It’s a defense v. offense distinction:
- Defense—An objection and counterclaim designed to diminish or zero-out a proof of claim in bankruptcy is not subject to arbitration; but
- Offense—An objection or counterclaim designed to do anything more . . . can be compelled to arbitrate.
That’s the essence of a recent opinion in Johnson v. S.A.I.L. LLC (In re Johnson), Adv. No. 22 -172, Northern Illinois Bankruptcy Court (issued March 28, 2023; Doc. 18). What follows is a summary of that opinion.
Facts
Over the past two years, there has been an interesting trend of courts, in certain circumstances, borrowing from principles of insolvency law when determining analogous questions of trust law. Most recently, the private wealth industry has seen this very application in connection with the now infamous proceedings relating to the trust known as the Ironzar II Trust[1].
Johnson & Johnson filed bankruptcy back in 2021 (In re LTL Management, Case No. 21-30589, New Jersey Bankruptcy Court).
That bankruptcy is now dismissed—on order of the U.S. Third Circuit Court of Appeals.
So, Johnson & Johnson refiles its bankruptcy (In re LTL Management, Case No. 23-12825, New Jersey Bankruptcy Court).
New and Improved
Here’s what’s new and improved about the second bankruptcy[fn. 1]:
“The trustee may avoid . . . any obligation . . . incurred by the debtor, that was madeor incurred“ with actual fraudulent intent or as constructive fraud.
–From § 548 of Bankruptcy Code (emphasis added).
Similar language is contained in the Uniform Voidable Transactions Act—and in its predecessor acts—for 100+ years. [Fn. 1]
But actions to avoid debts as fraudulent transfers are rare—and largely unknown, it seems.
A Bad Experience
Boy Scouts of American achieved a confirmed plan of reorganization in its bankruptcy.
That confirmation is now affirmed on appeal by the U.S. District Court in Delaware[fn. 1]—and is heading to the Third Circuit Court of Appeals for further review.
The District Court’s affirming opinion is 155 pages long and highly detailed. This article tries to summarizes the opinion’s highlights—attempting to make the complex clear.
100% Payment Plan
The core of the opinion, around which most everything else revolves, is this:
Question: Can a creditor prevent its debtor from filing bankruptcy by pre-petition contract terms?
Answer: No . . . according to In re Roberson Cartridge Co., LLC, Case No. 22-20192 in the Northern Texas Bankruptcy Court (03/07/2023, opinion at Doc. 77).
Facts
Say what?!.
“Hypothetical jurisdiction” for a bankruptcy appeal?!
Who knew? I sure didn’t.
But it is, apparently, a thing . . . and it may even be real.
At U.S. Supreme Court
A newly filed Petition in the U.S. Supreme Court is Waleski v. Montgomery, McCraken, Walker & Rhodes, LLP, Case No. 22-914 (Petition filed 3/16/2023).
–The Question
The Question Presented to the U.S. Supreme Court in Waleski v Montgomery is this:
What happens when a creditor class fails or refuses to vote on confirmation of a Subchapter V plan? Does that prevent a consensual confirmation?
We have a recent answer from In re Creason, Case No. 22-00988, Western Michigan Bankruptcy Court (opinion issued 2/23/2023).
Facts
The Subchapter V Debtor is a sole-proprietor dentist.
Facts
Insolvency Act 2003
Comment
In the Three Arrows case,(1) the BVI Court has endorsed what is believed to be its first extra-territorial order summoning directors of a BVI company (in liquidation) to appear for private examination by joint liquidators.
“Creative destruction” occurs when something new kills off whatever existed before it.
IPhone Example
Just think, for example, of all the creative destruction that the iPhone has wrought! It has destroyed businesses that provided telephones and phone books, cameras and film, audio recordings and players, newspapers and newsstands, and related services.