Thinking about investing in a distressed company? If the company declares bankruptcy, your investment may be subject to equitable subordination, whereby your claim is subordinated to the claims of other creditors. One of the most crucial factors in determining whether your claim is equitably subordinated is whether you are deemed an insider as an insider’s actions undergo significantly more scrutiny than those of non-insiders. Of course, when investing in a distressed company, the more control over the entity’s, the better, right?

The hurdles for KERP programs have been raised too high, causing debtors to lose critical personnel to the detriment of post-petition operations, say Frost Brown Todd’s Ronald Gold and Doug Lutz in our series of chats with high-profile bankruptcy lawyers.

Q. What’s the most challenging bankruptcy you’ve worked on, and why?

The buyer of a Chapter 11 debtor's coal supply contract was not liable for the seller's obligations to the sales agent who secured the contract for the debtor-seller, according to a recent decision by the U.S. Court of Appeals for the Sixth Circuit. Al Perry Enterprises, Inc. v. Appalachian Fuels, LLC, 2007 U.S. App. LEXIS 22808 (6th Cir. Sept. 27, 2007). As the court explained, the buyer could not be liable to the sales agent "absent an express assumption of the [debtor's prior] obligations." Id. at *17.

Background

The U.S. Court of Appeals for the Fourth Circuit has upheld the dismissal of a debtor’s chapter 11 petition filed two days before for the expiration of a holdover, at-will tenancy, finding that the debtor’s lack of good faith in filing the petition constituted cause for dismissal. Maryland Port Admin. v. Premier Auto. Svcs., Inc. (In re Premier Auto. Svcs., Inc.), 492 F.3d 274 (4th Cir. 2007).

Many participants in the multibillion-dollar distressed-debt trading markets were hoping that Federal District Court Judge Shira A. Scheindlin would permit expedited review of her ruling immunizing a purchaser of a claim against a debtor in bankruptcy from objections to the claim based upon the conduct of a prior holder of the claim.

A decision by the Illinois Court of Appeals reinforces the importance of providing pre-disposition notice to preserve a deficiency claim against an obligor. General Motors Acceptance Corp. v. Stoval, No. 1-06-1858, ____ N.W. 2d ____ (Ill. Ct. App. June 29, 2007).

The U.S. Court of Appeals for the Fourth Circuit has held that a creditor may not allocate payment by a nondebtor to interest first, before applying the balance to principal—and then seek to collect the remainder of the principal from a jointly liable debtor.

That strategy violated the Bankruptcy Code’s prohibition against collecting post-petition interest, the court reasoned in National Energy & Gas Transmission, Inc. v. Liberty Electric Power, LLC, No. 06-1459 (4th Cir. July 10, 2007). The majority’s rationale drew a pointed dissent.

Can a United States bankruptcy court deny recognition of a foreign insolvency proceeding even if no one opposes such recognition? In a recent decision, Judge Burton Lifland, a highly respected bankruptcy judge and one of the authors of Chapter 15 of the Bankruptcy Code, says yes.

Liquidators of Bear Stearns Funds Seek Relief under Chapter 15

A federal court in California recently has thrown its weight behind a majority rule that holds that letter of credit proceeds should be applied to damages resulting from the rejection of a lease of non-residential real property. In re Connectix Corp., No. 05-556848, 2007 WL 2137802 (Bankr. N.D. Cal. May 10, 2007). The court also addressed the formula the parties should employ to arrive at a damages figure.

A company attempting to reorganize its affairs in bankruptcy may seek to enjoin its creditors or other third parties from suing members of the company's senior management team during the course of the reorganization proceedings, so that the senior management members can devote their time and resources to the reorganization effort without distraction. Courts throughout the country have applied differing standards in determining when the granting of an injunction of proceedings against a non-debtor is appropriate.