Recent rulings in the Third Circuit Court of Appeals and the U.S.
In the first appellate court decision on the issue, the Third Circuit Court of Appeals recently held that trade claims subject to disallowance under section 502(d) of the Bankruptcy Code are disallowable “no matter who holds them.”1 In In re KB Toys Inc., the Third Circuit affirmed Bankruptcy and District Court decisions holding that trade claims subject to disallowance in the hands of an original claimant remain disallowable in the hands of a subsequent transferee.
In a recent decision, Senior Transeastern Lenders v. Official Comm. of Unsecured Creditors (In re TOUSA, Inc.), 2012 US App. LEXIS 9796 (11th Cir. May 15, 2012), the 11th Circuit Court of Appeals overturned a district court decision which had forcefully quashed a bankruptcy court decision to avoid, as a fraudulent transfer, a $400 million settlement and loan repayment by a parent company to a group of lenders (the “Transeastern lenders”).
Litigation arising from the Tousa, Inc. fraudulent transfer claims has been working its way through the legal system since 2009, and the recent decision issued by the 11th Circuit Court of Appeals (the “11th Circuit”), has significant ramifications for any party holding debt, whether that debt is secured, unsecured, original issue or purchased on the secondary market. Regardless of the type of debt, or its source, Tousa illustrates that lenders must heighten their due diligence efforts to protect themselves from the risk of a lawsuit alleging fraudulent transfer liability.
AFA Investment Inc., and its affiliates, including AFA Foods, American Foodservice Corporation, United Food Group, LLC, and American Fresh Foods (together “AFA”) have requested that the Bankruptcy Court overseeing their Chapter 11 cases approve procedures for a sale of all of their assets. The sale process was a condition required by AFA’s lenders to continue financing the companies in bankruptcy.
FairPoint Communications’ 2008 purchase of New England landlines from Verizon Communications is the subject of a $2 billion fraudulent transfer lawsuit, filed late last week by a litigation trust formed by FairPoint creditors, who claim that the $2.3 billion acquisition forced FairPoint into bankruptcy just 18 months later. North Carolina-based FairPoint, which emerged from bankruptcy in January but continues to struggle financially, provides wireline telephony and Internet services to nearly two million customers in 18 states.
On November 4, 2011, the SIPC Trustee took his first steps toward transferring frozen customer securities accounts held by MF Global Inc. ("MFGI") when he announced that he will be accepting proposals for the transfer of all customer securities accounts of MFGI (the "Securities Accounts") to another member of the Securities Investor Protection Corporation. This action is in addition to the steps the Trustee took last week to transfer certain segregated commodities accounts from MFGI to other futures commission merchants.
In a client advisory sent by our office a few months ago, we described a decision in the Madoff saga in which the District Court for the Southern District of New York (the Court) closed off a potential avenue of significant recovery for the Madoff Trustee (the Trustee) and the Ponzi scheme victims by denying the Trustee standing to pursue certain claims against feeder funds – firms that sent investors’ funds to Madof
The District Court for the Southern District of New York recently issued an opinion in Picard v. Katz, et al., (In re Bernard L. Madoff Investment Securities LLC),1 which limits avoidance actions against a debtor-broker’s customers to those arising under federal law based on actual, rather than constructive, fraud. The decision was issued by US District Judge Rakoff in the Trustee’s suit against the owners of the New York Mets (along with certain of their friends, family and associates).