Exception from Discharge of Debts for Fraud Committed by Business Partner

On February 22, 2023, the U.S. Supreme Court handed down its ruling in Bartenwerfer v. Buckley, No. 21-908, 2023 WL 214441 (U.S. Feb. 22, 2023), where it resolved a circuit split in ruling that a debt based on fraud committed by, or a false representation made by, the debtor's partner or agent is nondischargeable in the debtor's bankruptcy case.

With increased distress in the mid-market we may well see lenders using different tools to keep a closer eye on a company’s financial performance. One of those tools is to appoint a board observer.

In In re Global Cord Blood Corp., 2022 WL 17478530 (Bankr. S.D.N.Y. Dec. 5, 2022), the U.S. Bankruptcy Court for the Southern District of New York denied without prejudice a petition filed by the joint provisional liquidators for recognition of a "winding-up" proceeding commenced under Cayman Islands law.

The Bottom Line

One feature commonly seen in commercial lending transactions is a waiver of the borrower’s authority to file for bankruptcy without the consent of the lender. While such “blocking” provisions are generally upheld where the equity interest holders are the parties with such rights, they are generally unenforceable as a matter of public policy when such protection is given to a creditor with no meaningful ownership interest in the corporate debtor.

Everything, everywhere, all at once is our risk thesis for 2023, but one must not forget about concentration risk. This issue has rocketed up diligence agendas for LPs and GPs alike as the collapse of Silicon Valley Bank proved it really was the bank for venture capital.The entry of SVB into receivership on March 10, 2023 highlighted just how central it had become to U.S.

What happens when a creditor class fails or refuses to vote on confirmation of a Subchapter V plan? Does that prevent a consensual confirmation?

We have a recent answer from In re Creason, Case No. 22-00988, Western Michigan Bankruptcy Court (opinion issued 2/23/2023).

Facts

The Subchapter V Debtor is a sole-proprietor dentist.

In January, we wrote about Highland Capital Management, L.P. and the reorganized debtor’s filing of a petition for a writ of certiorari, by which the reorganized debtor asked the Supreme Court to consider whether section 524(e) of the Bankruptcy Code prohibits non-debtor exculpations.

Whether a foreign bankruptcy case can be recognized under chapter 15 if the foreign debtor does not satisfy the commands of both section 109 (of chapter 1) and section 1517 (of chapter 15) of the Bankruptcy Code has long been a contentious issue. As previewed at an oral argument held on March 10, 2023, the Eleventh Circuit has now waded into this thicket, setting up the possibility of a circuit-level counterweight to the Second Circuit’s seminal decision in In re Barnet.

Statutory Text

We have previously blogged about Bartenwerfer v. Buckley, No. 21-908, a Supreme Court case concerning the scope of the fraud exception to the dischargeability of debts in bankruptcy. Section 523 of the Bankruptcy Code exempts from discharge “any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . .

Section 365(n) of the United States Bankruptcy Code (11 U.S.C. Title 11) protects the rights of intellectual property (IP) non-debtor licensees. Section 365 of the Bankruptcy Code allows a debtor –in-possession, or a trustee (e.g., a software vendor) to: (a) assume, (b) assign, or (c) reject certain executory contracts – which would typically include software licenses. A debtor in possession’s decision to assume, assign, or reject an executory contract is subject to court approval, certain deadlines and other requirements detain Section 365 of the Bankruptcy Code.