With the possibility of a major stock brokerage liquidation appearing more likely than it has been in recent periods, the effect of a liquidation on customers and financial counterparties has become of great interest to many of our clients and others.

If you thought, like many, that the Delaware Supreme Court’s decision in Trenwick Am. Litig. Trust v. Billet, 2007 Del. LEXIS 357 (Del. 2007), put the theory of “deepening insolvency” to rest, once and for all, well, think again. A recent decision, George L. Miller v. McCown De Leeuw & Co. (In re The Brown Schools), 2008 Bankr. LEXIS 1226 (Bankr. D. Del. April 24, 2008), from the United States Bankruptcy Court for the District of Delaware shows that “deepening insolvency” endures, albeit in reduced form.

In March 2008, the Court of Appeals for the Seventh Circuit decided In re Airadigm Communications, Inc. (Airadigm Communications, Inc. v. FCC),1 a case that built upon the Supreme Court’s decision in FCC v. NextWave Personal Communications, Inc (“NextWave”).2 In NextWave, the Supreme Court held that the FCC’s participation in a bankruptcy proceeding is subject to the provisions of the Bankruptcy Code.

Introduction

In Oneida Ltd. v. Pension Benefit Guaranty Corp. (In re Oneida Ltd.),1 the United States Bankruptcy Court for the Southern District of New York addressed whether a premium payment created by the Deficit Reduction Act of 2005 (“DRA”)2 for pension plans terminated as part of a chapter 11 restructuring is a pre-petition claim or a post-petition administrative expense. The Court held that the statutorily mandated premium payment was a contingent pre-petition claim and was discharged upon confirmation of the debtor’s plan.

In May of 2006, the U.S. Bankruptcy Court in Chicago, Illinois, issued an 89-page opinion finding that a common stock valuation performed by KPMG (n/k/a BearingPoint) was reasonable and appropriate. The valuation had been performed in September 2000 of high-tech start-up Nanovation Technologies, Inc. After Nanovation filed for bankruptcy in 2001, the bankruptcy trustee sued BearingPoint, alleging that the valuation had been negligently performed and had grossly overvalued the stock.

The Ninth Circuit Bankruptcy Appellate Panel has issued a pair of rulings in a case involving high-stakes litigation—with a claim in excess of $230 million, including $3 million in postpetition attorneys’ fees and costs. Beyond the high stakes, the court’s conclusions in Centre Ins. Co. v. SNTL Corp. (In re SNTL Corp.), 380 B.R. 204 (9th Cir. BAP 2007) have far-reaching implications; they are likely to affect a multitude of financing transactions that become entangled in bankruptcy.

The United States Bankruptcy Court for the Eastern District of Michigan has held that postpetition financing did not receive automatic status as an administrative expense claim under section 346(b) of the Bankruptcy Code. Therefore, the creditor could not object to confirmation of the Debtor’s plan on the grounds that all administrative expense claims would not be paid in full. In re Mayco Plastics, Inc., 379 B.R. 691 (Bankr. E.D. Mich. 2008).

A federal bankruptcy court in Florida has addressed an issue of first impression in its district regarding the degree of error necessary to render a financing statement “seriously misleading” under UCC 9-506.

Previously, we have discussed the risks involved in failing to name the debtor correctly on a financing statement. See CRaB Alert, February 2007, p. 14, “Calling Borrower ‘Mike’ Leads To Failure To Perfect.”

A federal district court in Michigan has affirmed a bankruptcy court’s refusal to accept a higher bid for various estate assets because the bid was made after the close of the auction, albeit prior to the hearing to confirm the auction results. Evangelista v. Opperman (In re Sebert), No. 07-15509 (E.D. Mich. Mar. 11, 2008).

A recent decision by the Delaware bankruptcy court highlights the issues which must be considered by private equity firms, investment funds and other entities who play an active role in the management of their financially distressed portfolio companies.