Turns out, it depends on who you ask. Judge Bernstein said no. Recently, Judge Glenn said yes, but only for causes of action that resemble actual fraudulent transfers. It is unusual for the bankruptcy judges in Manhattan to disagree with each other, so let’s take a look at the issue.
Background
In a first, the Bankruptcy Court for the Southern District of New York in the Arcapita Bank case had to decide whether Shari’a compliant investment agreements, providing for Murabaha and Wakala transactions, qualify for the safe harbor protections provided in the bankruptcy code for securities contracts, forwards and swaps. The court held that they do not. Since the opinion runs about 100 pages long, we attempt to distill some very basic facts concerning Shari’a compliant transactions and point to important holdings made by the court.
Shari’a Compliant Transactions
On April 26, 2021, Royal Blue Realty Holdings, Inc., a New York-based real estate company, filed a petition under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the Southern District of New York (Case No. 21-10802). The company reports $1 million to $10 million in assets and $10 million to $50 million in liabilities.
On April 25, 2021, Secure Home Holdings LLC and various affiliates, which provide home security services and smart home automation to residential and small business customers, filed a petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of Delaware (Case No. 21-10745). The company reports $100 million to $500 million in both assets liabilities.
On April 24, 2021, New York-based beachwear retailer L&L Wings, Inc., which operates 26 stores in the Carolinas, Florida, Texas and California, filed a petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the Southern District of New York (Case No. 21-10795).
On April 24, 2021, Augustus Intelligence Inc., a New York based AI systems developer, filed a petition under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of Delaware (Case No. 21-10744). The company reports $10 million to $50 million in assets and $1 million to $10 million in liabilities.
Late on April 20, 2021, Texas-based WB Supply LLC, one of the largest privately held pipe and supply companies in the United States, filed a petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of Delaware (Case No. 21-10729). The company reports $10 million to $50 million in both assets and liabilities.
Late on April 19, 2021, Wilmington, Del.-based non-profit Connections Community Support Programs, Inc. (“CCSP”), which provides psychiatric/behavioral health services, substance use disorder treatment, housing and veterans’ services, intellectual disabilities services and operation support services, filed a petition under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of Delaware (Case No. 21-10723).
On April 12, 2021, Automotores Gildemeister SpA of Santiago, Chile filed a petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the Southern District of New York (Case No. 21-10685) along with several affiliates. The corporate minutes accompanying the petition indicate that the company contemplates a prepackaged chapter 11 filing.
Late on April 5, 2021, TECT Aerospace Group Holdings, Inc., along with certain affiliates that manufacture high precision components and assemblies for the aerospace industry, filed a petition under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of Delaware (Case No. 21-10670).