Participants in the multibillion-dollar market for distressed claims and securities had ample reason to keep a watchful eye on developments in the bankruptcy courts during each of the last three years. Controversial rulings handed down in 2005 and 2006 by the bankruptcy court overseeing the chapter 11 cases of failed energy broker Enron Corporation and its affiliates had traders scrambling for cover due to the potential that acquired claims/debt could be equitably subordinated or even disallowed, based upon the seller’s misconduct.
In Go West Entertainment, Inc. v. New York Liquor Authority (In re Go West Entertainment, Inc.),1 the United States Bankruptcy Court for the Southern District of New York refused to extend the automatic stay or to utilize its other injunctive powers to prevent state regulatory authorities from revoking a debtor’s liquor license.
The U.S. Court of Appeals for the Tenth Circuit held on July 15, 2008, that a major creditor with a seat on the debtor’s board of directors and a 10.6% equity interest was not an insider in a bankruptcy preference suit. In re U.S. Medical, Inc., 2008 WL2736658 (10th Cir. 7/15/08).
The Fifth Circuit recently issued an opinion addressing an important issue with respect to the preservation of a debtor's causes of action in a Chapter 11 plan of reorganization. The Fifth Circuit held that a reorganized debtor lacked standing to pursue certain common-law claims that were based on the pre-confirmation management of the bankruptcy estate's assets.
The Ninth Circuit’s Bankruptcy Appellate Panel (the “BAP”) held on July 18, 2008, that the Bankruptcy Code (“Code”) did not authorize a bankruptcy court’s approving the sale of a debtor’s property free and clear of a junior lien outside the reorganization plan context. In re PW, LLC __ B.R. __, 2008 WL 2840659 (B.A.P. 9th Cir. July 18, 2008). It directed the bankruptcy court to ascertain on remand whether state law permitted a court to compel the junior lienholder to release its lien in exchange for payment of less than the face value of its claim. Id., at *13-*16.
Earlier today (September 15, 2008), Lehman Brothers Holdings Inc. (Holdings), the corporate parent of the fourth largest investment bank in the United States, filed for Chapter 11 protection in the United States Bankruptcy Court for the Southern District of New York. As of writing, neither Holdings’ broker-dealer subsidiaries (including Lehman Brothers, Inc. [Lehman NY]) nor other subsidiaries (including Neuberger Berman Holdings, LLC, its asset management subsidiary) have commenced insolvency proceedings in the United States.
In In re Falcon Products, Inc., 381 B.R. 543 (8th Cir. BAP, 2008), the bankruptcy appellate panel (BAP) for the Eighth Circuit reversed a decision by the bankruptcy court for the District of Missouri, and held that when applying the hypothetical liquidation test to determine whether a secured creditor received potentially preferential payments, the collateral must be valued as of the petition date and not as of the payment transfer date.
Buyers of, and lenders upon, distressed California real property can sleep a little better following a recent U.S. Ninth Circuit Court of Appeals decision: In the Matter of Craig L. Tippett, 2008 U.S. App. LEXIS 18914 (September 4, 2008). In Tippett, the Court upheld the California bona fide purchaser statute against a federal preemption claim and declined to find a violation of the Bankruptcy Code’s automatic stay provision in order to affirm an unauthorized real property sale by the Chapter 7 debtor.
On July 22, 2008, the US Court of Appeals for the Second Circuit affirmed denial of the motion of Parmalat S.p.A. ("New Parmalat") to extend an injunction provided to its predecessor, Parmalat Finanziaria, S.p.A., under Bankruptcy Code section 304, against securities fraud actions.1 Although the appeal addressed the issue of injunction in the context of superseded Bankruptcy Code section 304, this decision and the underlying lower court opinion signify other issues of broader import, including the need for careful plan drafting and the complexities inherent in cross-border cases.
The United States Bankruptcy Court for the District of Delaware on May 30, 2008, issued a memorandum opinion in which it refused to dismiss claims of breach of fiduciary duty against directors and officers of a company who approved the sale of the company’s assets on the eve of its filing for bankruptcy protection. In issuing its opinion inIn re Bridgeport Holdings Inc., the court provided some guidelines for directors and officers, particularly during challenging economic times.