Compensation of a debt made after the debtor’s bankruptcy declaration via the appropriation of securities pledged by virtue of a financial guarantee, is admitted.

The validity of a transaction assessed as “compensation” that was carried out after the bankruptcy declaration of the company in debt was questioned before the Supreme Court. The credit entity applied the value obtained from the reimbursement of an investment fund that had been pledged to secure a credit policy to reduce the debt.

Section 553 of the Bankruptcy Code provides, subject to certain exceptions, that the Bankruptcy Code “does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case.” Debts are considered “mutual” when they are due to and from the same persons or entities in the same capacity.

Affirming the bankruptcy and district courts below, the Third Circuit Court of Appeals, in In re Federal-Mogul Global Inc., 684 F.3d 355 (3d Cir. 2012), held that a debtor could assign insurance policies to an asbestos trust established under section 524(g) of the Bankruptcy Code, notwithstanding anti-assignment provisions in the policies and applicable state law.

Asbestos Trusts in Bankruptcy

Much attention in the commercial bankruptcy world has been devoted recently to judicial pronouncements concerning whether the practice of senior creditor class “gifting” to junior classes under a chapter 1 1 plan violates the Bankruptcy Code’s “absolute priority rule.” Comparatively little scrutiny, by contrast, has been directed toward significant developments in ongoing controversies in the courts regarding the absolute priority rule outside the realm of senior class gifting— namely, in connection with the “new value” exception to the rule and whether the rule was written out of the Bankr

In the July/August 2010 edition of the Business Restructuring Review, we reported on an important ruling handed down by bankruptcy judge James M. Peck in the Lehman Brothers chapter 11 cases addressing the interaction between the Bankruptcy Code’s general setoff rules (set forth in section 553) and the Code’s safe harbors for financial contracts (found principally in sections 555, 556, and 559 through 562). In In re Lehman Bros. Holdings, Inc., 433 B.R. 101 (Bankr. S.D.N.Y.

The penultimate year in the first decade of the second millennium was one for the ages, or at least most people hope so.

Two circuit courts of appeal recently addressed whether a company filing chapter 11 for the sole purpose of retaining vital leases did so in good faith. In In re Capitol Food of Fields Corner, the First Circuit, in a matter of first impression on the issue of chapter 11’s implied good-faith filing requirement, declined to address the broader question, concluding that even if there is a good-faith filing requirement, a prima facie showing of bad faith could not be met because the debtor articulated several legitimate reasons for the necessity of reorganizing under chapter 11.

The U.S. Supreme Court has issued two bankruptcy rulings so far in 2007. On February 21, 2007, the Court ruled in Marrama v. Citizens Bank of Massachusetts that a debtor who acts in bad faith in connection with filing a chapter 7 petition may forfeit the right to convert his case to a chapter 13 case. On March 20, 2007, the Court ruled in Travelers Casualty & Surety Co. v. Pacific Gas & Electric Co.

A long-standing legal principle is that liens pass through bankruptcy unaffected. Like every general rule, however, this tenet has exceptions.

On July 28, 2012, Russian president Vladimir Putin gave his imprimatur to Federal Law No. 144-FZ, which amends Russian bankruptcy, financial, and banking legislation with the goal of improving regulations governing asset returns and interim management of insolvent banks. Among other things, the amendments change Russian insolvency law to remove executive compensation and bonuses from the list of priority claims in cases involving insolvent companies.