The ability to sell an asset in bankruptcy free and clear of liens and any other competing “interest” is a well-recognized tool available to a trustee or chapter 11 debtor in possession (“DIP”). Whether the category of “interests” encompassed by that power extends to potential successor liability claims, however, has been the subject of considerable debate in the courts. A New York bankruptcy court recently addressed this controversial issue in Olson v. Frederico (In re Grumman Olson Indus., Inc.), 445 B.R. 243(Bankr. S.D.N.Y. 2011).

In a case of first impression, the Third Circuit Court of Appeals in In re American Home Mortg. Holdings, Inc., 637 F.3d 246 (3d Cir. 2011), held that, for purposes of section 562 of the Bankruptcy Code, a discounted cash flow analysis was a “commercially reasonable determinant” of value for the liquidation of mortgage loans in a repurchase transaction.  

October 17, 2006 marked the one year anniversary of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the "Reform Act"). The Reform Act has provided some much needed relief to commercial landlords, and the reported decisions of bankruptcy courts during the first year of the Reform Act confirm the effectiveness of the new landlord-friendly provisions.

A debtor’s exclusive right to formulate and solicit acceptances for a plan of reorganization during the initial stages of a chapter 11 case is one of the most important benefits conferred under the Bankruptcy Code as a means of facilitating the successful restructuring of an ailing enterprise. By giving a chapter 11 debtor-in-possession time to devise a solution to balance sheet and operational problems without being burdened by the competing agendas of other stakeholders in the bankruptcy case, exclusivity levels the playing field, at least temporarily.

Delaware companies take note: a state court has ruled that companies in apparent good financial health may not use the bankruptcy process to avoid shareholder approval of an asset sale—even in situations in which a shareholder vote may be difficult to obtain.

Utility Services—Darby v. Time Warner Cable, Inc. (In re Darby), No. 05-20931 (5th Cir., Nov. 14, 2006)

The U.S. Court of Appeals for the Fifth Circuit has held, in an issue of first impression in the circuit, that a cable service provider was not a utility under section 366 of the Bankruptcy Code. Therefore, the cable company was not obligated to provide services to a bankrupt debtor, even though the debtor offered assurances of future payment. The ruling affirmed the holdings of two lower courts.

In a case of first impression, the U.S. Court of Appeals for the Second Circuit has held that a claim for damages based on a chapter 11 debtor’s failure to issue shares of its common stock in exchange for a claimant’s stock in another company pursuant to a termination agreement is subject to mandatory subordination.

In Rombro v. Dufrayne (In re Med Diversified, Inc.), 461 F.3d 251 (2d Cir. 2006), the court held that the claim “arose from” the purchase of the debtor’s stock within the meaning and purpose of the Bankruptcy Code’s subordination provision.

In light of the continued favorable business climate and ample liquidity in the U.S., the falloff in business bankruptcy filings in 2006 should come as no big surprise. Unlike 2005, which added three new stars to the all-time hit parade of chapter 11 “mega” cases, 2006 saw no new additions to the Top 10 list for public-company chapter 11 filings. Overall, the number of business bankruptcy filings dropped 20 percent in fiscal year 2006, the fifth straight year a decline was reported, according to statistics released by the Administrative Office of the U.S. Courts in October of 2006.

Entities doing business with a customer that files for bankruptcy protection generally have the right to refuse to continue providing goods or services to the chapter 11 debtor, unless such goods or services are covered by a continuing contract, in which case any forfeiture of the debtor’s rights under the agreement is generally prohibited to afford the debtor a reasonable opportunity to decide what to do with the contract.

The ability of a creditor whose claim is “impaired” to vote on a chapter 11 plan is one of the most important rights conferred on creditors under the Bankruptcy Code. The voting process is an indispensable aspect of safeguards built into the statute designed to ensure that any plan ultimately confirmed by the bankruptcy court meets with the approval of requisite majorities of a debtor’s creditors and shareholders and satisfies certain minimum standards of fairness.