IN RE: SOLIS (July 9, 2010)

Intercreditor agreements between first and second lien lenders are created all the time and are therefore not usually glitzy topics for client updates. But the recent intercreditor dispute between Donald Trump and corporate raider Carl Icahn over control of Trump's Atlantic City casinos had all the drama and glamour of the gambling dens and billionaires involved, including two competing but confirmable plans and senior and junior creditors vying for ownership of a gaming empire and its attendant upside.

David Vladeck, Director of the FTC’s Bureau of Consumer Protection, recently sent a letter to creditors of XY Magazine, warning that the creditors’ acquisition of personal information about the debtor’s subscribers and readers in contravention of the debtor’s privacy promises could violate the Federal Trade Commission Act (“FTC Act”).

Bankruptcy-related developments during the first half of this year have sent shock waves
through the secured lending, derivative, and distressed debt trading communities. Several
notable decisions may significantly affect the way these entities operate and calculate risk,
and result in changes to standard documentation. Until recently, a proposed overhaul of
Bankruptcy Rule 2019 threatened to discourage distressed debt investors, including hedge
funds, from participating in bankruptcy proceedings as part of an ad hoc committee or group.

In an interesting twist on a run-of-themill case regarding the personal liability of a corporate officer for unremitted sales taxes, the New York State Division of Tax Appeals held an owner (“Petitioner”) personally liable for sales tax even though the corporation was in Chapter 11 bankruptcy and was being run by a bankruptcy court-approved management company. In re Eugene Dinino, Docket Nos. 822605, 822606, 822607, 822608, 822609, 822610 (N.Y.S. Div. of Tax App. June 24, 2010).

Earlier this month, Bettina M Whyte, the SemGroup Litigation Trustee (the "Trustee") filed approximately 350 adversary actions against various creditors in the SemCrude bankruptcy. The majority of the adversary actions are preference actions under 11 U.S.C. section 547 of the United States Bankruptcy Code. Some of the adversary actions, however, allege defendants received fraudulent transfers from various SemCrude debtors (the "Debtors").

A federal judge has ruled that directors and officers of a company in bankruptcy proceedings may continue to access an eroding liability policy to cover their defense costs. The court based its decision on a close examination of the policy language, and alternatively held that the individual directors and officers had shown they were entitled to relief from the automatic stay. In re: Downey Financial Corp., No. 08-bk-13041 (CSS) (Bankr.D.Del. May 7, 2010).

Yesterday, Delaware Bankruptcy Judge Mary Walrath granted a request by Washington Mutual (WaMu) shareholders to appoint an independent examiner, to be chosen by the U.S. trustee, to review assets and claims in the company’s bankruptcy case related primarily to the 2008 seizure and sale of WaMu by the FDIC to JPMorgan Chase for $1.9 million.

The question of what happens to an international arbitration when a party files for bankruptcy in the United States is arising with increasing frequency. In the United States, the public policy interests that underlie both bankruptcy and arbitration legislation sometimes clash on critical points. The federal courts have developed competing approaches to addressing these issues. This fractured caselaw introduces uncertainty at the intersection of arbitration and bankruptcy.

US Bankruptcy Code

A group of creditors learned the hard way that there may be no excuse for a late claim. U.S. Bankruptcy Judge James Peck of the Southern District of New York recently disallowed seven proofs of claim that had been filed late in the Lehman bankruptcies. Judge Peck held that the reasons cited by the parties for the late filing did not rise to the level of “excusable neglect” and he was thus disallowing their claims. This is of particular interest as it comes out of the Southern District of New York, which has one of the largest bankruptcy dockets in the country.