The Slippery Slope to Fraud

In this detailed and insightful report, the Center for Audit Quality details how financial-accounting fraud can sometimes creep up on a company that would never have expected to become so embroiled in it.

Big, Broad Bankruptcy Bill

In the W.R. Grace bankruptcy, the United States Court of Appeals for the Third Circuit recently reaffirmed its prior rulings on the controversial issue of a bankruptcy court’s power to enjoin actions by third parties against non-debtors.1 Resting on prior precedent, the Third Circuit held that bankruptcy courts lack subject matter jurisdiction to enjoin third party actions that have no direct effect upon the bankruptcy estate.

The concurring opinion in a recent Third Circuit Court of Appeals case1 suggests that trademark licensees may be able to retain their rights in bankruptcy cases, even if licensors reject the license agreements. The majority did not consider whether the licensee could retain its rights. Instead, the majority held that the trademark license was not an executory contract; therefore, it could not be rejected under the Bankruptcy Code. The majority opinion applies narrowly to circumstances involving perpetual, exclusive, and royalty-free trademark licenses.

On October 21, 2010, the Ninth Circuit overruled what many thought to be well-settled law, and held that a bankruptcy trustee does not have standing to pursue alter ego claims, at least in cases governed by California law. The court first held that California state law does not recognize a general alter-ego cause of action that allows an entity and its equity holders to be treated as alter egos for purposes of all of the entity’s debts.

In September of this year, the Honorable Mary F. Walrath, the presiding Judge in the DHP Holdings bankruptcy, issued a decision addressing the effect of a forum selection clause when deciding a motion to change venue. This issue came before the court in an adversary action filed by DHP against The Home Depot. After DHP filed for bankruptcy, the company sued Home Depot for $5.5 million alleging Home Depot owed the company for an outstanding account receivable.

Associated Community Bancorp, Inc. v. The Travelers Companies, Inc., 2010 U.S. Dist. LEXIS 34799 (D. Conn. Apr. 8, 2010)

On October 21, 2010, the New York Court of Appeals ruled on certified questions in two cases: Kirschner v. KPMG LLP ("Kirschner"), certified by the United States Court of Appeals for the Second Circuit, and Teachers' Retirement System of Louisiana v. PricewaterhouseCoopers LLP ("Teachers' Retirement"), certified by the Delaware Supreme Court, reiterating and strengthening the in pari delicto defense.

On September 15, 2010, the House Subcommittee on Commercial and Administrative Law voted 8-4 to report H.R. 4677 to the full House Judiciary Committee. Called the “Protecting Employees and Retirees in Business Bankruptcies Act of 2010,” H.R. 4677 contains several substantial changes to federal law aimed at preserving workers’ wages and benefits during a Chapter 11 bankruptcy proceeding. The subcommittee members voted along party lines, indicating that the bill will have a difficult fight in the full committee – its fate may ultimately depend on the result of the recent election.

Recently, over 180 adversary actions were filed in the MPC Computers bankruptcy. The adversary actions fall generally in to two categories - preference actions filed by MPC's Committee of Unsecured Creditors and breach of contract actions filed by MPC. This post will look briefly at why MPC filed for bankruptcy and discuss what may happen next now that the adversary actions are underway.

Background on the MPC's Business and Events Leading to Bankruptcy

A New York bankruptcy judge held on October 4, 2010, that second lien lenders could object to a debtor’s bid procedures approved by the first lien lenders despite the terms of an intercreditor agreement inIn re Boston Generating, LLC, No. 10-14419 (SCC) (Bankr. S.D.N.Y. Oct. 4, 2010).1 The intercreditor agreement provided the first lien lenders with the “exclusive right to…make determinations regarding the…sale” of the collateral. According to the court, however, the agreement did not expressly preclude the second lien lenders from objecting to bid procedures.