A recent decision from the Bankruptcy Court of the Southern District of New York has rendered the enforcement of reclamation claims that arose 20 days prior to the bankruptcy filing almost impossible in cases in which there is a prepetition lien on inventory.

In In re Dana Corp., 2007 WL 1199221 (Bankr. S.D.N.Y. Apr. 19, 2007) there was $300 million in reclamation claims asserted, but the debtor estimated that valid reclamation claims totaled only approximately $3 million.

In a significant Delaware law decision regarding creditors’ ability to sue corporate fiduciaries, the Delaware Supreme Court recently addressed the issue of whether a corporate director owes fiduciary duties to the creditors of a company that is insolvent or in the “zone of insolvency.” In North American Catholic Educ. Programming Found., Inc. v. Gheewalla, the court concluded that directors of a solvent Delaware corporation that is operating in the zone of insolvency owe their fiduciary duties to the corporation and its shareholders, and not creditors.

While the Bankruptcy Code’s safe harbor provision in section 546(e) previously provided comfort for brokerdealers, the Bankruptcy Court’s decision in Gredd v. Bear, Stearns Securities Corp. (In re Manhattan Investment Fund, Ltd.), 359 B.R. 510 (Bankr. S.D.N.Y. 2007), chips away at this provision and creates new risks for those providing brokerage account services. Always at risk as a deep pocket, new duties have been thrust upon brokerdealers that go far beyond the terms of the account agreement.

Factual Background

Debtors, creditors, purchasers and lenders continue to carefully monitor employee incentive programs after the 2005 changes to Bankruptcy Code brought on by BAPCA. Although many feared the changes to section 503(c) would eliminate an important tool for creating incentives for employees, courts have consistently approved reasonable and well-thought-out incentive programs.

Factual Background

Organizations that acquire claims in bankruptcy should acquire such claims by a sale without knowledge of the debtors’ claims against the original holder or prior transferees, and obtain an indemnification from the transferor of such claims.

In a decision in In re Enron Corp., et al., 2007 U.S. Dist. LEXIS 63129, No. 05-01025 (S.D.N.Y. August 27, 2007), the Honorable Shira Scheindlin, United States District Judge for the Southern District of New York, held that the sale of a claim that is subject to equitable subordination under section 510(c) or disallowance under section 502(d) of the Bankruptcy Code may insulate the claim from subordination and disallowance when asserted against the buyer of the claim. At first blush the decision may be, and has been, read by some to offer relief and clarity to distressed debt investors.

In 1991, a decision of the Delaware Chancery Court helped popularize the term "zone of insolvency.”[1] In the intervening 16 years, numerous courts and commentators have cited this decision as standing for the proposition that the directors of a Delaware corporation that is either insolvent or in the zone of insolvency owe fiduciary duties to the creditors, as well as to the shareholders, of the corporation.

A recent federal district court appellate decision issued in the Enron chapter 11 case1 has ruled that the postpetition transfer of a prepetition bankruptcy claim from one party to another may insulate the transferred claim against certain types of attack based solely on conduct by a prior holder of the same claim. Whether a particular claim is protected depends upon how the claim was transferred.

The U.S. Court of Appeals for the Fourth Circuit has upheld the dismissal of a debtor’s chapter 11 petition filed two days before for the expiration of a holdover, at-will tenancy, finding that the debtor’s lack of good faith in filing the petition constituted cause for dismissal. Maryland Port Admin. v. Premier Auto. Svcs., Inc. (In re Premier Auto. Svcs., Inc.), 492 F.3d 274 (4th Cir. 2007).

In the summer of 2007, we reported on Gredd v. Bear, Stearns Securities Corp. (In re Manhattan Investment Fund, Ltd.),1 decided by the United States Bankruptcy Court for the Southern District of New York.