In an interpretive statement, the Commodity Futures Trading Commission has taken the position that “cleared-only contracts,” over-the-counter contracts submitted for clearing through a futures commission merchant to a derivatives clearing organization, should be included within the definition of “net equity” for purposes of U.S. Bankruptcy Code provisions applicable to commodity brokers. The CFTC’s interpretation generally would treat cleared-only contracts in the same manner as exchange-traded futures contracts in the event of a futures commission merchant bankruptcy.

With the possibility of a major stock brokerage liquidation appearing more likely than it has been in recent periods, the effect of a liquidation on customers and financial counterparties has become of great interest to many of our clients and others.

The bankruptcy court overseeing the Lehman Brothers chapter 11 cases rejected efforts by Lehman Brothers Special Financing Inc. (LBSF) to recover roughly $1 billion in payments made to numerous noteholder defendants from the liquidation of collateral originally pledged to secure both obligations under notes issued by special purpose entities and credit default swap (CDS) obligations to LBSF, holding that the termination of the swap and liquidation and distribution of the collateral were protected by the Bankruptcy Code’s safe harbor.

The City of Detroit filed for protection under chapter 9 of the Bankruptcy Code on July 18, 2013,1 becoming the largest municipality to ever file for bankruptcy. Detroit’s bankruptcy filing presents numerous complicated issues, which will be resolved over the course of the case.

The US Court of Appeals for the Ninth Circuit recently resolved a split within the circuit when it held that a bankruptcy court has the power to recharacterize debt as equity.

The Ninth Circuit recently held that: (1) bankruptcy courts lack the constitutional authority to enter a final judgment on all fraudulent transfer claims against non-claimants, whether brought under state or federal law, and (2) a defendant can waive such an argument by not asserting the applicability of Stern v. Marshall¹ at the trial level.² Further, in dicta, the court noted that bankruptcy courts may issue proposed findings of fact and conclusions of law in matters in which the bankruptcy court cannot issue final orders.

California’s AB 506 process was intended to help a municipality in restructuring its debt obligations and avoid bankruptcy. However, the lessons of the bankruptcies of the City of Stockton, the Town of Mammoth Lakes and the City of San Bernardino support the reality that a meaningful restructure requires material involvement by the major stakeholders. California’s recent wave of municipal bankruptcies tend to show that the AB 506 process has not changed this reality, but rather made a difficult process longer and more arduous.

On May 29, 2012, the U.S. Supreme Court, in a unanimous decision, resolved a high-profile circuit split regarding the right of secured creditors to credit bid in an asset sale under a chapter 11 plan. In RadLAX Gateway Hotel, LLC v. Amalgamated Bank,¹ the Court held that a debtor cannot deny a secured creditor the right to credit bid as part of a chapter 11 plan providing for the sale of assets free and clear of the secured creditor’s liens on those assets.

The United States Bankruptcy Court for the Southern District of New York (the Court), has held that section 553(a) of the Bankruptcy Code prohibits a swap counterparty from setting off amounts owed to the debtor against amounts owed by the debtor to affiliates of the counterparty, notwithstanding the safe harbor provision in section 561 of the Bankruptcy Code and language in the ISDA Master Agreement permitting the swap counterparty to effect “triangular” setoffs. In re Lehman Brothers Inc., Case No. 08-01420 (JMP)(SIPA) (Bankr. S.D.N.Y. October 4, 2011).

In re Zais Investment Grade Ltd. VII1 is the latest in a recent line of bankruptcy cases challenging bedrock assumptions regarding securitization special purpose entities (SPEs) and bankruptcy considerations in securitization transactions.2 Zais establishes precedent allowing a senior noteholder of a collateralized debt obligation (CDO) to place the CDO issuer in an involuntary chapter 11 bankruptcy in order to advance an asset management plan that would otherwise require supermajority approval of all noteholders (including all junior classes) under the related indenture.