While the Bankruptcy Code’s safe harbor provision in section 546(e) previously provided comfort for brokerdealers, the Bankruptcy Court’s decision in Gredd v. Bear, Stearns Securities Corp. (In re Manhattan Investment Fund, Ltd.), 359 B.R. 510 (Bankr. S.D.N.Y. 2007), chips away at this provision and creates new risks for those providing brokerage account services. Always at risk as a deep pocket, new duties have been thrust upon brokerdealers that go far beyond the terms of the account agreement.

Factual Background

In In re Calpine Corporation, 2007 WL 685595 (Bankr. S.D.N.Y. 2007), the Bankruptcy Court for the Southern District of New York considered the issue of whether secured creditors whose debt was being paid prior to its original maturity date were entitled to a prepayment premium.

While derivations of intercreditor agreements continue to enhance the rights of the senior secured party, whether the many provisions provided for are enforceable in bankruptcy remains a burning question. Recently, the Bankruptcy Court for the Northern District of Georgia in In re Aerosol Packaging, LLC, 2006 WL 4030176 (Bankr. N.D.Ga. 2006) helped bring clarity to one of the most important of these issues: is the right of a senior creditor to vote the claim of a junior creditor on whether to accept or reject a plan of reorganization enforceable in bankruptcy?

In Motorola, Inc. v. Official Committee of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452 (2d Cir. 2007), the Official Committee of Unsecured Creditors (the “Committee”) and the debtors’ lenders sought approval of a settlement prior to confirmation of a plan of reorganization. While the Court concluded that many aspects of the settlement might otherwise be approved, it found that a provision that distributed funds in violation of the absolute priority rule lacked sufficient justification.

A federal district court in New York has overturned a bankruptcy court decision that some say had threatened to disrupt the secondary market in claims against companies in bankruptcy. See Enron Corp. v. Springfield Associates, L.L.C., No. 01-16034 (S.D.N.Y., Aug. 27, 2007).

In previous editions of the Business Restructuring Review, we reported on a pair of highly controversial rulings handed down in late 2005 and early 2006 by the New York bankruptcy court overseeing the chapter 11 cases of embattled energy broker Enron Corporation and its affiliates. In the first, Bankruptcy Judge Arthur J. Gonzalez held that a claim is subject to equitable subordination under section 510(c) of the Bankruptcy Code even if it is assigned to a third-party transferee who was not involved in any misconduct committed by the original holder of the debt.

In a decision in In re Enron Corp., et al., 2007 U.S. Dist. LEXIS 63129, No. 05-01025 (S.D.N.Y. August 27, 2007), the Honorable Shira Scheindlin, United States District Judge for the Southern District of New York, held that the sale of a claim that is subject to equitable subordination under section 510(c) or disallowance under section 502(d) of the Bankruptcy Code may insulate the claim from subordination and disallowance when asserted against the buyer of the claim. At first blush the decision may be, and has been, read by some to offer relief and clarity to distressed debt investors.

Decision determines that silica trust and channeling injunction are appropriate under Third Circuit standards.

On September 24, 2007, the U.S. Bankruptcy Court for the Western District of Pennsylvania issued an opinion recommending confirmation of the Chapter 11 plans of North American Refractory Company (NARCO) and Global Industrial Technologies, Inc. (GIT). The decision caps a five-and-a-half-year reorganization for the Pittsburgh, Pennsylvania-based family of industrial companies.

The decision of the U.S. Bankruptcy Court in Hutson v. Smithfield Packing Co. (In re National Gas Distributors, LLC)1 poses potentially serious problems for parties trading gas under the North American Energy Standards Board (NAESB) base contract. The U.S. Court of Appeals for the Fourth Circuit will soon review this case of first impression about what constitutes a “swap agreement” under the expanded definition included in the U.S. Bankruptcy Code after the 2005 amendments.

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.