I sense a sea change in the recent Delaware decision in Intervention Energy Holdings, LLC, 2016 WL 3185576 (6/3/16), refusing to enforce a bankruptcy proofing provision of a Delaware LLC’s operating agreement. Until recently, the trend had been to accept the fundamental principles of bankruptcy remoteness, although courts sometimes found ways to avoid honoring anti-bankruptcy devices in specific cases.

Since April, two bankruptcy courts have refused to enforce limited liability company ("LLC") agreement provisions requiring the respective LLCs to obtain the unanimous consent of their members in order to seek bankruptcy relief.1 On June 3, 2016, the Bankruptcy Court for the District of Delaware (the "Delaware Bankruptcy Court") relied on federal public policy to invalidate an LLC agreement provision requiring unanimous member consent to file bankruptcy where the member at issue owed no fiduciary duties to the LLC and the member's primary relationship to the

A recent decision from the United States Bankruptcy Court for the Western District of Texas caught our eye because of the unconventional opening line:

“Summers are hot in Texas, so pools are a hot item. But not hot enough to help a pool installer [ . . . ] avoid bankruptcy” – Judge Tony M. Davis, United States Bankruptcy Judge.

The U.S. District Court for the Eastern District of New York recently held that a confirmable Chapter 13 plan cannot both “vest” title to real property and “surrender” that property to a secured lender, and that the secured lender may refuse to accept the vesting in satisfaction of its claim.

Thus, the Court held that a debtor may not force the transfer of title in collateral to a secured creditor in satisfaction of the secured creditor’s claim, without the consent of the secured creditor.

As an example of the conflicting and contrasting court rulings on the effect of surrender in bankruptcy (see our prior update), the District Court of Appeal of the State of Florida, Fifth District, recently dismissed a borrower’s appeal from a final judgment of foreclosure because the borrower admitted during the course of his bankruptcy proceeding that he owed the mortgage debt and stated his intention to surrender the mortgage

Key Notes:

On June 10, 2016, the Treasury Department (Treasury) and the Internal Revenue Service (the IRS) issued final regulations on the federal income tax treatment of discharge of debt issued by disregarded entities (e.g., single member LLCs) and grantor trusts (e.g., investment trusts). Under the regulations, the exemption of cancellation of debt income of taxpayers that are insolvent or in a Title 11 case (bankruptcy) only applies if the owner of the disregarded entity or grantor trust is insolvent or is a debtor in a bankruptcy case.

Section 502(e)(1)(B) of the Bankruptcy Code allows debtors to seek disallowance of certain types of contingent claims to avoid being twice liable on a single obligation. It has the added benefits of facilitating debtors’ efficient exit from bankruptcy and ensuring that unsecured creditors are paid in a timely fashion. Debtors commonly seek Section 502(e)(1)(B) relief for claims involving environmental remediations or tort lawsuits, for example personal injury actions.

The Bankruptcy Judges and Chapter 13 Trustees for the United States Bankruptcy Court for the Southern District of Ohio have reviewed and approved a proposed District Wide Mandatory Form Chapter 13 Plan and proposed form Order Confirming Chapter 13 Plan and Awarding Attorney Fees. Currently, the Dayton, Cincinnati, and Columbus Bankruptcy Courts use different Chapter 13 form plans. The use of these different form plans makes it difficult for practitioners and creditors to keep track of the particular requirements for each court location.

A recent decision out of a New Jersey Bankruptcy Court highlights a loophole in the Bankruptcy Code which may allow Chapter 7 debtors to keep significant assets out of the hands of trustees and creditors.