“Whoever is careless with the truth in small matters cannot be trusted with important matters.”

– Albert Einstein

An individual Chapter 11 debtor’s “estate was diminishing” with no “reasonable likelihood of rehabilitation,” held the U.S. Court of Appeals for the First Circuit on July 5, 2016. In re Hoover, 2016 WL 3606918, *2 (1st Cir. July 5, 2016), affirming the bankruptcy court’s conversion of the case to a Chapter 7 liquidation. In a rare appellate decision on the conversion issue, the First Circuit affirmed the finding that the debtor had sold “inventory without replacing it with new inventory or retaining cash sufficient to offset the diminution.” Id. at *3.

Until the recent U. S. Supreme Court’s decision in Husky International Electronics, Inc. v. Ritz, __ U.S. __, 136 S.Ct. 1581, 194 L.Ed.2d 655, 84 U.S. L.W. 4270 (2016), there was disagreement in the circuit courts regarding whether a debtor in bankruptcy could be denied a discharge under 11 U.S.C. § 523(a)(2)(A) where the evidence of wrongdoing proved the debtor committed actual fraud, but there was no evidence that the debtor made a misrepresentation to the creditor seeking to bar the discharge.

Recently, a bankruptcy court in the First Circuit, confronted with whether the debtors’ chapter 12 case could be converted to a chapter 11 case – an issue over which there is split in the case law – determined that the Debtors’ chapter 12 case could not be converted to a chapter 11 case.

Relevant Statutes and Statutory Provisions:

On June 14th, the First Circuit modified the bankruptcy court's $250,000 sanction award against a mortgage servicer who erroneously claimed to be the mortgage holder. The mortgage servicer did not deliberately or intentionally seek to mislead the bankruptcy court and its actions were not prejudicial. First Circuit therefore modified the award to $5,000. In re Jacalyn S. Nosek.  

In this edition of the Landlord’s Corner, we review various cases that address the (i) rights of landlords to recover their property post-rejection, (ii) whether payments pursuant to a termination of lease agreement constitute preferential transfers and (iii) whether a lease could be retroactively rejected in the absence of a formal motion to reject.

Bankruptcy Code § 365(d)(3) requires the trustee or the debtor in possession to "timely perform all the obligations of the debtor . . .arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1)." In 2001 the Third Circuit construed this section to require the debtor to perform the lease in accordance with its terms. CenterPoint Properties v. Montgomery Ward Holding Corp. (In re Montgomery Ward Holding Corp.), 268 F.3d 205 (3d Cir. 2001).

On February 7, 2011, in In re DBSD North America, Inc.,1 the Court of Appeals for the Second Circuit released its opinion joining the Third Circuit in condemning socalled “gifting plans,” thus deepening the perceived circuit split with the First Circuit which has been interpreted as approving of gifting plans. In so doing, the Second Circuit relied on the U.S. Supreme Court cases of Bank of Am. Nat’l Trust & Sav. Ass’n v. 203 N. LaSalle St. P’ship2 and Norwest Bank Worthington v.

So what do railroad barons, second lien lenders and satellites have in common? Strangely, the derailment of the gifting doctrine for cram-down plans, at least, in the Second Circuit. In an Opinion filed on February 7, 2011, the Second Circuit issued what amounted to a teaser for bankruptcy professionals. It started with a decision by Bankruptcy Judge Gerber of the Southern District of New York to confirm a Chapter 11 plan that included a “gift” from the second lien lenders to equity, even though unsecured creditors were not being paid in full.

On February 7, 2011, in a highly anticipated decision, the Second Circuit Court of Appeals held that in Chapter 11 reorganizations, senior creditors may not “gift” recoveries to junior creditors and/or equity interest holders over the objection of an intervening class. In In re DBSD N.A., Inc., __ F.3d __, 2011 WL 350480 (2d Cir. 2011), the majority ruled that such “gift plans” run afoul of the “absolute priority rule,” which is codified in Section 1129(b) of Bankruptcy Code. The decision has significant implications for future bankruptcy cases in New York.