Organizations that acquire claims in bankruptcy should acquire such claims by a sale without knowledge of the debtors’ claims against the original holder or prior transferees, and obtain an indemnification from the transferor of such claims.

Recently, in Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., the U.S. Supreme Court resolved a conflict among the circuit courts of appeal by overruling the Ninth Circuit’s Fobian rule, which dictated that attorneys’ fees are not recoverable in bankruptcy for litigating issues “peculiar to federal bankruptcy law.” In reaching its decision, the Supreme Court reasoned that the Fobian rule’s limitations on attorneys’ fees find no support in either section 502 of the Bankruptcy Code or elsewhere.

In previous editions of the Business Restructuring Review, we reported on a pair of highly controversial rulings handed down in late 2005 and early 2006 by the New York bankruptcy court overseeing the chapter 11 cases of embattled energy broker Enron Corporation and its affiliates. In the first, Bankruptcy Judge Arthur J. Gonzalez held that a claim is subject to equitable subordination under section 510(c) of the Bankruptcy Code even if it is assigned to a third-party transferee who was not involved in any misconduct committed by the original holder of the debt.

Investor group “Save the Queen” purchased the historic Queen Mary ship and surrounding land and development rights for $43 million from the previous operator, Queen’s Seaport Development, which filed for Chapter 11 bankruptcy in 2005.

In an adversary proceeding brought by a liquidating company to determine the availability of coverage under the debtor's insurance policies, the United States District Court for the District of Delaware has held that the insolvency of an underlying insurer did not affect an excess carrier's obligation for claims within its own layer of coverage. In re Integrated Health Services, Inc., 2007 WL 2687593 (D. Del. Sept. 12, 2007). Although the adversary proceeding was initially filed in bankruptcy court, it was consensually withdrawn to the district court.

An employee of a car care business accused the co-owner's business partner of sexually harassing her. Incredibly (and as an example of what not to do about a sexual harassment claim), the co-owner told her to stop flirting with his partner and asked her to sign a memo that "anything that happened was of a consensual nature." The employee was told she would be fired if she did not sign the memo. She refused to sign and did not return to work.

In a case involving a bankruptcy reorganization in which a trustee in bankruptcy was given the right to pursue claims of misappropriation or infringement (but not ownership of the bankrupt’s intellectual property), the U.S. Court of Appeals for the Federal Circuit reversed the district court finding that the no trustee had standing to bring suit. Morrow, et al. v. Microsoft Corp., Case Nos. 06-1512, -1518, -1537 (Fed. Cir., Sept. 19, 2007 (Moore, J.; Prost, J., dissenting).

With the recent decline in housing and real estate generally, companies in the homebuilding and construction markets face serious challenges. Some projects have already been forced into Chapter 11 and others will almost certainly require either a bankruptcy filing or out-of-court restructure. In the event a bankruptcy is filed, vendors, contractors, subcontractors and other interested parties should be aware of the impact of important bankruptcy code provisions on their relationship with troubled companies.

Automatic Stay

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.