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.

On May 3, 2017, the Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”), acting on behalf of the cash-strapped Commonwealth of Puerto Rico (the “Commonwealth”), filed for bankruptcy protection in the District Court for the District of Puerto Rico. The Commonwealth’s Title III Petition for Covered Territory or Covered Instrumentality (the “Petition”) was filed in accordance with Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), codified at 48 U.S.C. § 2161, et seq.

Last year we reported (here) that Alberta’s Redwater Energy Corporation decision signaled good news for lenders and noteholders secured by Alberta O&G assets because the federal Canadian Bankruptcy and Insolvency Act (“BIA”) prevailed over conflicting provisions in the provincial regulations promulgated by the Alberta Energy Regulator (“AER”).

Last year, we reported that Australia had proposed significant insolvency reforms that, in our view, are long overdue ("A Major Leap Forward for Australian Insolvency Laws").

On March 22, 2017, the Supreme Court, in Czyzewski et al., v. Jevic Holding Corp., et al., confirmed that the Bankruptcy Code does not permit “priority skipping” in Chapter 11 structured dismissals. In doing so, the Court held that, although the Code does not explicitly provide what, if any, priority rules apply to the distribution of estate assets in a Chapter 11 structured dismissal, “[a] distribution scheme in connection with the dismissal of a Chapter 11 case cannot, without the consent of the affected parties, deviate from the basic priority rules that apply under the . . .

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.

Reversing the lower courts, the Third Circuit Court of Appeals has today held that, under New York law (which governs 95% of all indentures), the early repayment of indenture notes in Chapter 11 is an optional redemption requiring the payment of make-whole notwithstanding the automatic acceleration of the notes due to the Chapter 11 filing. Delaware Trust Co. v. Energy Future Intermediate Holding Company LLC (In re Energy Future Holdings Corp.), Case No. 16-1251 (5th Cir. Nov. 17, 2016).

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.