The appellate courts have been busy explaining or clarifying preference and fraudulent transfer law. Although novices may think the Bankruptcy Code (Code) is clear on its face, imaginative counsel have found gaps in the statute and generated rafts of litigation since the Code's enactment in 1979. Recent appellate decisions, summarized below, show that courts are still making new law or refining prior case law.
Preferences
Creditors of distressed businesses are often frustrated by shareholder-controlled boards when directors pursue strategies that appear to be designed to benefit shareholders at the creditors’ expense. In these circumstances, creditors might consider sending a letter to the board to convince the directors to pivot and adopt alternative strategies or face risk of liability for breaching fiduciary duties. The efficacy of this approach depends on many factors, including the company’s financial condition, the board’s composition and the underlying transactions at issue.
“Under the long-standing ‘solvent-debtor exception,’ plaintiffs [unsecured trade creditors] possess an equitable right to receive post-petition interest at the contractual or default state law rate, subject to any other equitable considerations, before [the debtor] collects surplus value from the bankruptcy estate,” held the Ninth Circuit on Aug. 29, 2022. In re PG&E Corporation, 2022 WL 3712498, *4 (9th Cir. Aug. 29, 2022) (2-1).
The defendant "was a `mere conduit' of [a] fraudulent transfer and cannot be liable to the bankruptcy estate for funds she never knew about," held the U.S. Court of Appeals for the Second Circuit on May 5, 2022. In re BICOM N.Y., LLC, 2022 WL 1419997 (2d Cir. May 5, 2022). Affirming the lower courts' granting of summary judgement to the defendant transferee, the court refused to "equate ...
In a previous alert, we covered the Delaware Chancery Court’s decision in Stream TV Networks last year.
The Third Circuit recently affirmed the bankruptcy court's approved retention of the debtor's counsel ("S") when that "law firm dropped an existing client to avoid conflicts that would prevent it from taking on a more lucrative client [i.e., the debtor]." In re Boy Scouts of America, 2022 WL 1634643, *7 (3d Cir. May 24, 2022) (BSA). According to the court, there were "not enough facts to put [the so-called "hot potato" doctrine] into play" and disqualify S under the Rules of Professional Conduct. Id.
On July 5, 2022, cryptocurrency brokerage Voyager Digital filed for chapter 11 in the Southern District of New York Bankruptcy Court, citing a short-term “run on the bank” due to the “crypto winter” in the cryptocurrency industry generally and the default of a significant loan made to a third party as the reasons for its filing. At Voyager’s first day hearing on July 8, 2022, the Bankruptcy Court asked the critical question of whether the crypto assets on Voyager’s platform were property of the estate or its customers.
Last November, in In re LTL Mgmt. LLC, 1 Bankruptcy Judge Craig Whitley in Charlotte, North Carolina, ordered LTL Management LLC’s Chapter 11 bankruptcy case moved to New Jersey after finding that LTL Management had used the “Texas Two-Step” to manufacture jurisdiction in North Carolina improperly. LTL Management is a subsidiary of Johnson & Johnson (“J&J”) and a defendant in thousands of talc-related tort claim lawsuits.
In In re Purdue Pharma, L.P., 1 U.S. District Court Judge Colleen McMahon of the Southern District of New York vacated Purdue Pharma’s confirmed plan of reorganization after finding that the bankruptcy court below did not have statutory authority to issue a confirmation order granting non-consensual third-party releases—namely for the benefit of the Sackler family, which owns Purdue.