appeals for the Second Circuit.

Weil Bankruptcy Blog connoisseurs will recall that, in May 2019, we wrote on the Southern District of New York’s decision in In re Tribune Co. Fraudulent Conveyance Litigation, Case No. 12-2652, 2019 WL 1771786 (S.D.N.Y. April 23, 2019) (Cote, J.) (“Tribune I”).

Transfers and transactions up to ten years old may be scrutinized, unwound and recovered by a trustee, the bankruptcy court sitting in Massachusetts recently held in the NECCO (think chalky wafer candy) bankruptcy case. The ruling, in a case of first impression in Massachusetts, expands the reach back period from the typical four-year period for fraudulent transfer recovery, so long as the IRS is a creditor in the case.

A recent decision from the United States District Court for the Southern District of New York, In re Tribune Co. Fraudulent Conveyance Litigation, Case No. 12-2652, 2019 WL 1771786 (S.D.N.Y. April 23, 2019) (Cote, J.), has re-examined application of the “securities safe harbor” under section 546(e) of the Bankruptcy Code, 11 U.S.C. §§ 101–1532, to the transferees of “financial institutions” in so-called “conduit transactions,” following the United States Supreme Court’s 2018 decision in Merit Management Group, LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018).

Introduction

In re Katy Indus., Inc., 590 B.R. 628 (Bankr. D. Del. 2018) presented an interesting question: If a stalking horse bidder’s successful bid to purchase a company in chapter 11 was partially predicated upon a credit bid, and a portion of that credit bid was challenged after the sale closed, what would be the result for the bidder’s overall successful bid if that portion of the credit bid was eliminated?

Background

Tolstoy warned that “if you look for perfection, you’ll never be content”; but Tolstoy wasn’t a bankruptcy lawyer. In the world of secured lending, perfection is paramount. A secured lender that has not properly perfected its lien can lose its collateral and end up with unsecured status if its borrower files bankruptcy.

Beauty Brands, LLC, along with two subsidiaries and affiliates, has filed a petition for relief under chapter 11 in the Bankruptcy Court for the District of Delaware (Lead Case No. 19-10031).