A creditor’s “later-in-time reclamation demand is ‘subject to’ [a lender’s] prior rights as a secured creditor,” held the U.S. Court of Appeals for the Seventh Circuit on Feb. 11, 2020. In re HHGregg, Inc., 2020 WL 628268 (7th Cir. Feb. 11, 2020). And “[w]hen a lender insists on collateral, it expects the collateral to be worth something,” said the U.S. Court of Appeals for the Third Circuit on Feb. 11, 2020, when rejecting a guarantor’s “novel reading” of his security agreement. In re Somerset Regional Water Resources, LLC, 2020 WL 628542 (3d Cir. Feb. 11, 2020).

Lender repossesses the equipment of its business borrower after it defaults on its secured loan agreement. Because borrower needs the equipment to run its business, it then files a Chapter 11 petition and promptly asks lender to return the equipment. Lender refuses because the equipment secures the defaulted loan. Depending on where the debtor sought bankruptcy relief (e.g., New York or New Jersey), lender may be subject to sanctions for holding on to the equipment. 

Canada’s two main insolvency and restructuring statutes, the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA) were recently amended to include a new duty of good faith on the part of all “interested persons” involved in an insolvency proceeding. The amendments do not define “good faith” or “interested persons”. Although requiring all participants in an insolvency proceeding to act in good faith may be a laudable objective, the statutory amendments are problematic.

A bankruptcy trustee may sell “avoidance powers to a self-interested party that will abandon those claims, so long as the overall value obtained for the transfer is appropriate,” held the U.S. Court of Appeals for the Ninth Circuit on Jan. 15, 2020. Silverman v. Birdsell, 2020 WL 236777, *1 (9th Cir. Jan. 15, 2020).

The Supreme Court this winter will hear (and in one case, has heard and determined) high-profile appeals involving federal and provincial government powers, corporate rights under the Charter of Rights and Freedoms, and two complex commercial appeals.

The Court is also expected to release several decisions on contract law in 2020 that will have significant implications for businesses.

Appeal Heard and Decided

A secured lender’s “mere retention of property [after a pre-bankruptcy–repossession] does not violate” the automatic stay provision [§ 362(a)(3)] of the Bankruptcy Code (“Code”), held a unanimous U.S. Supreme Court on Jan. 14, 2021. City of Chicago v. Fulton, 2021 WL 125106, *4 (Jan. 14,2021). Reversing the Seventh Circuit’s affirmance of a bankruptcy court judgment holding a secured lender in contempt for violating the automatic stay, the Court resolved “a split” in the Circuits. Id., at *2. The Second, Eighth and Ninth Circuits had agreed with the Seventh Circuit.

“[A] secured creditor [has no] affirmative obligation under the automatic stay to return a debtor’s [repossessed] collateral to the bankruptcy estate immediately upon notice of the debtor’s bankruptcy,” the U.S. Court of Appeals for the Third Circuit held on Oct. 28, 2019. In re Denby-Peterson, 2019 WL 5538570, 1 (3d Cir. Oct. 28, 2019). Affirming the lower courts, the Third Circuit joined “the minority of our sister courts — the Tenth and D.C. Circuits” with its holding.

A bankruptcy court’s preliminary injunction was “not a final and immediately appealable order,” held the U.S. District Court for the District of Delaware on Dec. 10, 2019. In re Alcor Energy, LLC

An insolvent parent’s college “tuition payments… depleted the [debtor’s] estate and furnished nothing of direct value to the [debtor’s] creditors…,” held the U.S. Court of Appeals for the First Circuit on Nov. 12, 2019. In re Palladino, 2019 WL 5883721, *3 (1st Cir. Nov. 12, 2019). Reversing the bankruptcy court on a direct appeal, the First Circuit rejected its reasoning “that a financially self-sufficient daughter offered [the debtor parents] an economic benefit.” Id. at *2.

“[A] secured creditor [has no] affirmative obligation under the automatic stay to return a debtor’s [repossessed] collateral to the bankruptcy estate immediately upon notice of the debtor’s bankruptcy,” held the U.S. Court of Appeals for the Third Circuit on Oct. 28, 2019. In re Denby-Peterson, 2019 WL 5538570, *1 (3d Cir. Oct. 28, 2019). Affirming the lower courts, the Third Circuit joined “the minority of our sister courts – the Tenth and D.C. Circuits” with its holding.