The U.S. Court of Appeals for the Second Circuit, on July 9, 2007, decisively affirmed a bankruptcy court's dismissal of an equitable subordination complaint filed by a creditors' committee against eight investment fund lenders. Official Committee of Unsecured Creditors of Applied Theory Corporation v. Halifax Fund, L.P., et al. (In re Applied Theory Corporation), ___ F.3d ___, 2007 U.S. App. LEXIS 16180 (2d Cir. July 9, 2007).

A recent decision out of a North Carolina bankruptcy court has reopened the question of whether a physical supply contract may qualify as a forward contract or swap agreement for purposes of the Bankruptcy Code. Although previous U.S. case law determined that those terms included commodity supply agreements, the U.S. Bankruptcy Court for the Eastern District of North Carolina disagreed.

In Official Committee of Unsecured Creditors v. Halifax Fund, L.P. (In re Applied Theory Corp.),1 the Second Circuit, in a per curiam opinion, held that an official committee of unsecured creditors (the "Committee"), under the circumstances, did not have the right to commence an adversary proceeding seeking the equitable subordination of claims held by insiders of a Chapter 11 debtor. The Applied Theory court rebuffed the Committee's characterization of its claim as a direct claim that the Committee could prosecute without the bankruptcy court's permission.

While many amendments to bond indentures can be made without consent from all bondholders, “non-impairment” clauses provide that the indenture may not be amended or restructured in any way that will affect or impair a bondholder’s right to receive principal and interest when due without unanimous consent.

Investor group “Save the Queen” purchased the historic Queen Mary ship and surrounding land and development rights for $43 million from the previous operator, Queen’s Seaport Development, which filed for Chapter 11 bankruptcy in 2005.

In a case involving a bankruptcy reorganization in which a trustee in bankruptcy was given the right to pursue claims of misappropriation or infringement (but not ownership of the bankrupt’s intellectual property), the U.S. Court of Appeals for the Federal Circuit reversed the district court finding that the no trustee had standing to bring suit. Morrow, et al. v. Microsoft Corp., Case Nos. 06-1512, -1518, -1537 (Fed. Cir., Sept. 19, 2007 (Moore, J.; Prost, J., dissenting).

A federal court in California recently has thrown its weight behind a majority rule that holds that letter of credit proceeds should be applied to damages resulting from the rejection of a lease of non-residential real property. In re Connectix Corp., No. 05-556848, 2007 WL 2137802 (Bankr. N.D. Cal. May 10, 2007). The court also addressed the formula the parties should employ to arrive at a damages figure.

A fundamental premise of chapter 11 is that a debtor’s prebankruptcy management is presumed to provide the most capable and dedicated leadership for the company and should be allowed to continue operating the company’s business and managing its assets in bankruptcy while devising a viable business plan or other workable exit strategy. The chapter 11 “debtor-in-possession” (“DIP ”) is a concept rooted strongly in modern U.S. bankruptcy jurisprudence. Still, the presumption can be overcome.

The power to alter the relative priority of claims due to the misconduct of one creditor that causes injury to others is an important tool in the array of remedies available to a bankruptcy court in exercising its broad equitable powers. However, unlike provisions in the Bankruptcy Code that expressly authorize a bankruptcy trustee or chapter 11 debtor-in-possession (“DIP ”) to seek the imposition of equitable remedies, such as lien or transfer avoidance, the statutory authority for equitable subordination—section 510(c)—does not specify exactly who may seek subordination of a claim.

In the summer of 2007, we reported on Gredd v. Bear, Stearns Securities Corp. (In re Manhattan Investment Fund, Ltd.),1 decided by the United States Bankruptcy Court for the Southern District of New York.