By: Peter Doggett, Jr.
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
Rejecting a per se rule, the Second Circuit Court of Appeals in Motorola Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC)[1] attempted to balance the need for flexibility with the Bankruptcy Code’s priority scheme[2] by holding that compliance with the Code's priority rules is the “most important factor” to consider in approving a pre-plan settlement under Bankruptcy Rule 9019[3] where the settlement distributes assets.[4]

By: Elizabeth L. Anderson
St. John's Law Student
American Bankrutpcy Institute Law Review Staff
 
Rejecting the Second Circuit’s Wagoner[1] rule and agreeing with the First, Third, Fifth, and Eleventh Circuits, United States Court of Appeals for the Eighth Circuit held that the collusion of corporate insiders with third parties to injure the corporation does not deprive the corporation’s trustee of standing to sue third parties.[2] However, such a situation may give rise to the defense of in pari delicto barring the trustee’s action.[3]

By: Michael Maffei
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
In a good news, bad news decision for prime brokers, the District Court in In re Manhattan Investment Fund v. Gredd[1] held that a prime broker is an initial transferee of funds held in a customer’s margin account, but recognized a “robust” good faith defense to transferee liability.  In this appeal from an award of summary judgment,[2] Bear Sterns had receive approximately $141 million to cover margin calls for a hedge fund that, in reality, was a “Ponzi” scheme.  In a holding that spells trouble for prime brokers, the Court rejected the argument that a prime broker is a “mere conduit” and lacks “dominion and control” over the funds in a margin account.  Applying the Second Circuit’s “nuanced” approach, the Court rejects the narrow view that a party must have unfettered control over funds in order to be an initial transferee.[3]  Since Bear Sterns could use the margin funds to protect itself against possible losses, it did not qualify as a mere conduit.  Further, the discretionary authority given it as prime broker to close out positions, which was standard in the industry, was sufficient “control” to trigger transferee status.