Whittle Development, Inc. v. Branch Banking & Trust Co.

The bankruptcy court in the City of Harrisburg's Chapter 9 proceeding held a hearing on Tuesday, November 1 on the Mayor’s motion for an order clarifying that the City had the ability to pay its debts in the ordinary course.  The court found that given the limitation on its jurisdiction under Chapter 9 of the Bankruptcy Code and given that Bankruptcy Code Section 363 (which deals with generally with the use, sale or lease of property) is not incorporated into Chapter 9, the City does have the authority to pay its vendors in the ordinary course, including vendors with amounts owed

In a recent appeal to the Sixth Circuit Bankruptcy Appellate Panel, Inre Collins, 2011 WL 4445451 (6th Cir. BAP Aug. 12, 2011), the trustee sought a declaratory judgment to determine the validity, extent, and priority of liens on the debtor’s real property held by four defendants.  The trustee appealed the district court’s dismissal of his complaint as to purported holders of the debtor’s first and second mortgages on the debtor’s property.

Last month, District Court Judge Shira A. Scheindlin of the Southern District of New York affirmed a bankruptcy court ruling which held that the environmental cleanup obligations of debtor Mark IV Industries, Inc. were not discharged in bankruptcy.2 Given the current legal landscape, Mark IV may make the likelihood of discharging environmental claims even more difficult, potentially undermining chapter 11 as an optimal alternative for companies saddled with environmental liabilities.

A recent New York bankruptcy case holds that shareholders, directors and officers who dissolve a corporation to avoid paying a judgment against the business may be jointly and severally liable for a non-dischargeable debt in their personal bankruptcies.

Numerous municipalities in California and elsewhere are struggling financially. Indeed, Harrisburg, Pennsylvania and Central Falls, Rhode Island have both recently filed for Chapter 9 protection. State governments may have neither the economic reserves nor the political will to bail out troubled cities and counties. These circumstances have raised the focus on Chapter 9 as a tool for reorganizing municipality debt obligations and has deepened the debate between states and their municipalities about the best strategies for addressing a fiscal crisis.

The Court of Appeal has confirmed that the costs of complying with Financial Support Directions (“FSDs”) proposed to be issued to certain Nortel and Lehman companies by the Pensions Regulator (“TPR”) qualify as “super priority” administration expenses, payable in priority to unsecured creditors, floating charge holders and the administrators’ own fees.

The question

Although the number of commercial bankruptcy filings has dropped, the number of lawsuits arising out of these bankruptcies is on the rise.  These lawsuits are called “avoidance actions” because they seek to avoid or “unwind” transfers to third parties.  The most common avoidance actions are “preference” actions, filed against unsecured trade creditors to recover alleged “preferential payments” made by the debtor.

On August 9, 2011, the United States Court of Appeals for the Fifth Circuit held that a non-insider's debt claim can be recharacterized as equity in Grossman v. Lothian Oil Inc. (In re Lothian Oil, Inc.).2 The Fifth Circuit, in reversing the district court, held that: (i) there is no per se rule limiting to insiders the recharacterization of debt claims as equity and (ii) non-insider debt claims may be recharacterized as equity under section 502(b) of the Bankruptcy Code.

Introduction