The Delaware Supreme Court has affirmed, without opinion, a ruling by a lower court that ‘deepening insolvency’ is not a cause of action under Delaware law. Trenwick America Litig. Trust v. Billett, 931 A.2d 438 (Del. 2007).

The ruling appears to be the strongest nail yet in the coffin of so-called “deepening insolvency” actions.

In a recent decision, the United States Bankruptcy Court for the Southern District of New York (the “U.S. Court”) exercised its abstention powers and dismissed an involuntary chapter 11 petition filed against an Argentine company, Compania de Alimentos Fargo, SA (“Fargo”).1 Fargo, a debtor in an insolvency proceeding in Argentina, had moved to dismiss the involuntary petition principally because its Argentine bankruptcy case was still pending.

The United States Bankruptcy Court for the Southern District of New York has held that a severance payment made to an executive who worked for both Enron Corp. (“Enron”) and various affiliates of Enron prior to Enron’s filing for bankruptcy was a preferential transfer that could be avoided by the Official Committee of Unsecured Creditors (the “Committee”).1 In reaching this conclusion, the Bankruptcy Court rejected the argument that the severance payment was an “ordinary course” transaction that was protected from avoidance.

In previous Alerts, we have addressed the complexities of claims in bankruptcy. Likewise, trading in claims and securities can present challenges. Difficulties have arisen in large Chapter 11 reorganizations as constituencies engaged in the Chapter 11 process, who are major players in the case, seek to trade in securities relating to that case. This Alert explores the impact that some trading activities may have on potential recoveries in the bankruptcy and the help (and impact) of the Internal Revenue Code.

By Order, dated January 14, 2008, United States Bankruptcy Judge Martin Glenn for the United States Bankruptcy Court for the Southern District of New York, granted the motion (the "Motion") filed by a group of creditors seeking transfer of venue of the Dunmore Homes, Inc. (the "Debtor") bankruptcy case from the United States Bankruptcy Court for the Southern District of New York (the "Court") to the Eastern District of California, Sacramento Division. A number of other creditors and the Official Unsecured Creditors Committee joined in the Motion.

The importance and practical benefits resulting from the use of the same in-house counsel for an entire corporate family are numerous. For example, the in-house attorneys are particularly familiar with the corporate family’s structure, can assist with joint public filings, and can expertly oversee the corporate family’s compliance with regulatory regimes. If a subsidiary in the corporate family becomes financially distressed, however, the creditors of the financially distressed entity may look to the parent corporation for recourse.

In the January 2008 issue, we reported on In re Solutia, Inc.,1 decided by the United States Bankruptcy Court for the Southern District of New York. The Solutia court demonstrated how contractual entitlements of debt instruments may be altered in bankruptcy. There, the original issue discount of certain secured notes was found to be interest, rather than principal, causing a significant portion of the noteholders’ claims to be disallowed. In In re Urban Communicators PCS, Ltd.

In CDI Trust v. U.S. Electronics, Inc. (In re Communications Dynamics, Inc.),1 the United States Bankruptcy Court for the District of Delaware addressed the issue of whether a rejection damages claim is subject to setoff against a pre-petition debt owed by the creditor to the debtor. The Court found that a rejection damages claim should be treated as if it arose pre-petition, and that the provisions of section 553 permitted, rather than prevented, the setoff of the rejection damages claim against the pre-petition debt.

Background

On April 9, 2008, the US Bankruptcy Court for the District of Delaware issued its opinion in Miller v. McDonald, et al., 2008 WL 1002035 (Bkrtcy.D.Del.), in which it held that the general counsel of a public company had a duty to implement a system that would provide reasonable monitoring to prevent corporate wrongdoing. The court found that the general counsel’s duty arose from two sources. First, Delaware law imposes a duty on directors and senior officers to implement a system that would provide reasonable monitoring of corporate activity.

Participants in the multibillion-dollar market for distressed claims and securities had ample reason to keep a watchful eye on developments in the bankruptcy courts during each of the last three years. Controversial rulings handed down in 2005 and 2006 by the bankruptcy court overseeing the chapter 11 cases of failed energy broker Enron Corporation and its affiliates had traders scrambling for cover due to the potential that acquired claims/debt could be equitably subordinated or even disallowed, based upon the seller’s misconduct.