On April 23, 2019, the United States District Court for the Southern District of New York, in fraudulent transfer litigation arising out of the 2007 leveraged buyout of the Tribune Company,1 ruled on one of the significant issues left unresolved by the US Supreme Court in its Merit Management decision last year.
Intercreditor agreements--contracts that lay out the respective rights, obligations and priorities of different classes of creditors--play an increasingly important role in corporate finance in light of the continued prevalence of complex capital structures involving various levels of debt. When a company encounters financial difficulties, intercreditor agreements become all the more important, as competing classes of creditors seek to maximize their share of the company's limited assets.
On January 17, 2017, in a long-awaited decision in Marblegate Asset Management, LLC v. Education Management Finance Corp.,1 the US Court of Appeals for the Second Circuit held that Section 316 of the Trust Indenture Act ("TIA") does not prohibit an out of court restructuring of corporate bonds so long as an indenture's core payment terms are left intact.
In a recent bankruptcy case, Richard Lewiston unsuccessfully attempted to shelter his assets in the Lois and Richard Lewiston Living Trust (the “Trust”) from inclusion in his bankruptcy estate based on the Trust’s spendthrift provision. Here, the bankruptcy court looked to Michigan state law in applying the provisions of the Bankruptcy Code and concluded the Trust property was part of Lewiston’s bankruptcy estate.
Facts about the Trust:
On June 12, the United States Supreme Court in Clark v Rameker resolved the question that has recently split the 5th and 7th Circuits– Are inherited IRAs protected from the beneficiary’s creditors in a bankruptcy proceeding? The Court unanimously held that they are not.
In 2012, the Fifth Circuit ruled in In re Chilton that inherited IRAs constituted retirement funds within the “plain meaning” of §522 of the Bankruptcy Code and were thus exempt from the bankruptcy estate, under § 522(d)(12) (the federal exemptions). See our prior discussion of this case here.
After Chilton, many thought the issue was settled.
On December 5, 2013, Judge Steven Rhodes of the US Bankruptcy Court for the Eastern District of Michigan held that the city of Detroit had satisfied the five expressly delineated eligibility requirements for filing under Chapter 9 of the US Bankruptcy Code1 and so could proceed with its bankruptcy case.
When the Fifth Circuit, in a case of first impression for that circuit and all of its sister circuit, last year ruled in In re Chilton, 11-40377, 2012 WL 762924 (5th Cir. Mar. 12, 2012) that inherited IRAs constituted retirement funds within the “plain meaning” of §522 of the Bankruptcy Code and were thus exempt from the bankruptcy estate, under § 522(d)(12) (the federal exemptions), many thought the issue was settled.
The Bankruptcy Court for the Western District of Washington has now joined other states in invalidating transfers to a self-settled trust on a variety of grounds in the latest asset protection self settled trust case, In re Huber, 2012 Bankr. LEXIS 2038 (May 17, 2013).
The general rule is that an IRA is exempt from the claims of creditors. Indeed, the Federal Bankruptcy Code provides in Sections 522(b)(3)(C) and 522(d)(12) that a retirement plan, including an IRA and a Roth IRA, is an exempt asset in bankruptcy. However in Green v. Pershing L.L.C., N.D. Okla., No. 4:12-cv-00296-CVE-FHM, 10/22/12, the U.S. District Court for the Northern District of Oklahoma ruled that the plan sponsor was not liable for turning over Mr. Green’s entire IRA to the IRS in response to the Notice of Levy and demand the IRS served on Pershing L.L.C. (“Pershing”).