The power to alter the relative priority of claims due to the misconduct of one creditor that causes injury to others is an important tool in the array of remedies available to a bankruptcy court in exercising its broad equitable powers. However, unlike provisions in the Bankruptcy Code that expressly authorize a bankruptcy trustee or chapter 11 debtor-in-possession (“DIP ”) to seek the imposition of equitable remedies, such as lien or transfer avoidance, the statutory authority for equitable subordination—section 510(c)—does not specify exactly who may seek subordination of a claim.
In light of the continued favorable business climate and ample liquidity in the U.S., the falloff in business bankruptcy filings in 2006 should come as no big surprise. Unlike 2005, which added three new stars to the all-time hit parade of chapter 11 “mega” cases, 2006 saw no new additions to the Top 10 list for public-company chapter 11 filings. Overall, the number of business bankruptcy filings dropped 20 percent in fiscal year 2006, the fifth straight year a decline was reported, according to statistics released by the Administrative Office of the U.S. Courts in October of 2006.
Section 552(b)(2) of the Bankruptcy Code provides that if a creditor prior to bankruptcy obtained a security interest in rents paid to the debtor, that security interest extends to postpetition rents to the extent provided in the security agreement. Courts have disagreed, however, on the question of whether the debtor must provide adequate protection with respect to such postpetition rents. The resolution of this issue typically determines whether the debtor may use a portion of the postpetition rents that it receives to fund the administrative costs of its bankruptcy.
On April 23, 2012, the U.S. Supreme Court approved amendments to the Federal Rules of Bankruptcy Procedure. The amended rules automatically become effective on December 1, 2012, unless Congress acts before then to reject, modify, or delay the rule changes. Several of the amendments involve technical and conforming changes to eliminate inconsistencies within the existing Bankruptcy Rules, as well as changes designed to make the bankruptcy rules consistent with the Federal Rules of Civil Procedure and the Federal Rules of Appellate Procedure.
Two recent decisions from the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") have further contributed to the rapidly expanding volume of chapter 15 jurisprudence. In In re Fairfield Sentry Ltd., 2011 WL 1998374 (Bankr. S.D.N.Y. May 23, 2011), and In re Fairfield Sentry Ltd., 2011 WL 1998376 (Bankr. S.D.N.Y. May 23, 2011), bankruptcy judge Burton R. Lifland rendered two decisions involving offshore "feeder funds" that invested in the massive Ponzi scheme associated with Bernard L. Madoff Investment Securities LLC ("BLMIS").
The "common interest" doctrine allows attorneys representing different clients with aligned legal interests to share information and documents without waiving the work-product doctrine or attorney-client privilege. Issues involving the common-interest doctrine often arise during the course of a business restructuring, because restructurings tend to involve various constituencies, including the company, the official committee of unsecured creditors, secured debt holders, other creditors, and equity holders whose legal interests may be aligned at any one time.
A creditor’s ability in a bankruptcy case to exercise rights that it has under applicable law to set off an obligation it owes to the debtor against amounts owed by the debtor to it, thereby converting its unsecured claim to a secured claim to the extent of the setoff, is an important entitlement.
A fundamental premise of chapter 11 is that a debtor’s prebankruptcy management is presumed to provide the most capable and dedicated leadership for the company and should be allowed to continue operating the company’s business and managing its assets in bankruptcy while devising a viable business plan or other workable exit strategy. The chapter 11 “debtor-in-possession” (“DIP ”) is a concept rooted strongly in modern U.S. bankruptcy jurisprudence. Still, the presumption can be overcome.
The implementation of restrictions on stock and/or claims trading has become almost routine in large chapter 11 cases involving public companies on the basis that such restrictions are vital to prevent forfeiture of favorable tax attributes that can be triggered by a change in control. Continued reliance on stock trading injunctions as a means of preserving net operating loss carry forwards, however, may be problematic, after the controversial ruling handed down in 2005 by the Seventh Circuit Court of Appeals in In re UAL Corp.
“Safe harbors” in the Bankruptcy Code designed to minimize “systemic risk”—disruption in the securities and commodities markets that could otherwise be caused by a counterparty’s bankruptcy filing—have been the focus of a considerable amount of judicial scrutiny in recent years. The latest contribution to this growing body of sometimes controversial jurisprudence was recently handed down by the U.S. Court of Appeals for the Second Circuit.