Troubled economic times predictably result in an escalation in bankruptcy filings. As the economy began to worsen last year, the U.S. Court of Appeals for the Fifth Circuit issued a reminder that courts can—and will—penalize parties that tax an already busy bankruptcy court system with bad faith filings.

As has been reported and rumored for many weeks, the bankruptcy filing for either GM or Chrysler, or both companies, is clearly one of the potential destinations on the road ahead. For certain parts suppliers who can take advantage of guarantees under the Auto Supplier Support Program recently announced by the U.S. Treasury Department, the news of a bankruptcy filing may feel somewhat less dire, except with respect to the likely disruption and fall off of future business.  

A recent opinion from the U.S. Court of Appeals for the Third Circuit confirms that “actual control” over a debtor is not necessary to qualify as a nonstatutory “insider” for the purpose of extending the period for preference recovery under Section 547 of the Bankruptcy Code. See Schubert v. Lucent Technologies, Inc. (In re Winstar Communications, Inc.), 554 F.3d 382 (3rd Cir. 2009).

The U.S. Court of Appeals for the Fourth Circuit recently issued a decision that has the potential to have a major impact on how contracts that provide for physical delivery of commodities are treated under U.S. bankruptcy law.  

The U.S. Bankruptcy Court for the District of Delaware recently issued a decision addressing triangular set-off provisions, which potentially has very far-reaching implications for the enforceability of contractual set-off rights under U.S. law.

A known creditor, which was aware of a debtor’s pending bankruptcy but did not receive legally required notice of the debtor’s chapter 11 case, was not barred from bringing a state action following bankruptcy discharge.

The U.S. Court of Appeals for the First Circuit held that actual knowledge of the pending chapter 11 case did not satisfy due process requirements; therefore, the known creditor’s subsequent claim was not barred by the debtor’s discharge injunction. Arch Wireless, Inc. v. Nationwide Paging, Inc. (In re Arch Wireless, Inc.), 534 F.3d 76 (1st Cir. 2008).

Companies that engage in multiple transactions with different entities of related groups often enter into contractual netting agreements that allow the setoff of obligations between entities within the groups. The effectiveness of these agreements has been called into question by a recent decision of a bankruptcy court in Delaware, which refused to allow a party to a contractual netting agreement to offset its obligations to the debtors against obligations of the debtors under the netting agreement.

Debt-for-debt exchanges are not new, but are worth revisiting given the current economic climate. Furthermore, the recently enacted "Stimulus Act"1 provides some temporary relief to debtors from potentially harsh tax consequences of restructuring. The following discussion is relevant to issuers (also referred to as debtors) or holders (also referred to as creditors) of debt who are "US persons" (as defined in the US Internal Revenue Code).2

In order to illustrate some of the key US federal income tax consequences of a debt-for-debt exchange, consider the following example:

In a recent decision, the Bankruptcy Court for the District of Delaware allowed the collateral agent for senior lenders to credit bid for the debtors’ assets even though all of the senior lenders had not authorized the bid. One of the senior lenders had objected to the group’s acquisition of the debtors’ assets by the credit bid. In re GWLS Holdings, Inc., 2009 WL 453110 (Bankr. D. Del. Feb. 23, 2009) (Walsh, J.).

A bankruptcy filing by a property owner may not be the only action that prevents foreclosure of a security interest in that property held by a secured creditor. In a growing list of cases, courts also have held the bankruptcy of a junior secured creditor with a lien on the property invokes the automatic stay against such action.