On July 24, 2013 the First Circuit Court of Appeals, applying an “investment plus” test, concluded that a Sun Capital private equity investment fund was engaged in a “trade or business” for purposes of determining whether the fund could be jointly and severally liable under ERISA for the unfunded pension withdrawal liability of the portfolio company.¹ Two Sun Capital investment funds, conveniently named Sun Capital Partners III, LP (“Fund III”) and Sun Capital Partners IV, LP, (“Fund IV”) (the “Sun Funds”) collectively owned 100 percent of Scott Brass, Inc.

On July 24, 2013, Judge Steven W. Rhodes of the Bankruptcy Court for the Eastern District of Michigan approved the City of Detroit’s motion to extend the automatic stay to various non-debtor parties, including certain state officials. The Court’s ruling effectively stays all pending litigation against the City, allows the City to continue to move forward with its chapter 9 case, and paves the way for a dispute over the City’s eligibility to file for chapter 9.

The Chapter 9 Filing and the State Court Litigation

On the afternoon of July 18, 2013, the City of Detroit filed its highly anticipated petition for relief under Chapter 9 of the Bankruptcy Code in the Bankruptcy Court for the Eastern District of Michigan. This marks the largest municipal bankruptcy filing in United States history.¹As a result of the Chapter 9 filing, all actions by creditors to collect prepetition claims against the City are enjoined through the imposition of an automatic stay, except for the application of special revenues pledged to indebtedness.

The absolute priority rule ordinarily prevents a Chapter 11 debtor from distributing any money or property to junior creditors and old equity investors unless all senior creditors have first been paid in full. See 11 U.S.C. § 1129(b)(2)(B)(ii). Nevertheless, old equity investors may attempt to receive new equity in the reorganized debtor in consideration for providing new (post-bankruptcy) investments in the debtor.

The EU Court of Justice held that Directive 2008/94/EC of the European Parliament and of the Council of 22 October 2008 (“Directive 2008/94”) applies to pension benefits under a supplementary pension scheme, regardless of the cause of the employer’s insolvency, and without taking into account state pension benefits. Directive 2008/94 provides that member states must protect the pension interests of retirees when an employer becomes insolvent.

On April 1, 2013, the U.S. Bankruptcy Court for the Eastern District of California ruled that the City of Stockton qualified to file for protection under chapter 9 of the Bankruptcy Code. The court’s decision on this issue serves as an important milestone for chapter 9 jurisprudence, clarifying the requirements for “good faith” negotiations and being “insolvent” as conditions to filing for chapter 9 protection. Significantly, the court held that a municipal debtor need not negotiate with all of its creditors, only those that it intends to impair.

On February 19, 2013, the six-person Review Team appointed by Michigan’s Governor to conduct a detailed financial review of the City of Detroit delivered its report to the Governor. The Report

As a result of the Review Team’s conclusion, the Governor is required to take action under Michigan’s emergency financial manager law by no later than March 21, 2013.  

The following flow chart summarizes the next steps to be taken in the financial review process of the City of Detroit.  

The U.S. Supreme Court recently denied a petition for writ of certiorari by United Healthcare Insurance Company (“UHC”), which had requested judicial review of a ruling by the U.S. Court of Appeals for the Fifth Circuit, whose jurisdiction includes the State of Texas. The Fifth Circuit’s opinion had held that ERISA did not preempt state claims brought by Access Mediquip (“Access”), a medical device provider, against UHC for negligent misrepresentation, promissory estoppel, and violations of the Texas Insurance Code (see Access Mediquip L.L.C. v. UnitedHealthcare Insurance Co., No.

FCStone, a New York-based commodities brokerage firm, was recently ordered to return a transfer of $15.6 million to the bankruptcy estate of Sentinel Management Group. Approximately $1.1 million of this amount constituted a prepetition transfer of proceeds the debtor obtained from the sale of securities, which proceeds the debtor distributed to a certain segment of its customers, including FCStone.

Bankruptcy Code § 1129(a)(10) provides that in order for a plan proponent to “cram down” - i.e., force acceptance of - a plan of reorganization on a dissenting class of creditors, at least one impaired class of creditors must vote in favor of the plan. Because a plan is often not accepted by all classes entitled to vote, the ability to procure at least one impaired, accepting class in order to cram down a dissenting class is essential in achieving plan confirmation.