In a recent Hunton & Williams client alert, we discussed some of the issues relating to the termination of credit default swap agreements that were pending before the Lehman bankruptcy court, including the enforceability of so-called “flip clauses.” (“Swap Termination and the Subordination of Termination Payments in the Lehman Bankruptcy,” December 2009.) Recently, the court ruled for Lehman on many of these issues. The court’s ruling (Lehman Brothers Special Financing Inc.

Chrysler Proposes Joint Plan of Liquidation; Unsecured Creditors' Distribution Contingent Upon the Outcome of the Daimler Lawsuit

On January 15, 2010, in In re Reliant Energy Channelview LP, the Third Circuit Court of Appeals affirmed the decision of the U.S. Bankruptcy Court for the District of Delaware denying payment of a $15 million break-up fee to the initial bidder of a power plant in conjunction with the debtor’s Section 363 bankruptcy asset sale. The Court based its ruling on the fact that it did not consider the fee necessary to preserve the value of the bankruptcy estate.

On December 15, 2009, the Court of Appeals for the Third Circuit heard oral argument in a closely-watched bankruptcy appeal stemming from the In re Philadelphia Newspapers, LLC chapter 11 case pending in the United States Bankruptcy Court for the Eastern District of Pennsylvania. At issue in the appeal is the right of a secured creditor of a chapter 11 debtor to credit bid its secured claims, when the debtor proposes to sell the collateral to a third party, “free and clear” of the creditor’s lien, pursuant to a non-consensual (i.e., “cramdown”) plan of reorganization.

Introduction

The United States Bankruptcy Court for the Southern District of New York ruled recently on the validity of “gift plans” – plans of reorganization under which a senior creditor “gifts” assets to a junior creditor or equity holder.1 In In re Journal Register Co.,2 Bankruptcy Judge Alan L. Gropper approved a plan in which secured lenders gifted a portion of their recovery to certain trade creditors, and detailed some of the important limitations on gift plans.

Evolution of the Gift Plan Doctrine

The U.S. Bankruptcy Court for the Southern District of Texas issued a stern warning to professional services providers regarding “tail fees,” establishing a presumption of unreasonableness against contract terms requiring fees not attached to tangible, identifiable and material benefits to the debtor’s estate.

In a majority opinion dated December 15, 2009, the Ninth Circuit Bankruptcy Appellate Panel held that a chapter 11 debtor may not equitably subordinate a creditor's claim and transfer the lien securing that claim, when such creditor is, itself, in bankruptcy, before first obtaining relief from the automatic stay under section 362 of the U.S. Bankruptcy Code in such creditor's bankruptcy case. Lehman Commercial Paper v. Palmdale Hills Prop. (In re Palmdale Hills Prop., LLC), 2009 Bankr. LEXIS 4294 (B.A.P. 9th Cir. Dec. 15, 2009).

Anyone who obtains title insurance, whether as an owner or a lender, should be aware of a recent abrupt and significant change in title insurance practices across the country. Title companies have recently stated that they will no longer delete creditors’ rights exclusions from, or add affirmative creditors’ rights coverage as an endorsement to, any of their issued title policies.

Overcoming months of delay, regional local exchange carrier Fairpoint Communications filed a reorganization plan with a New York bankruptcy court that would reduce the carrier’s debt load by two-thirds and give secured creditors an ownership stake of 92% in the post-bankruptcy entity. At the same time, Fairpoint reached settlements with the states of New Hampshire and Vermont that address commitments to service quality and to the provision of broadband services in those states.

A recent decision provides new support for excluding a broad range of severance pay from FICA taxes—a position undercut by the taxpayer’s loss in CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008). United States v. Quality Stores Inc., (W.D. Mich., Feb. 23, 2010), affirms a bankruptcy court’s conclusion that, contrary to Revenue Ruling 90-72, 1990-2 C.B.