Client Alert

In recent years, constructively fraudulent transfer claims asserted in bankruptcy cases, especially those arising from LBOs and similar shareholder transactions, have hit a major road block.

The U.S. Bankruptcy Court for the District of Delaware recently issued an opinion that addresses, among other issues, the question of whether section 546(e) of the Bankruptcy Code preempts certain fraudulent transfer avoidance actions brought under state law. In re Physiotherapy Holdings Inc., No. 15-51238 (Bankr. D. Del. June 20, 2016).

Parties to all legal proceedings - including bankruptcy proceedings - are entitled to Constitutionally protected due process rights, including reasonable notice and an opportunity to be heard. In the bankruptcy context, the debtor must give known creditors reasonable notice of certain critical events, including the sale of the debtor’s assets and the deadline to file claims against the debtor.

Section 382 limits a loss corporation’s ability to use its Net Operating Losses (NOLs) carryforwards following an "ownership change."¹ An ownership change is triggered if one or more "5-percent shareholders" of the loss corporation increase their ownership in the aggregate by more than 50 percentage points during a testing period. Following an ownership change, the "Section 382 limitation" generally reduces the ability to use NOLs to offset taxable income in any post-change year.²

On April 20, 2011, the IRS issued proposed regulations under Treas. Reg. §1.267(f)-1(c) (the Proposed Regulations), which will become effective after they are adopted as final regulations. The Proposed Regulations modify the current deferred loss rules to allow the acceleration of a deferred loss in certain circumstances that routinely arise in international restructurings of U.S. companies. Accordingly, corporations in a controlled group that are considering a sale to another member of the controlled group should evaluate the consequences under the Proposed Regulations.

The Bankruptcy Code sets forth the relative priority of claims against a debtor and the waterfall in which such claims are typically paid. In order for a court to confirm a plan over a dissenting class of creditors – what is commonly called a “cram-down” – the Bankruptcy Code demands thateither (i) the dissenting class receives the full value of its claim, or (ii) no classes junior to that class receive any property under the plan on account of their junior claims or interests. This is known as the “absolute priority rule.”