On June 9, 2014, the Supreme Court issued a decision in Executive Benefits Insurance Agency v. Arkison, a case that tested the extent of the jurisdiction of bankruptcy court judges to decide fraudulent transfer and certain other claims against non-debtors. Ropes & Gray LLP represented the petitioner in obtaining certiorari and in the Supreme Court proceedings.
Lenders and their attorneys are conditioned to believe that being over-secured is as good as life gets for a creditor. Lenders want to secure repayment with collateral that is valuable and liquid, while their attorneys ensure that the security interest is properly perfected. But, post-closing confidence in a job well done can quickly evaporate if the borrower files a bankruptcy case intending to sell the collateral.
On June 9, 2014, the US Supreme Court issued a unanimous decision in Executive Benefits Insurance Agency v. Arkison (“Executive Benefits”)1 that resolved a fundamental bankruptcy procedural issue that had arisen in the wake of Stern v.
Energy Future Holdings Corp. filed a prepackaged ("pre-pack") chapter 11 in April 2014 seeking a complete restructuring and quick-exit from bankruptcy, aiming to be in and out of bankruptcy in under 11 months. In May 2014, the Bankruptcy Court for the District of Delaware confirmed the prepackaged disclosure statement and reorganization plan of Quiznos, and on May 23, 2014, the Bankruptcy Court for the Southern District of New York approved a $570 million loan in the Momentive Performance Materials prepack bankruptcy.
Professional compensation is often a contentious issue in bankruptcy, as we have previously discussed.
Secured creditors naturally want to be repaid. Sometimes secured creditors go as far as asking a debtor to waive its right to seek bankruptcy protection. Although such clauses are frequently held to be unenforceable, we previously have discussed exceptions for LLCs.
In In re Residential Capital, LLC, the U.S. Bankruptcy Court for the Southern District of New York recently granted an oversecured creditor's request for postpetition interest at the contractual default rate, even though the debtor was insolvent. In doing so, the Bankruptcy Court rejected an argument that awarding postpetition interest at the default rate (which was 4% higher than the non-default rate) would provide an undue windfall to the oversecured creditor and harm unsecured creditors.
Why This Decision Is Important
Since 1988, section 365(n) of the U.S. Bankruptcy Code has protected licensees of intellectual property from having their licenses rejected by an insolvent licensor. While this statute addresses certain contingencies and exceptions, the basic rule is that an insolvent licensor is not free to terminate (or ‘reject’) an intellectual property license the way it is free to shed itself of other contracts.
The U.S. District Court for the District of Delaware has affirmed a bankruptcy court order which approved both a sale of the debtors’ assets and the establishment of an escrow account, which essentially provides a “gift” to fund a distribution to the debtors’ unsecured creditors. What is significant about this order is that it approved the use of gifting in a chapter 11 bankruptcy case.
An executive’s right to severance payments isn’t always written in stone, even if his employer agrees to provide them. In this post, we described how one exec lost his severance pay after the Federal Reserve decided that his employer, a bank, was in a “troubled condition” at the time.