A recent opinion from the United States Bankruptcy Court for the Western District of New York shows that even the best laid strategies can return to haunt the insiders of a debtor.  In Wallach v.

Introduction

Bankruptcy cases can be expensive affairs not only for the debtor, but also for creditors trying to obtain payment on their claims. A Bankruptcy Court in the Middle District of Florida recently approved a provision in a chapter 11 plan allowing for certain unsecured creditors to be reimbursed for their legal fees if their participation in the case helped maximize recoveries for other creditors, even though the Bankruptcy Code does not explicitly allow for this kind of reimbursement.

The Supreme Court heard arguments yesterday in RadLAX Gateway Hotel over whether the Bankruptcy Code permits a debtor in a chapter 11 case to sell encumbered assets without providing its secured lenders an opportunity to credit bid their debt. 

The United States Bankruptcy Court for the Southern District of New York has lifted the automatic stay in bankruptcy to permit D&O and E&O insurers to advance or reimburse insured directors,’ officers’ and employees’ reasonable defense costs incurred in underlying litigation arising out of the insured company’s collapse.  In re MF Global Holdings Ltd., et al., No. 11-15059 (MG) (Bankr. S.D.N.Y. Apr. 10, 2012)

U.S. bankruptcy law permits debtors-in-possession and trustees to sell assets free and clear of claims, liens and other interests. But a federal judge in New York ruled recently that a purchaser does not necessarily buy free and clear when a product manufactured pre-bankruptcy causes injury after a sale closes. Morgan Olson L.L.C. v. Frederico (In re Grumman Olson Indus., Inc.), No. 11 Civ. 2291, 2012 U.S. Dist. LEXIS 44314 (S.D.N.Y. Mar. 29, 2012) (JPO). In this situation, the purchaser can remain liable for injuries caused by the asset purchased from the debtor.

The Ninth Circuit held that a bankruptcy court properly denied a motion to compel arbitration against a debtor, notwithstanding the existence of a valid arbitration agreement covering the dispute, and held that the bankruptcy court properly exercised its discretion to adjudicate the claim in the bankruptcy proceedings.  In re Thorpe Insulation Co., 671 F.3d 1011 (9th Cir. 2012) (No.

On January 10, 2012, a Florida bankruptcy court ruled in In re Pearlman, 462 B.R. 849 (Bankr. M.D. Fla. 2012), that substantive consolidation is purely a bankruptcy remedy and that it accordingly did not have the power to consolidate the estate of a debtor in bankruptcy with the assets and affairs of a nondebtor. In so ruling, the court staked out a position on a contentious issue that has created a widening rift among bankruptcy and appellate courts regarding the scope of a bankruptcy court’s jurisdiction over nondebtor entities.

On March 9, 2012, Susheel Kirpalani, the court-appointed examiner for Dynegy Holdings LLC (Dynegy), concluded that the debtor's transfer of certain assets to its parent company, Dynegy Inc., prior to its bankruptcy filing may be recoverable as a fraudulent transfer. Kirpalani further determined that Dynegy's board of directors breached its fiduciary duty in approving the asset transfer. Dynegy Inc. vigorously disputes the examiner's findings.

On March 26, 2012, Judge Mary F. Walrath of the United States Bankruptcy Court for the District of Delaware refused to rule that, as a matter of law, payments made to satisfy a debtor’s obligations under a letter of credit constitute “settlement payments” protected from avoidance under section 546(e) of the Bankruptcy Code. EPLG I, LLC v. Citibank, National Association et al. (In re Qimonda Richmond, LLC, et al.), No. 09-10589, 2012 Bankr. LEXIS 1264 (Bankr.