On June 16th, the Supreme Court of the United States issued a decision that is likely to have a significant impact on how debtors will sell assets in bankruptcy. InFlorida Department of Revenue v.

Resolving a split among various circuits, the United States Supreme Court has ruled that the exemption from state stamp taxes under section 1146(a) of the Bankruptcy Code does not apply to asset sales under section 363 of the Bankruptcy Code that took place before confirmation of a debtor’s chapter 11 plan—an event that may take months or years to accomplish.1

Given the state of the economy, it will not be a rare occurrence in the short term for a supplier to receive a request to sell and deliver further goods to a purchaser who has filed proceedings under the Companies Creditors Arrangement Act (CCAA) or Chapter 11 of the United States Bankruptcy Code — and who is already indebted for unpaid pre-filing sales.

In Giant Eagle, Inc. v. Phar-Mor, Inc.,1 the United States Court of Appeals for the Sixth Circuit held that a lessor-claimant whose lease was rejected pursuant to section 365(a) of Title 11 of the Bankruptcy Code was entitled to a claim for future-rent damages against the debtor, even though the lessor had entered into a nearly identical substitute lease. The Court concluded that efforts to mitigate damages by the lessor would not be considered in reducing the actual damage claim when those efforts failed to reduce the actual harm suffered by the lessor.

In COR Route 5 Co. v. Penn Traffic Co.1 (In re Penn Traffic Co), the United States Court of Appeals for the Second Circuit held that a non-debtor party to an executory contract may not, by fulfilling its contractual obligations post-petition, deprive the debtor of its ability to reject an executory contract.

In a recent decision of the United States Bankruptcy Court for the District of Delaware, In re Federal Mogul Global, Inc., No. 01-10578 (JKF) (Bankr. D. Del., Mar. 19, 2008) (click here to read the decision), the court ruled that the assignment of rights in certain insurance policies to an asbestos trust was valid and enforceable under the Bankruptcy Code, and anti-assignment provisions in the policies and applicable state law were preempted.

On July 17, 2008, in Phar-Mor, Inc. v. McKesson Corp. (Nos 05-4525/4526), the Sixth Circuit affirmed the Northern District of Ohio's ruling that a vendor's administrative expense priority on its reclamation claim survives, even after the goods that are subject to reclamation are sold and the proceeds are used to satisfy a secured creditor's superior claim. Full text of the opinion.

Facts

On April 9, 2008, in the M. Fabrikant & Sons, Inc. bankruptcy case pending in the Southern District of New York, Chief Judge Stuart M. Bernstein held that a seller of bank debt under the standard LSTA claims transfer documents transfers all of its rights except for those explicitly retained, including unmatured contingent claims, thus giving broad construction to the term “Transferred Rights” under the standard LSTA trade documents.

The Ninth Circuit held on July 3, 2008, that an oversecured creditor’s claim for payment was entitled to a “presumption in favor of the loan agreement’s default rate (an additional 2% interest), subject only to reduction based upon any equities involved.” General Elec. Capt’l Corp. v. Future Media Productions, Inc., 2008 WL2610459, *2 (9th Cir. 7/3/08). Reversing the lower courts, the Court of Appeals held that the bankruptcy court had improperly applied a questionable Ninth Circuit precedent when denying the lender a default rate of interest. Id., at *4.

The November/December 2007 issue of Insolvency Notes featured an article highlighting a Manhattan-based federal bankruptcy court's refusal to officially recognize proceedings commenced in the Cayman Islands to liquidate two Bear Stearns-managed hedge funds that collapsed in June of that year.