Lear Corporation and related U.S., Canadian, and Cayman Island affiliates (“Lear”) filed voluntary bankruptcy petitions on July 7, 2009 in the United States Bankruptcy Court for the Southern District of New York (“Bankruptcy Court”). Lear intends to continue to operate its businesses while in bankruptcy. Other than certain Lear related entities based in Canada and the Cayman Islands, Lear’s non-U.S. subsidiaries do not appear to be included in Lear’s U.S. bankruptcy filing and apparently will continue to operate outside the supervision and jurisdiction of the Bankruptcy Court.

Late last night, after presiding over a three-day hearing on the matter last week, U.S. Bankruptcy Judge Robert Gerber of the U.S. Bankruptcy Court for the Southern District of New York issued an order authorizing the sale of substantially all of the assets of General Motors Corporation (“Old GM”) under Section 363 of the Bankruptcy Code (“Section 363 Sale”).

Directors and officers managing corporations, especially when the corporation is insolvent or operating in insolvency situations, need to be cognizant of their fiduciary duties. This alert provides a brief overview of these fiduciary duties, including practical considerations in the exercise of these duties.

Fiduciary Duties When a Corporation is Solvent

On June 10, 2009, the sale of substantially all of Chrysler's assets closed, just 42 days after the country's third largest automaker filed for bankruptcy protection. The closing followed a contentious sale hearing before the Bankruptcy Court, an expedited appeal to the Second Circuit Court of Appeals and a brief stay imposed by the United States Supreme Court. The source of the contention: three Indiana state pension funds, arguing that the sale of Chrysler's assets constituted a sub rosa plan of reorganization that upended the priority scheme of the Bankruptcy Code.

The court overseeing the chapter 11 bankruptcy cases of Lehman Brothers Holdings Inc. and various subsidiaries (the “Debtors”), has entered an order establishing deadlines and procedures for filing claims against the Debtors. In terms of procedural requirements, the order places unusual burdens on parties whose claims are based on derivative contracts and guarantees.

A Virginia bankruptcy court has issued a decision that should be a major eye-opener for any entity that engages in tax-free exchanges under section 1031 of the Internal Revenue Code.

The U.S. Court of Appeals for the Fifth Circuit has issued a case useful for credit bidders that successfully bid on their own collateral at a bankruptcy sale, which goes forward without a specific agreement "carving out" expenses. Borrego Springs Bank N.A. v. Skuna River Lumber L.L.C., (In re Skuna River Lumber, LLC), 564 F.3d 353 (5th Cir. 2009).

Under section 363(f) of the bankruptcy code, a trustee may sell assets of the bankruptcy estate free and clear of liens and other interests. Generally, absent consent of the lienholder, a trustee may only sell assets free and clear of liens under one of the following conditions:

The bankruptcy case of the City of Vallejo, Calif., the largest chapter 9 case filed since the Orange County case 15 years ago, continues to produce significant decisions on issues of first impression. First, following a lengthy trial, the Bankruptcy Court for the Eastern District of California, where the City's case is pending, found that the City met all of the qualifications necessary to be a municipal debtor under chapter 9. In re City of Vallejo, 2008 WL 4180008 (Bankr. E.D. Cal. Sept. 5, 2008).

In a harshly worded decision, a federal bankruptcy judge concluded that a syndicated loan product was so one-sided in favor of the lender as to "shock the conscience" of the court. The judge therefore equitably subordinated the secured lender's claim. See In re Yellowstone Mountain Club, LLC, No. 08-61570, 2009 WL 1324950 (Bankr. D. Mont. May 12, 2009).

Yellowstone Mountain Club