“The discharge of claims in bankruptcy applies with no less force to claims that are meritorious, sympathetic, or diligently pursued. Though the result may chafe one’s innate sense of fairness, not all unfairness represents a violation of due process.”
On March 19, 2021, the United States Court of Appeals for the Third Circuit issued a unanimous decision[1] affirming that the mutuality requirement of section 553(a) of the Bankruptcy Code must be strictly construed and, therefore, that triangular setoffs are not permissible in bankruptcy.
In a decision arising out of Tribune’s 2008 bankruptcy, the United States Court of Appeals for the Third Circuit recently issued a decision affirming confirmation of the media conglomerate’s chapter 11 plan over objections raised by senior noteholders who contended that the plan violated their rights under the Bankruptcy Code by not according them the full benefit of their prepetition subordination agreements with other creditors.
The Office of the Director of Corporate Enforcement (ODCE) recently issued new guidance outlining the implications of COVID-19 on its insolvency related functions. The statement provides an update on how they will assess the actions of directors of companies which have gone or will go into an insolvent liquidation as a consequence of the pandemic. The guidance is undoubtedly a welcome publication during this difficult time for almost all businesses.
Background
As the coronavirus (COVID-19) pandemic continues to shake global markets, it is likely that more companies will need to restructure to address liquidity constraints, to right-size their balance sheets, or to implement operational restructurings. In addition to a potential surge in restructurings, the spread of COVID-19 is already having pronounced impacts on companies planning or pursuing restructurings, and further market turmoil may cause even broader changes to the restructuring marketplace.
Potential Increase in Restructuring Activity
The U.S. Supreme Court held today in Mission Product Holdings, Inc. v. Tempnology, LLC that a trademark licensee may retain certain rights under a trademark licensing agreement even if the licensor enters bankruptcy and rejects the licensing agreement at issue. Relying on the language of section 365(g) of the Bankruptcy Code, the Supreme Court emphasized that a debtor’s rejection of an executory contract has the “same effect as a breach of that contract outside bankruptcy” and that rejection “cannot rescind rights that the contract previously granted.”
In a recent decision arising out of the Republic Airways bankruptcy, Judge Sean Lane of the United States Bankruptcy Court for the Southern District of New York held that the liquidated damages provisions of certain aircraft leases were improper penalties and, thus, “unenforceable as against public policy” under Article 2A the New York Uniform Commercial Code. In re Republic Airways Holdings Inc., 2019 WL 630336 (Bankr. S.D.N.Y. Feb. 14, 2019).
On February 8, 2019, the United States District Court for the Southern District of Texas, Houston Division, affirmed a Bankruptcy Court order enjoining a claimant from pursuing claims against a debtor’s non-debtor affiliates based upon third-party release and injunction provisions included in the debtor’s confirmed chapter 11 plan. In re CJ Holding Co., 2019 WL 497728 (S.D. Tex. Feb. 8, 2019).
In the recent case of Re M.D.Y. Construction Limited [2018] IEHC 676, an Interim Examiner made an application pursuant to section 541 of the Companies Act 2014 (the “2014 Act”) to have proposals for a scheme of arrangement confirmed by the High Court. Interestingly, the application was made before the Interim Examiner’s appointment had been confirmed by the Court.
Section 541 of the 2014 Act provides, inter alia, that the report of an Examiner shall be set down for approval by the Court as soon as may be after receipt of the report by the Court.
The United States Court of Appeals for the Third Circuit recently issued a 2–1 decision affirming the ruling of the Bankruptcy Court for the District of Delaware, which reconsidered its prior approval of a $275 million termination fee in connection with a proposed merger. In re Energy Future Holdings Corp., No. 18-1109, 2018 WL 4354741, at *14 (3d Cir. Sept. 13, 2018).