Four years after New York grocery chain Tops’ exit from Chapter 11, U.S. Bankruptcy Judge Robert Drain ruled that the Tops’ Chapter 11 trustee may proceed with litigation against certain private equity investors. The trustee alleged that the investors drove the company into bankruptcy by paying themselves more than $375 million in dividends while neglecting to address Tops’ unfunded pension liabilities.
“… [B]ecause Congress has not clearly abrogated the solvent-debtor exception,” the U.S. Court of Appeals for the Fifth Circuit held that a reorganized solvent debtor had to “pay what it promised now that it is financially capable.” In re Ultra Petroleum Corp., 2022 WL 8025329, *1, (5th Cir. Oct. 14, 2022) (2-1). Moreover, “given [the debtor’s ] solvency, post-petition interest is to be calculated according to the agreed-upon … contractual default rate …,” not the “much lower Federal Judgment Rate …,” held the court. Id.
The “connections” of the chairman (“W”) of the debtor’s investment bank (“S”) to his family’s foundations do “not give rise to an actual, active conflict of any kind,” held a bankruptcy judge in the Southern District of New York on Oct. 17, 2022. In re SAS A.B., 2022 WL 10189110, *3 (Bankr. S.D.N.Y. Oct. 17, 2022). According to the court, it “is only through strained speculation [by the U.S. Trustee] that a potential issue can even be posited.” Accord, In re Harold & Williams Dev. Co., 977 F.2d 906 (4th Cir.
“…[B]ecause Congress has not clearly abrogated the solvent-debtor exception,” the U.S. Court of Appeals for the Fifth Circuit held that a reorganized solvent debtor had to “pay what it promised now that it is financially capable.” In re Ultra Petroleum Corp., 2022 WL 8025329, *1, (5th Cir. Oct. 14, 2022) (2-1). Moreover, “given [the debtor’s ] solvency, post-petition interest is to be calculated according to the agreed-upon … contractual default rate …,” not the “much lower Federal Judgment Rate . . .,” held the court. Id.
“Under the long-standing ‘solvent-debtor exception,’ plaintiffs [unsecured trade creditors] possess an equitable right to receive post-petition interest at the contractual or default state law rate, subject to any other equitable considerations, before [the debtor] collects surplus value from the bankruptcy estate,” held the Ninth Circuit on Aug. 29, 2022. In re PG&E Corporation, 2022 WL 3712498, *4 (9th Cir. Aug. 29, 2022) (2-1).
The Third Circuit recently affirmed a bankruptcy court’s denial of a defendant’s motion to disqualify the plaintiff’s law firm in a large adversary proceeding, holding that it had not abused its discretion because the plaintiff law firm (W) had “complied with” American Bar Association Model Rule of Professional Conduct 1.10(a)(2). In re Maxus Energy Corp., 2022 WL 4113656, *4 (3d Cir. Sept. 9, 2022). According to the court, a lawyer (B) who “moved from” the defendant’s law firm “to the [plaintiff’s] firm” was not cause for W (the new firm) to be disqualified.
The appellate courts have been busy explaining or clarifying preference and fraudulent transfer law. Although novices may think the Bankruptcy Code (Code) is clear on its face, imaginative counsel have found gaps in the statute and generated rafts of litigation since the Code's enactment in 1979. Recent appellate decisions, summarized below, show that courts are still making new law or refining prior case law.
Preferences
On Dec. 16, 2021, U.S. District Court Judge Colleen McMahon in the Southern District of New York vacated Purdue Pharma’s confirmed plan of reorganization after finding that the Bankruptcy Court below did not have statutory authority to issue a confirmation order granting non-consensual third-party releases — namely for the benefit of the Sackler family who owns Purdue. In re Purdue Pharma, L.P., Case No. 7:21-cv-08566 (S.D.N.Y. Dec. 16, 2021).
The bankruptcy trustee of a bank holding company was not entitled to a consolidated corporate tax refund when a bank subsidiary had incurred losses generating the refund, held the U.S. Court of Appeals for the Tenth Circuit on May 26, 2020. Rodriguez v. FDIC (In re United Western Bancorp, Inc.), 2020 WL 2702425(10th Cir May 26, 2020). On remand from the U.S. Supreme Court, the Tenth Circuit, as directed, applied “Colorado law to resolve” the question of “who owns the federal tax refund.” Id., at *2.
The Third Circuit recently took a “pragmatic approach” when affirming lower court orders denying a stay of bankruptcy settlement distributions pending appeal. In re S.S. Body Armor I, Inc., 2019 WL 2588533 (3d Cir. June 25, 2019). After holding that the district court’s “stay denial order” was “final” for jurisdictional purposes, it also confirmed “the applicable standard of review” on motions for stays pending appeals.
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