Pursuant to § 1104 of the United States Bankruptcy Code, the court may appoint a bankruptcy examiner to investigate the debtor with respect to allegations of fraud, dishonesty, incompetence, misconduct or mismanagement. A qualified examiner, with a clearly defined mission, can drastically affect the outcome of the bankruptcy case and directly impact the return to creditors. The difference between a successful financial restructure or liquidation and an investigation yielding little value to the creditors often depends on the approach taken by the examiner and his professionals.
The recent downturn in the financial sector and related bankruptcy filings have shed light on issues involving executive compensation, particularly in chapter 11 cases. Specifically, bankrupt companies often have paid substantial bonuses to executives prior to filing for bankruptcy protection and desire to retain those executives throughout the bankruptcy process through additional bonus payments and similar schemes. These types of payments have been criticized as giveaways to management.
While investors and lenders brace for the next wave of chapter 11 filings, those who are parties to intercreditor agreements need to take stock on how their relationship with their fellow creditors and the borrower may be impacted by a bankruptcy filing by the borrower. If the borrower is in financial extremes, the primary lender who is secured by all the business assets may be unwilling or unable to extend additional credit to the troubled borrower.
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)
The U.S. Bankruptcy Code provides for the appointment of a bankruptcy examiner to investigate the debtor with respect to allegations of fraud, dishonesty, incompetence, misconduct or mismanagement. The right examiner, with a clearly defined mission, will have a major influence on the bankruptcy process. The difference between a successful financial restructuring or liquidation-resulting in substantial recoveries for the key constituencies-and a time-consuming (and asset-consuming) meltdown, can depend on the approach of the examiner and the examiner's support team.
The United States District Court for the Western District of Pennsylvania has held that an excess liability insurer had no standing to object to a Chapter 11 bankruptcy debtor's reorganization plan where the plan, although requiring contributions from the insurer's policyholder, was not contingent on the policyholder obtaining any funds or proceeds from its insurer. Hartford Accident and Indemnity Co., et al. v. North Am. Refractories Cos. et al., Civ. Action No. 07-1750, Bankr. Case No. 02-20198 (JFK) (W. D. Pa. Jul. 25, 2008).
In two related actions, the United States Bankruptcy Court for the District of Delaware ruled that the proceeds of a D&O policy are not property of the debtor's estate and refused to grant an injunction requested by a trustee to prevent the directors and officers from consummating a settlement that would exhaust the policy limits.
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.
During the current economic downturn, a number of financially distressed franchisees either have filed or may file for bankruptcy protection to restructure their financial obligations. As a result, franchisors should familiarize themselves with some bankruptcy basics before they are confronted with the situation.
What Happens If One of Our Franchisees Declares Bankruptcy?
The United States District Court for the Western District of Pennsylvania has affirmed two final orders of the bankruptcy court finding that (1) the debtor's insurers lacked standing to object to confirmation of the bankruptcy plan; (2) a channeling injunction for silica claims was appropriately included in the debtor's plan; (3) an assignment of the debtor's rights under its insurance policies to the personal injury trust was authorized by bankruptcy law; and (4) the debtor's reorganization plan was confirmable under the Bankruptcy Code. Hartford Accident & Indemnity Co. v.