The Bankruptcy Court for the District of New Jersey denied motions to dismiss the chapter 11 case of the newly created subsidiary of Johnson & Johnson, LTL Management LLC, and granted the debtor’s motion to stay prosecution of actions asserting talc related personal injuries against its J&J affiliates and the products distributors. This is the first opinion outside the North Carolina bankruptcy court approving the use of the so-called Texas Two Step as a bankruptcy execution strategy.

The Motions to Dismiss

A recent decision of the New York Court of Appeals, Sutton v. Pilevsky held that federal bankruptcy law does not preempt state law tortious interference claims against non-debtors who participated in a scheme that caused a debtor—in this case a bankruptcy remote special purpose entity—to breach contractual obligations intended to ensure that the entity remains a Special Purpose Entity (SPE) and to facilitate the lenders’ enforcement of remedies upon a future bankruptcy filing, if any.

The Second Circuit Court of Appeals recently held in In re Tribune Company Fraudulent Conveyance Litigation, No. 13-3992-cv (L) (2d Cir., Dec. 19, 2019) that Bankruptcy Code Section 546(e) barred claims seeking to avoid payments made by Tribune to its shareholders as part of a leveraged buyout (LBO).

After Energy Future Holdings (EFH), maybe not so much. The size of the break-up fee approved by the bankruptcy court in EFH was undoubtedly large by any account – US$275 million. But it was approved following all necessary filings, notice and hearings. All parties and counsel involved were highly sophisticated and experienced. The court that approved the fee was the Delaware bankruptcy court, by all accounts one of the most experienced and sophisticated bankruptcy courts in the nation. And there wasn’t even a hint of fraud, misrepresentation or failure to disclose material facts.

Directors and officers (D&Os) of troubled companies should be highly sensitive to D&O insurance policies with Prior Act Exclusion. While policies with such exclusion may be cheaper, a recent decision by the U.S. Court of Appeal for the Eleventh Circuit raises the spectre that a court may hold a loss to have more than a coincidental causal connection with the officer’s conduct pre-policy period and make the (cheaper) coverage worthless.

A substantive non-consolidation opinion is a common feature of structured finance transactions in the U.S. Most, if not all, opine as to what a bankruptcy court would do, but express no opinion on the appellate process. We would venture a guess that most opinion recipients assume that if the bankruptcy court gets it wrong, their rights will be vindicated on appeal. The Eighth Circuit opinion in Opportunity Finance¹ casts a troubling shadow over that assumption.

Background

When a portfolio company underperforms, a sponsor may consider various options to address the perceived performance issues, including changes to a portfolio company’s management team, cost structure, capital structure or other parameters, depending on the nature of the issue(s) at hand. When changes in capital structure may be desirable, often in the context of excessive debt and related liquidity issues, a sponsor’s choices may include a consensual workout outside of bankruptcy, or a court-supervised restructuring under Chapter 11 of the U.S.

Introduction

Judge James M. Peck of the Bankruptcy Court for the Southern District of New York held, on June 25, 2013 (the “Lehman Op.”),1that claims under repurchase transactions (“Repos”) do not qualify as customer claims and therefore are not entitled to the priority or coverage provided for customers’ claims under the Securities Investor Protection Act (“SIPA”).

Courts generally agree that pre-petition agreements to forgo the protec-tions of bankruptcy are invalid as against public policy. A recent Tenth Cir-cuit Bankruptcy Appellate Panel decision calls this accepted premise into question by holding that provisions contained in a limited liability company agreement that expressly barred the company, and restricted the manager, from filing a bankruptcy petition were enforceable. DB Capital Holdings, LLC v. Aspen HH Ventures, LLC (In re DB Capital Holdings, LLC), No. 10-046, 2010 Bankr. LEXIS 4176 (B.A.P. 10th Cir., Dec.

Key Takeaways