Companies that terminate pension plans before filing for bankruptcy may no longer escape paying significant claims to the PBGC.

In Pension Benefit Guaranty Corporation v. Oneida, Ltd. dated April 8, 2009, the U.S. Court of Appeals for the Second Circuit reversed a ruling by the U.S. Bankruptcy Court for the Southern District of New York characterizing certain “termination premiums” owed to the Pension Benefit Guaranty Corporation (PBGC) pursuant to the Deficit Reduction Act of 2005 as contingent, pre-petition claims and thus dischargeable in bankruptcy.

The Fourth Circuit’s reversal of the bankruptcy court’s narrow reading of swap agreement clarifies the nature of agreements entitled to broad protections under the Bankruptcy Code, but until the decision is fully implemented on remand, swap participants will bear increased risk in hedging transactions.

The decision in In re SemCrude, L.P., et al. prohibiting parties from contracting around Bankruptcy Code section 553’s mutuality requirement may disrupt customary business practices, including those widely used in the energy, natural gas and crude oil markets, because it rules that contracting for cross affiliate netting does not “create” the mutuality required for setoff.

Sellers should be proactive in taking steps to protect themselves from a distressed buyer’s non-payment.  

In the current economic downturn, sellers are dealing with many formerly good customers whose financial health is deteriorating. To protect their interests, sellers should assess their rights under applicable contracts and law and develop a strategy to minimize their exposure.

Step 1 – Assess the Parties’ Contractual Rights

The European Commission has approved the plan by the Italian authorities to sell the assets of the airline Alitalia, which had entered into financial difficulties, under a special insolvency procedure. The Commission concluded that the sale of the assets would not constitute a subsidy prohibited under EU State aid rules provided the assets are sold at market value and other conditions have been satisfied. An independent trustee has been appointed to oversee the sale by the administrator assigned under the special insolvency procedure.

Two recent decisions by the Delaware Supreme Court clarify the fiduciary duties owed to creditors by directors of Delaware corporations that are insolvent or operating in the zone of insolvency. First, in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, the Delaware Supreme Court, in a case of first impression, addressed the ability of creditors to assert claims for breach of fiduciary duty against directors of a Delaware corporation that is insolvent or operating within the zone of insolvency.

Re Cheyne Finance PLC

The UK courts recently interpreted the definition of insolvency in a way which can lead to an insolvency default being triggered earlier than before.

In a case involving a bankruptcy reorganization in which a trustee in bankruptcy was given the right to pursue claims of misappropriation or infringement (but not ownership of the bankrupt’s intellectual property), the U.S. Court of Appeals for the Federal Circuit reversed the district court finding that the no trustee had standing to bring suit. Morrow, et al. v. Microsoft Corp., Case Nos. 06-1512, -1518, -1537 (Fed. Cir., Sept. 19, 2007 (Moore, J.; Prost, J., dissenting).

Decision determines that silica trust and channeling injunction are appropriate under Third Circuit standards.

On September 24, 2007, the U.S. Bankruptcy Court for the Western District of Pennsylvania issued an opinion recommending confirmation of the Chapter 11 plans of North American Refractory Company (NARCO) and Global Industrial Technologies, Inc. (GIT). The decision caps a five-and-a-half-year reorganization for the Pittsburgh, Pennsylvania-based family of industrial companies.

The decision of the U.S. Bankruptcy Court in Hutson v. Smithfield Packing Co. (In re National Gas Distributors, LLC)1 poses potentially serious problems for parties trading gas under the North American Energy Standards Board (NAESB) base contract. The U.S. Court of Appeals for the Fourth Circuit will soon review this case of first impression about what constitutes a “swap agreement” under the expanded definition included in the U.S. Bankruptcy Code after the 2005 amendments.