Earlier this year, the U.S. Court of Appeals for the Second Circuit held that a proposed “gifting” plan distributing value from the second lien lenders to the prepetition equity holder violated the absolute priority rule and was confirmed in error.2 This decision, by a 2-1 panel vote,3 reversed the decisions of the Bankruptcy and District Courts for the Southern District of New York. The Second Circuit also affirmed unanimously the designation of the vote of an indirect competitor of the debtor that held no claims prior to the petition date.

A theme running through many apparent-authority cases is the question of who loses: for example, the LLC whose property was used to secure unauthorized, personal borrowings by a member or manager, or the bank that in good faith made the loan to the malefactor? Often the recipient of the funds has used the money for personal matters and is essentially judgment proof.

The United States Bankruptcy Court for the District of Nevada has held that proceeds from a professional liability policy were not property of the insured-debtors' bankruptcy estate because the proceeds were payable only for the benefit of third party claimants and could not be accessed by the debtors directly.  In re Endoscopy Center of Southern Nevada, Nos. BK-S-09-22780-MKN, S-09-22776-MKN, S-09-22784-MKN, 2011 WL 2184387 (Bankr. D. Nev. May 23, 2011).

In a decision that may create serious problems for bankruptcy case administration, the Supreme Court this morning invalidated part of the Bankruptcy Court jurisdictional scheme. Stern v. Marshall, No. 10-179, 564 U.S. ___ (June 23, 2011). Specifically, the Court held that the Bankruptcy Courts cannot issue final judgments on garden variety state law claims that are asserted as counterclaims by the debtor or trustee against creditors who have filed proofs of claim in the bankruptcy case.

In Chapter 11 reorganization cases, a debtor and a creditor generally seek to negotiate a mutually agreeable plan of reorganization. However, in many instances, the debtor will propose a plan which impairs the interest of a secured creditor and results in the secured creditor’s objection of the plan’s proposed treatment. In

The United States Supreme Court recently submitted to Congress an amendment to Bankruptcy Rule 2019 dealing with disclosure by groups of hedge funds and other distressed investors in reorganization cases. Unless Congress blocks its passage, which is unlikely, the amendment will become effective on Dec. 1, 2011.1 As shown below, the new rule streamlines and clarifies what had become a frequently litigated disclosure process.

Background

In Lehman Brothers Special Financing, Inc. v. Ballyrock ABS CDO 2007-1 Limited (In re Lehman Brothers Holdings, Inc.), Adv. P. No. 09-01032 (JMP) (Bankr. S.D.N.Y. May 12, 2011) [hereinafter “Ballyrock”], the United States Bankruptcy Court for the Southern District of New York held that a contractual provision that subordinates the priority of a termination payment owing under a credit default swap (CDS) to a debtor in bankruptcy, and which caps the amount of the termination payment, may be an unenforceable ipso facto clause under section 541(c)(1)(B).

A Delaware bankruptcy judge recently held that a landlord's right of first refusal to purchase a debtor/tenant's liquor license (the "Option") was unenforceable since the debtor rejected the lease containing the Option1. Disagreeing with a ruling of the First Circuit Court of Appeals2, the Delaware court held that the Option provision was a non-severable part of an executory contract that was not subject to specific performance.

The Facts

Summary

In a 56 page opinion published June 9, 2011, Judge Walsh ruled that a method of operating in which all of the credits and debits between two companies were netted out allows this same method to be used in calculating a set-off defense in preference litigation. Judge Walsh’s opinion is available here (the “Opinion”).

Background

On June 28, 2011, the Court of Appeals for the Seventh Circuit rejected the views of the Third Circuit and the Fifth Circuit and held that a reorganization plan which proposes the sale of encumbered assets free and clear of liens must honor the secured creditor’s right to credit bid its claim in order to be confirmed under the “fair and equitable” standard of the Bankruptcy Code. In the combined appeals of In re River Road Hotel Partners, LLC, et al. andIn re Radlax Gateway Hotel, LLC, et al.