In the latest decision arising out of long-running disputes over confirmation of the Tribune Company’s Chapter 11 plan, the Third Circuit issued important new guidance concerning the enforceability of subordination agreements in cramdown plans, holding (1) that subordination agreements “need not be strictly enforced” in such plans, and (2) that the relevant comparison, for determining unfair discrimination, need not always be a comparison between the recovery of the preferred class and the dissenting class, but may sometimes entail a comparison between the dissenting class’s desired and act

On May 20, 2019, in Mission Product Holdings, Inc. v. Tempnology, LLC, 587 U.S. ---, 139 S. Ct. 1652 (2019), the Supreme Court resolved a split among the circuits, holding that a licensor’s rejection of a trademark license in bankruptcy constitutes a prepetition breach, but does not terminate the license.

The Bottom Line

The Third Circuit, in Artesanias Hacienda Real S.A. de C.V. v. N. Mill Capital, LLC (In re Wilton Armetale, Inc.), 968 F.3d 273 (3d Cir. 2020), issued a decision with potential implications for creditors who wish to pursue causes of action after a bankruptcy trustee refuses to act on such claims. The Third Circuit held that if a bankruptcy trustee clearly abandons a cause of action, the right of creditors to pursue that cause of action “spring[s] back to life.”

What Happened?

On Aug. 8, 2018, the U.S. Court of Appeals for the First Circuit upheld the right of Kramer Levin’s bondholder clients to seek a receiver for the Puerto Rico Electric Power Authority (PREPA) — the first appellate court in the history of municipal bankruptcy to do so. The First Circuit reversed U.S. District Judge Laura Taylor Swain, who presides over all proceedings under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). PREPA bondholders alleged that PREPA’s mismanagement had depreciated revenues pledged to them as collateral.

The Ninth Circuit, in Blixseth v. Credit Suisse, 961 F.3d 1074, 1078 (9th Cir. 2020), issued a significant decision on the issue of whether nonconsensual third-party releases are ever permitted in Chapter 11 plans. Distinguishing its prior decisions on the topic, the Ninth Circuit permitted a nonconsensual third-party release that was limited to the exculpation of participants in the reorganization from claims based on actions taken during the case.

Statutory Background

The Supreme Court has granted certiorari in Merit Management Group L.P. v. FTI Consulting Inc. to resolve a circuit split over the interpretation of Section 546(e) of the Bankruptcy Code, the “safe harbor” provision that shields specified types of payments “made by or to (or for the benefit of)” a financial institution from avoidance on fraudulent transfer grounds.

The Bottom Line

By now, both indenture trustees and offices of the U.S. Trustee around the country are undoubtedly familiar with the Southern District of New York’s 2014 opinion in the case of In re Lehman Brothers Holdings, Inc., 508 B.R. 283 (S.D.N.Y. 2014) (Lehman II), finding that individual committee members must establish a “substantial contribution” to the case under Section 503 of the Bankruptcy Code before the payment of their fees will be approved as part of a Chapter 11 plan. In the years since the Lehman II decision, however, U.S.

The Bottom Line

The Third Circuit recently affirmed that a debtor in Chapter 11 can use a tender offer to settle claims without running afoul of the Bankruptcy Code. Although In re Energy Future Holdings Corp.is limited to its particular facts and circumstances, the decision could lead to increased use of tender offers prior to confirmation of a bankruptcy plan.