THE RULING: CHAPTER 15 DEBTORS CAN ASSERT AVOIDANCE ACTIONS UNDER STATE LAW

The so-called 20-day administrative priority claim (set forth in Section 503(b)(9) of the Bankruptcy Code) is perhaps the best remedy available to vendor creditors in Chapter 11 cases.

David Conaway [email protected] 704.945.2149 Manufacturing Customers Vendors Supply Chain Insolvency Litigation Commercial and Financial Contracts Cross-Border

BACKGROUND

It’s no secret that Kmart is facing another liquidity crisis. Just over ten years after Sears rescued the discount retailer from bankruptcy in 2006, the pioneer of the “blue light special” is destined for another, and perhaps last, going out of business sale. Earlier this year, the company publicly disclosed its inability to avoid insolvency stating: “Our historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern.” In other words, Kmart knows its heading for that blue light special in the sky.

In this Update

• on April 24, 2017, the Alberta Court of Appeal affirmed the Alberta Court of Queen’s Bench’s decision in Redwater Energy Corporation (Re), 2016 ABQB 278 (Redwater)
• reasons for the Redwater decision
• the issues in Redwater raise various important policy concerns regarding land owners, the public at large and the oil and gas industry
• background and significant implications of Redwater

Introduction

In Caetano v Quality Meat Packers, 2017 ONSC 1199, Justice Belobaba of the Ontario Superior Court recently had opportunity to consider whether two representative proceedings commenced on behalf of two separate groups of employees against an insolvent employer ought to be struck because, despite the actions having been commenced within the applicable two year limitation period, the plaintiffs in those two actions had failed to obtain the necessary representation orders within the two year period.

I am pleased to share a great article on the recent reform of German insolvency law regarding avoiding pre-insolvency transactions by my good friend and colleague Annerose Tashiro, a leading cross-border insolvency specialist in Germany. This is important in the event a contract counter-party becomes insolvent in Germany. Also, German avoidance laws are likely applicable should an insolvent German company also file a Chapter 15 proceeding in the U.S.

Under Section 521(a)(2)(A) of the federal bankruptcy code, a debtor in a chapter 7 bankruptcy must file a statement within 30 days of the bankruptcy filing notifying the court, creditors and the trustee whether the debtor intends to retain or surrender property encumbered by a mortgage.  In its October, 2016 decision in the case of In re Failla, the 11th Circuit Court of Appeals, in affirming rulings from the bankruptcy court and the federal district court, held that once a chapter 7 debtor elects to "surrender" mortgaged property, he is precluded from thereafter opposing

In Reichhold Holdings US, Inc., on August 24, 2016, the Delaware Bankruptcy Court ruled that a vendor's reclamation trumped a lender's lien on inventory, arising from a post-petition DIP loan (that was used to repay the prepetition loan).

Generally, reclamation claims are subject to existing liens on inventory. However, where a prior loan is paid, the underlying liens are extinguished, and the existing reclamation claim becomes the first "lien" on the inventory. Liens arising from a subsequent DIP loan are junior to the pre-existing reclamation claim.

Companies that sell goods or extend credit to customers expect to be paid. When customers become insolvent, or file for Chapter 11 protection, those expectations are no longer realistic. Yet, there are a number of "creditor remedies" that can be utilized to maximize recovery from the insolvent customer. This article addresses one such "remedy": a carve-out from the pre-petition secured lender.