The Bankruptcy Protector

Overview

Considerations of “environmental, social and governance” (or ESG) criteria with respect to a company’s management and operations continue to take on greater importance in lenders’ and investors’ credit and investment decisions. How a borrower or a target company measures up to these ever-developing ESG standards will impact its cost of capital and value to potential investors and acquirors.

Reaching an outcome in line with two other circuit courts, on February 16, 2022, the Fifth Circuit Court of Appeals permitted a Chapter 11 trustee to sell a debtor’s real property free and clear of the leasehold estates held by certain non-debtor lessees. See In re Royal Street Bistro, L.L.C., 2022 WL 499938 (5th Cir. February 16, 2022)(the “Ruling”)

The United States District Court for the Western District of New York recently upheld the findings of a Bankruptcy Court, which held that the in rem tax foreclosure of the subject property was a fraudulent conveyance. SeeDuvall v. Cty. of Ont., 2021 U.S. Dist. LEXIS 216970 (W.D.N.Y. 2021). The matter arose from the tax foreclosure of property (the “Property”) for the non-payment of taxes arising in 2015. In October 2016, the County issued a foreclosure petition and notices, advising that interested parties had the right to redeem the Property on or before January 13, 2017.

The US Supreme Court tends to hear a couple of bankruptcy cases per term. Most of these cases deal with interpreting provisions of the Bankruptcy Code. However, every few years or so, the Supreme Court decides a constitutional issue in bankruptcy. Some are agita-inducing (Northern Pipeline, Stern), some less so (Katz). The upcoming case is a little more nuanced, but could have major consequences.

A bankruptcy court gave “unnecessary and unlikely incorrect” reasoning to support its “excessively broad proposition that sales free and clear under [Bankruptcy Code (“Code”)] Section 363 override, and essentially render nugatory, the critical lessee protections against a debtor-lessor under [Code] 365(h),” said the U.S. Court of Appeals for the Fifth Circuit on Feb. 16, 2022. In re Royal Bistro, LLC, 2022 WL 499938, *1-*2 (5th Cir. Feb. 16, 2022).

On February 19, 2020, Congress enacted the Small Business Reorganization Act (“SBRA”) to, among other things, streamline the chapter 11 bankruptcy process for a small business. Under the SBRA, a “small business” was one with less than $2,725,625.00 in debt. Few businesses, however, were eligible to take advantage of these new provisions because their debts exceeded the cap.

Over the past decade, there have been several court decisions on whether particular make-whole premiums should be allowed as part of a creditor's claim in bankruptcy, such as Momentive,¹ EFH,² American Airlines,³ and Ultra Petroleum.⁴ Although these decisions and others set forth the legal standards to be applied and resolved the specific claims at issue, the decisions provide little guidance or clarity on the allowability of make-whole claims in future cases.

Lots of things are wrong with the student loan program in these United States. For example:

• It’s a corporate-welfare program for high-price colleges; but
• Their students pay the price.

Unfortunately, the safety valve protection for students (i.e., a bankruptcy discharge) has failed them—and made the problem worse!

Here’s how