On April 26, 2011, the Supreme Court approved a number of amendments to the Federal Rules of Bankruptcy Procedure. In particular, the Supreme Court amended Bankruptcy Rule 2019 to clarify the disclosure required of certain parties in interest in a chapter 9 or 11 bankruptcy case.1 These amendments were drafted by a panel of bankruptcy judges and restructuring experts and are intended to resolve a split in decisions concerning the proper application of the current Bankruptcy Rule 2019.

On April 27, 2011, the United States Supreme Court approved certain amendments to Bankruptcy Rule 2019 requiring disclosures by certain creditors and equity holders in Chapter 11 cases. We expect that amended Rule 20191 (“Amended Rule 2019”) will take effect as a matter of law on December 1, 2011 unless in the interim Congress enacts legislation to reject, modify, or defer the rules, which we view as unlikely.

We've all heard of Chapter 7 and Chapter 11 of the Bankruptcy Code, but what is Chapter 9? Chapter 9 provides a municipality protection from its creditors while it develops a plan to resolve or adjust its debts. Adjustment of a municipality's debt involves refinancing such debts to (i) extend the time to pay debt obligations or (ii) reduce the amount of interest on such obligations.

In Geltzer v. Mooney (In re MacMenamin’s Grill, Ltd.), Adv. Pro. No. 09-8266 (Bankr. S.D.N.Y. April 21, 2011), the United States Bankruptcy Court for the Southern District of New York held that the safe harbor in section 546(e) of the Bankruptcy Code does not apply to a small, private leveraged buyout (LBO) transaction that posed no systemic risk to the stability of the financial markets.

In a recent decision arising out of the Chapter 11 bankruptcy case of Global Industrial Technologies, Inc. (GIT),1 the U.S. Court of Appeals for the Third Circuit, sitting en banc, held that insurance companies that had issued liability insurance policies to a manufacturer before its bankruptcy filing had standing to object to confirmation of the company’s Chapter 11 plan of reorganization, even though the plan had been designed to be “insurance neutral” with regard to the policies.

Summary

In a 10 page decision signed May 5, 2011, Judge Walsh of the Delaware Bankruptcy Court denied a motion to dismiss and held that the plaintiff Litigation Trustee satisfied the “particularity” requirements of Federal Rules of Civil Procedure 12(b)(6) and 9(b), despite having his complaint allege that each transfer within a 13 page list of transfers was fraudulent. Judge Walsh’s opinion is available here (the “Opinion”).

A recent bankruptcy case in Pennsylvania,In re Shubh Hotels Pittsburgh, LLC, 439 B.R. 637 (Bankr. W.D. Pa. 2010), held that as long as the “debtor-in-possession” exercises its sound business judgment when making its decision, the “debtor-in-possession” can enter into a new 15-year franchise agreement over the objection of the secured lender.

On April 29, 2011, the Internal Revenue Service (“IRS”) issued Private Letter Ruling (“PLR”) 201117036 denying recognition of tax-exempt status under Section 501(c)(3) of the Internal Revenue Code (“Code”) to a nonprofit credit counseling agency (“CCA”) because its primary activity would have been the provision of pre-bankruptcy certification and post-bankruptcy counseling for fees.

Judge Walsh released an amended Opinion in the NEC Holdings Corp. case on May 18, 2011. His previous opinion had an incomplete citation of 28 U.S.C. § 157(b)(2). It shows just how serious our judges are about the Bankruptcy Code.

In an effort to keep followers of this blog fully apprised of every opinion released by the Delaware Bankruptcy Court, I have linked to Judge Walsh’s newly corrected opinion here.

In general, substantive consolidation allows for the assets and liabilities of affiliated debtor entities to be consolidated and disbursed as if the assets were held and the liabilities were owed by a single legal entity. Unlike joint administration, which promotes procedural convenience and efficiency without affecting the substantive rights of creditors, substantive consolidation can force creditors of a solvent debtor to share in the debtors’ aggregate asset pool in parity with creditors of less solvent debtors.