In a decision likely to affect thousands of Madoff investors, the Second Circuit Court of Appeals on Aug. 16, 2011 unanimously upheld the method used by the liquidating trustee for Bernard L.

The case of White v Davenham Trust Ltd, has reaffirmed that a creditor can choose its own method of enforcing a debt which has been guaranteed even where it might hold security for that debt.

The U.S. Court of Appeals for the First Circuit held on June 23, 2011, that junior creditors could receive a distribution over the objection of senior creditors who claimed they were entitled to post-petition interest under contractual subordination provisions. In re Bank of New England Corporation, ___ F.3d ___, 2011 WL 2476470 (1st Cir. June 23, 2011). In reaching its decision, based on the bankruptcy court's fact findings, the court stressed "that the parties did not intend to subordinate the Junior Noteholders to post-petition interest."Id. at *5.

The U.S. Court of Appeals, in a 2-1 decision on June 28, 2011, held that Bankruptcy Code § 546(e), which exempts a “Settlement Payment” from a bankruptcy trustee’s avoiding powers, insulated two sellers of Enron Corporation’s commercial paper from suit despite Enron’s early pre- bankruptcy redemption. Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., ___F.3d ___, 2011 WL 2536101 (2d Cir. June 28, 2011) (2-1).

The United States Supreme Court recently submitted to Congress an amendment to Bankruptcy Rule 2019 dealing with disclosure by groups of hedge funds and other distressed investors in reorganization cases. Unless Congress blocks its passage, which is unlikely, the amendment will become effective on Dec. 1, 2011.1 As shown below, the new rule streamlines and clarifies what had become a frequently litigated disclosure process.

Background

The court has a limited discretion not to make a bankruptcy order where the debt is the subject of a statutory demand which has not been paid and is outstanding at the time of the bankruptcy petition hearing.

The Seventh Circuit affirmed a district court’s ruling that a debtor-in-possession (“DIP”) lender had breached its financing agreement, barring its claim for commitment and funding fees from the DIP. Arlington LF, LLC v. Arlington Hospitality, Inc., No. 09-3560, 2011 WL 727981, *9 (7th Cir. March 3, 2011), aff’g No. 08 C 5098, 2011 WL 3055350 (N.D. Ill. Sept. 18, 2009). Although the DIP itself had also breached the agreement, that breach was not, in the court’s view, effective until after the lender had already “walked away.” Id. at *6.

In circumstances where a debtor lacks mental capacity to deal with a statutory demand and subsequent bankruptcy petition, the court will rescind or annul a bankruptcy order.

United States District Court Judge Alan S. Gold, on February 11, 2011, reversed a Florida bankruptcy court’s controversial October 2009 fraudulent transfer judgment1 against a group of lenders based on their receipt of a $421 million loan repayment in July 2007. 3V Capital Master Fund, et al., v. Official Committee of Unsecured Creditors of Tousa, Inc., et al, Case No. 10-60017-CIV (S.D. Fla. Feb.

The U.S. Court of Appeals for the Second Circuit, on Feb. 7, 2011, held that senior creditors could not “gift” part of their reorganization plan recovery to existing shareholders of the debtor.In re DBSD N. Am., Inc., __ F.3d __, 2011 WL 350480 (2d Cir. Feb. 7, 2011) (2-1) (Lynch, J.) (explainingIn re DBSD N. Am., Inc., 627 F.3d 496 (2d Cir. 2010) (summary opinion)). Its extensive 62-page opinion explained the court’s previous two-page summary ruling of Dec.