In 1991, a decision of the Delaware Chancery Court helped popularize the term "zone of insolvency.”[1] In the intervening 16 years, numerous courts and commentators have cited this decision as standing for the proposition that the directors of a Delaware corporation that is either insolvent or in the zone of insolvency owe fiduciary duties to the creditors, as well as to the shareholders, of the corporation.

In a recent decision, the United States Bankruptcy Court for the Southern District of New York found that the Statutory Committee of Unsecured Creditors (the “Committee”) of Iridium, a failed Motorola spin-off venture, was unable to prove that Iridium was insolvent or had unreasonably small capital during the four-year period prior to commencement of its bankruptcy case.

A recent federal district court appellate decision issued in the Enron chapter 11 case1 has ruled that the postpetition transfer of a prepetition bankruptcy claim from one party to another may insulate the transferred claim against certain types of attack based solely on conduct by a prior holder of the same claim. Whether a particular claim is protected depends upon how the claim was transferred.

The United States Bankruptcy Court for the Southern District of New York granted preliminary injunctions ordering a directors and officers liability insurer to advance defense costs, despite the fact that the insurer had denied coverage, and without adjudicating the coverage defense. Axis Reinsurance Co. v. Bennett et al., Adv. No. 07-01712 (S.D.N.Y. Bankr. Aug. 31, 2007); Grant v. Axis Reinsurance Co., Adv. No. 07-2005 (S.D.N.Y. Bankr. Sep. 11, 2007). The bankruptcy court applied New York law and relied heavily on the case In re WorldCom, Inc.

The Bankruptcy Code limits the amount a landlord may recover from a bankrupt tenant for damages caused by the termination of a lease of real property. But what if the tenant trashes the landlord's property before turning over the premises? Does the damage limitation apply to the landlord's claim for the cost of cleaning up the mess?

A recent ruling by a federal court in New York has the potential to severely impact the $500 billion a year distressed debt market.

The Delaware Supreme Court has affirmed, without opinion, a ruling by a lower court that ‘deepening insolvency’ is not a cause of action under Delaware law. Trenwick America Litig. Trust v. Billett, 931 A.2d 438 (Del. 2007).

The ruling appears to be the strongest nail yet in the coffin of so-called “deepening insolvency” actions.

The U.S. Court of Appeals for the Fourth Circuit has held that a creditor may not allocate payment by a nondebtor to interest first, before applying the balance to principal—and then seek to collect the remainder of the principal from a jointly liable debtor.

That strategy violated the Bankruptcy Code’s prohibition against collecting post-petition interest, the court reasoned in National Energy & Gas Transmission, Inc. v. Liberty Electric Power, LLC, No. 06-1459 (4th Cir. July 10, 2007). The majority’s rationale drew a pointed dissent.

Can a United States bankruptcy court deny recognition of a foreign insolvency proceeding even if no one opposes such recognition? In a recent decision, Judge Burton Lifland, a highly respected bankruptcy judge and one of the authors of Chapter 15 of the Bankruptcy Code, says yes.

Liquidators of Bear Stearns Funds Seek Relief under Chapter 15

A federal court in California recently has thrown its weight behind a majority rule that holds that letter of credit proceeds should be applied to damages resulting from the rejection of a lease of non-residential real property. In re Connectix Corp., No. 05-556848, 2007 WL 2137802 (Bankr. N.D. Cal. May 10, 2007). The court also addressed the formula the parties should employ to arrive at a damages figure.