The U.S. Court of Appeals for the Eleventh Circuit recently held that the anti-modification provision in the federal Bankruptcy Code applies to loans secured by mixed-use real properties, such as the large parcel at issue here which functioned both for commercial use and as the debtor’s principal residence.

A copy of the opinion in Lee v. U.S. Bank National Association is available at: Link to Opinion.

When a contracting party declares bankruptcy, it is crucial to grasp the implications for existing contracts. This article highlights the most important legal ramifications for the non-bankrupt parties involved.

Continuation or Termination

Deal structure matters, particularly in bankruptcy. The Third Circuit recently ruled that a creditor’s right to future royalty payments in a non-executory contract could be discharged in the counterparty-debtor’s bankruptcy. The decision highlights the importance of properly structuring M&A, earn-out, and royalty-based transactions to ensure creditors receive the benefit of their bargain — even (or especially) if their counterparty later encounters financial distress.

Background

On June 27, 2024, the Supreme Court issued its opinion in Harrington v. Purdue Pharma L.P., 603 U.S. ____ (2024) holding that the Bankruptcy Code does not allow for the inclusion of non-consensual third-party releases in chapter 11 plans. This decision settles a long-standing circuit split on the propriety of such releases and clarifies that a plan may not provide for the release of claims against non-debtors without the consent of the claimants.

Here’s a dilemma:

• Should bankruptcy be available as a tool for resolving mass tort cases of all types (like it already is in asbestos contexts)?

Here’s an illustration of the dilemma:

• many tort claimants in the Johnson & Johnson case DO NOT want bankruptcy involved; but
• many tort claimants in the Purdue Pharma case were BEGGING the courts to approve the bankruptcy plan.

How do we solve this dilemma?

On June 6, 2024, the United States Supreme Court issued its long-awaited ruling in Truck Insurance Exchange v. Kaiser Gypsum Co., Inc., et al.,¹ nullifying the insurance neutrality test for insurer standing in bankruptcy proceedings and holding that insurance companies that may face liability for bankruptcy claims filed against a debtor are parties in interest under section 1109(b) of the Bankruptcy Code that are entitled to “be heard on any issue” in such debtor’s bankruptcy case.

On June 27, 2024, the United States Supreme Court issued its decision in Harrington v. Purdue Pharma LP, addressing the question of whether a company can use bankruptcy to resolve the liability of non-debtor third parties. The Supreme Court, in a 5-4 decision, held that the bankruptcy code does not authorize a release and an injunction that, as part of a plan of reorganization under Chapter 11, effectively seek to discharge the claims against a nondebtor without the consent of the affected claimants.

Last week, in a 5-to-4 decision in the case ofHarrington, United States Trustee, Region 2 v. Purdue Pharma L.P, et al., the U.S. Supreme Court struck down the ability of bankruptcy courts to order non-consensual third-party releases (i.e., claims held by non-debtors against non-debtor third parties) as part of a Chapter 11 plan.

The phrase “Texas Two-Step,” as used in bankruptcy, is a legal expletive. Regardless of what the details of a Texas Two-Step might be, the phrase has become synonymous with:

• abusive behavior;
• bad faith conduct;
• a means for swindling creditors;
• the antithesis of “doing what’s right”;
• a tool for avoiding liability;
• etc., etc.

Describing a legal tactic as a “Texas Two-Step” is like calling that tactic a “#$&*#%R&” or “#*$&.” It’s a legal expletive that means “really, really bad.”

Introduction

On April 9th , the Second Panel of the Superior Court of Justice (STJ) unanimously ruled a case law regarding Special Appeals 2.090.060, 2.090.066 and 2.100.114, which were heard by Justice Humberto Martins, for judgment by the repetitive rite.

The controversial issue, registered as Theme 1,250 in the STJ database, analyzed “whether an award of attorney's fees is due in the event of a claim being upheld in judicial reorganization and bankruptcy proceedings”.