In late December 2022, the United States District Court for the District of Delaware issued an opinion affirming the Mallinckrodt bankruptcy court’s November 2021 decision that the debtor could discharge certain post-petition, post-confirmation royalty obligations for the sale of Acthar Gel.

In the past six months, four major players in the crypto space have filed for chapter 11 bankruptcy protection: Celsius Network, Voyager Digital, FTX, and BlockFi, and more may be forthcoming. Together, the debtors in these four bankruptcy cases are beholden to hundreds of thousands of creditors. The bulk of the claims in these cases are customer claims related to cryptocurrency held on the debtors’ respective platforms. These customer claimants deposited or “stored” fiat currency and cryptocurrencies on the debtors’ platforms.

On November 29, U.S. Senator Ron Wyden (D-OR), Chairman of the Senate Finance Committee, sent requests for information to the CEOs of six of the largest crypto exchanges. The requests seek information about the safeguards each exchange has put in place to protect customers’ assets in the event they file for bankruptcy or otherwise experience financial distress.

Recent rulings out of the United States Court of Appeals for the Fifth Circuit and its lower bankruptcy courts have emphasized the circuit’s broad interpretation of section 363(m) of the Bankruptcy Code, which protects bankruptcy sales from being overturned on appeal.

In her September 23 opinion in In re Royal Street Bistro, LLC, et al., No. 21-2285, District Judge Sarah S. Vance provided a comprehensive summary of the Fifth Circuit case law while mooting a debtor’s attempt to appeal a sale under section 363 of the Bankruptcy Code.

In his final opinion, Judge Robert D. Drain of the United States Bankruptcy Court for the Southern District of New York held that dividends paid from proceeds of safe-harbored transactions under section 546(e) of the Bankruptcy Code are not safe-harbored. While only approximately 15 pages of Judge Drain’s 109-page final opus are dedicated to consideration of the section 546(e) issue, the relevant analysis ends with a pressing question to Congress and an appeal to modify section 546(e) to “restrict to public transactions its currently overly broad free pass . . .

Summary

The U.S. Bankruptcy Code’s safe harbor provisions provide comfort to financial institutions that transfers made under protected financial contracts will generally not be subject to avoidance or “clawback” if the transferor subsequently files for bankruptcy protection under Chapter 7 or Chapter 11 of the U.S. Bankruptcy Code.

Following an August 11, 2022 opinion from the Court of Appeals for the Fifth Circuit, certain irrevocable surety bonds will not be considered executory contracts in bankruptcy, even when a court applies a functional multiparty approach to the traditional Countryman definition of an executory contract.

The crypto winter has overcast the summer for many Voyager customers. Upon the commencement of Voyager’s chapter 11 filing in July, customer accounts were frozen. Unable to trade their own crypto assets, some frustrated customers rushed to consult with legal counsel. Others began studying bankruptcy law in the hopes of finding a legal solution. It was only late last week, on August 4, when some customers found relief from the crypto storm: Judge Michael Wiles approved Voyager’s motion to allow certain customers who had cash in their accounts to withdraw cash, up to $270 million.

Following an August 4, 2022 memorandum opinion from Judge Brendan L. Shannon of the United States Bankruptcy Court for the District of Delaware, a party to a safe harbored contract can qualify as a “financial participant” under section 546(e) of the Bankruptcy Code even where the party was not a financial participant at the time of the transaction.