The U.S. Court of Appeals for the First Circuit recently ruled in the Puerto Rico bankruptcy case that Fifth Amendment takings claims cannot be discharged or impaired by a bankruptcy plan. As a matter of first impression in that circuit, the Court disagreed with the Ninth Circuit and held that former property owners affected by prepetition takings must be paid in full.

In re Fin. Oversight & Mgmt. Bd., 41 F.4th 29 (1st Cir. 2022)

Affirming the bankruptcy court below in a case of first impression, in In re Caviata Attached Homes, LLC, 481 B.R. 34 (B.A.P. 9th Cir. 2012), a Ninth Circuit bankruptcy appellate panel held that a relapse into economic recession following a chapter 11 debtor’s emergence from bankruptcy was not an “extraordinary circumstance” that would justify the filing of a new chapter 11 case for the purpose of modifying the debtor’s previously confirmed plan of reorganization.

Modification of a Confirmed Chapter 11 Plan

In the first circuit-level opinion on the issue, the Fourth Circuit Court of Appeals in Matson v. Alarcon, 651 F.3d 404 (4th Cir. 2011), held that, for purposes of establishing priority under section 507(a)(4) of the Bankruptcy Code, an employee's severance pay was "earned" entirely upon termination of employment, even though the severance amount was determined by the employee's length of service with the employer.

Section 507(a)(4)

The Bankruptcy Code treats insiders with increased scrutiny, from longer preference periods to rigorous equitable subordination principles, denial of chapter 7 trustee voting rights, disqualification in some cases of votes on a cram-down chapter 11 plan, and restrictions on postpetition key-employee compensation packages. The treatment of claims by insiders for prebankruptcy services is no exception to this general policy: section 502(b)(4) disallows insider claims for services to the extent the claim exceeds the "reasonable value" of such services.