In Metropolitan Government of Nashville & Davidson County v. Hildebrand, the Sixth Circuit Court of Appeals explains how to read the phrase “applicable nonbankruptcy law” as it is used in the United States Bankruptcy Code. The case – a chapter 13 individual bankruptcy case – discussed the phrase in the context of section 511(a) of the Bankruptcy Code, which deals with the appropriate rate of interest applicable to tax claims.

There is an inherent tension between the goals of bankruptcy law and the state law doctrine of constructive trust. A central tenet of bankruptcy policy is that similarly situated creditors should be treated equally: because an insolvent business or individual will not be able to pay all creditors in full, a proper bankruptcy system must provide as equitable a distribution to each of them as possible. Constructive trust law, on the other hand, works to the advantage of a single creditor – which always means the detriment of the others when everyone is competing for limited funds.

(6th Cir. Feb. 23, 2017)

The Sixth Circuit affirms the bankruptcy court’s decision to confirm the debtor’s Chapter 13 plan, which included payment of overdue property taxes under Tennessee law with an interest rate of 12%. The state argued that the interest rate should be 18% due to the additional 6% interest permitted under the applicable state statute for a default penalty. The court holds that the 12% provided in the “nonbankruptcy law” is applicable, while the 6% penalty is not applicable. Opinion below.

Judge: Stranch

In January 2017, a divided panel of the United States Court of Appeals for the Second Circuit issued its widely reported opinion in Marblegate Asset Management, LLC vs. Education Management Corp., in which the majority held that the “right ... to receive payment” set forth in Section 316(b) of the Trust Indenture Act of 1939 (TIA) prohibits only nonconsensual amendments to an indenture’s core payment terms and does not protect the practical ability of bondholders to recover payment.

Background

On February 28, 2017, Judge Sontchi of the Delaware Bankruptcy Court issued an opinion (the “Opinion”) in the Money Center of America bankruptcy – Bankr. D. Del., Case 14-10603. The Opinion is available here. This Opinion decided two separate, but similar, motions to dismiss filed by 2 entities owned by federally recognized Indian Tribes and sovereign nations (the “Tribes”).

(Bankr. S.D. Ind. Feb. 24, 2017)

The bankruptcy court denies the plaintiff’s motion for summary judgment in this nondischargeability action under 11 U.S.C. §§ 523(a)(2), (4), and (6). The plaintiff argued that a state court judgment collaterally estopped the debtor from defending against the claims. The court holds that the findings in the state court judgment are insufficient to prevent the debtor from asserting a defense in this action. Opinion below.

Judge: Carr

Attorney for Plaintiff: Mulvey Law LLC, Joseph L. Mulvey

Since February 2016, the Local Rules for the United States Bankruptcy Court for the District of Delaware provide for combined hearings on approval of disclosure statements and confirmation of plans and for the use of combined disclosure statement and plans in liquidating chapter 11 cases.

A recent case in the Southern District of New York, U.S. Bank, NA v. T.D. Bank, NA, applied the so-called Rule of Explicitness to the allocation of recoveries among creditors outside of a bankruptcy proceeding. In the bankruptcy context, this rule requires a clear and unambiguous intention to turn over post-petition interest to senior creditors at the expense of junior creditors. The court in this case found the requisite documentary clarity to pay post-petition interest ahead of the distribution of principal.

One of the most powerful and oft used devices in bankruptcy is the sale of assets “free and clear” of liens, claims and interests. One issue a buyer at a bankruptcy sale must consider, however, is whether due process has been met with respect to parties whose liens, claims and/or interests are released through such sale. Indeed, a lack of due process could foil a “free and clear” sale, leaving a buyer with an encumbered purchase and nowhere to turn for recourse.

In a decision last month, DCF Capital, LLC v. US Shale Solutions, LLC (Sup. Ct. NY Co. Jan. 24, 2017), a New York State Supreme Court justice held that a noteholder that had properly accelerated indenture debt may sue to collect that debt notwithstanding the operation of a standard no-action clause. This holding, while appealing from a noteholder perspective, may not be compelled by Section 316(b) of the Trust Indenture Act on which it rests and is contrary to some prior case law.

Background