Chapter 11

Court Focuses on Policy Rather Than Formality in Approving Key Employee Plans

Submitted by mdiaz on Tue, 02/19/2013 - 16:29
Posted: 12 weeks 4 days ago

By: Erin Dempsey

St. John's Law Student

American Bankruptcy Institute Law Review Staff
 
 
Rejecting the technical arguments of the United States Trustee (the “UST”), the Bankruptcy Court focused on the policies behind the restrictions on employee retention plans to approve the debtor’s key employee incentive plan (“KEIP”) in In re Velo Holdings[1].  The Velo Holdings Court approved the KEIP because it was incentive-based rather than retentive-based and was a valid exercise of the debtor’s sound business judgment.[2]
 

S Corporation May Not Pay Shareholders’ Post-Petition Tax Obligations

Submitted by mdiaz on Tue, 02/19/2013 - 12:30
Posted: 12 weeks 4 days ago

By: Erin Rieu-Sicart

St. John’s Law Student

American Bankruptcy Institute Law Review Staff
 
 
Finding that it would violate the absolute priority rule, the United States Bankruptcy Court for the Western District of North Carolina, in In re Carolina Internet, Ltd., held that an insolvent S corporation may not pay post-petition taxes on behalf of its shareholders because a corporation’s creditors have priority over its shareholders.[1] That approach highlights the problems bankruptcy creates for pass-through entities such as S corporations, because the benefits of successful post-petition operations flow to the creditors while the tax consequences of those operations are borne by the shareholders.
 

Third Circuit Rejects Wait-and-See Valuation Approach and Accepts Lien Stripping in Section 506(a)

Submitted by mdiaz on Thu, 01/24/2013 - 11:41
Posted: 16 weeks 2 days ago

By: Andrew Richmond

St. John’s Law Student

American Bankruptcy Institute Law Review Staff
 
 
In In re Heritage Highgate, Inc.,[1] the Third Circuit held that the fair market value of property as of the confirmation date controls whether or not a lien is fully secured.[2]  Additionally, the court held that lien stripping is permissible in a chapter 11 reorganization.[3] The debtors, Heritage Highgate and Heritage-Twin Ponds II, were real-estate developers working on a project that was financed by a group of banks (the “Bank Lenders”) and other entities collectively known as Cornerstone Investors (“Cornerstone”).[4]  Both the Bank Lenders and Cornerstone secured their investments with liens on substantially all of the debtors’ assets but Cornerstone’s claims were contractually subordinated to the Bank Lenders’.[5] After selling a quarter of the project’s planned units, the debtors filed a chapter 11 petition.  The debtors’ joint proposed plan of reorganization proposed paying secured claims in full and paying 20% of the unsecured claims with funds obtained through the sale of the project’s remaining units.[6]  These estimated recoveries were based on the debtors’ appraisal, which valued the project at $15 million.[7] During the course of the case, the debtors continued to build and sell units and, with the consent of its secured lenders, used the sale proceeds to fund ongoing operating losses.[8] As a result, the fair market value of the project was reduced to approximately $9.54 million as of the time of plan confirmation, which was less than the Bank Lender’s $12 million secured claim.[9] Cornerstone argued their $1.4 million claim should still be fully secured and to hold otherwise would constitute impermissible lien stripping.[10] The bankruptcy court disagreed and determined that the proper method of valuing Cornerstone’s secured claim was the fair market value of the project as of the time of plan confirmation.[11]  Therefore, Cornerstone’s claim was unsecured.[12]

Fourth Circuit Preserves Absolute Priority Rule Despite Challenge Through BAPCPA

Submitted by mdiaz on Mon, 01/14/2013 - 14:20
Posted: 17 weeks 5 days ago

By: Andrew Serrao

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In the first appellate decision on the issue, the Fourth Circuit in In re Maharaj[1] held that the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) did not abrogate the absolute priority rule’s applicability to individual Chapter 11 debtors.[2] Ganess and Vena Maharaj (the “Debtors”) accumulated a significant amount of debt while owning and operating an auto body repair shop.[3] The Debtors filed a voluntary petition under Chapter 11 in bankruptcy court, and subsequently filed a plan of reorganization (the “Plan”),[4] pursuant to section 1121(a).[5] The Plan provided that the Debtors would continue to own and operate their auto body business, using income from the business to pay general unsecured claims.[6] The Plan also separated creditors into four classes[7]. Class 3 (general unsecured claims) voted to reject the Plan,[8] and the Debtors sought a cram down.[9] If BAPCPA had abrogated the absolute priority rule, the Debtors could have retained their auto body business and crammed down the Plan.[10] However, the Fourth Circuit held that the absolute priority rule had not been abrogated by BAPCPA.[11]

Bad Faith Constitutes “Cause” For Dismissal of a Bankruptcy Case

Submitted by mdiaz on Tue, 01/08/2013 - 13:35
Posted: 18 weeks 4 days ago

By: Kathleen Mullins

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In In re Lee[1] the United States Bankruptcy Appellate Panel for the Sixth Circuit (the “BAP”) held that the bankruptcy court properly dismissed the debtor’s Chapter 11 bankruptcy petition because the debtor’s filing was abusive.[2] The debtor defaulted on her mortgage loan with Chase Home Finance (“Chase”) on one of her investment properties.[3] Chase sought to foreclose on the property, and the debtor filed bankruptcy, staying the foreclosure action.[4] This case was dismissed and Chase sought to foreclose a second time.[5] Once again, however, the debtor filed bankruptcy.[6] After the case was dismissed and Chase again attempted to foreclose, the debtor filed bankruptcy a third time.[7] This time Chase made a motion to dismiss the case, asserting that the debtor was acting in bad faith and was abusing the bankruptcy process in order to evade foreclosure by filing bankruptcy petitions whenever Chase made progress in the foreclosure action.[8] The bankruptcy court found that the debtor had been filing bankruptcy petitions “as a buffer to prevent the foreclosure proceedings from going forward” and it dismissed her case for acting in bad faith, which the court determined constituted sufficient “cause” under section 1112(b).[9]

Creditor Committee’s Concurrent Investigation Did Not Vitiate Need for Independent Examiner

Submitted by mdiaz on Tue, 01/08/2013 - 13:23
Posted: 18 weeks 4 days ago

By: Brendan A. Bertoli

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

The Bankruptcy Court for the Southern District of New York held that courts have discretion to appoint an independent examiner in cases where the debtor’s fixed debts exceed five million dollars, but the facts of In re Residential Capital, LLC[1] warranted appointment.[2] Berkshire Hathaway (“Berkshire”), joined by the Trustee, sought the appointment of an independent examiner to investigate certain pre-petition transactions between the debtor, GMAC, Ally and Cerebus Capital.[3] Berkshire claimed that appointment was mandatory pursuant to section 1104(c)(2) of the Bankruptcy Code.[4] The Official Committee of Unsecured Creditors (“the Committee”) objected to appointment, arguing that its own investigation obviated the need for an independent examiner.[5] The court held that appointment was not mandatory because section 1104(c)’s mandatory language is qualified by the phrase “as is appropriate.”[6] However, the court held that the Committee’s concurrent investigation, by itself, was not enough to render an independent examiner’s appointment inappropriate.[7]

Courts may Override §1111(a) and Require Proofs of Interest to be Filed

Submitted by mdiaz on Tue, 01/08/2013 - 13:16
Posted: 18 weeks 4 days ago

 By: Brett Joseph

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In In re Greenwich Sentry, L.P.,[1] the Bankruptcy Court for the Southern District of New York held that section 1111(a) of the Bankruptcy Code did not prevent the court from requiring all interest holders to file proofs of interest.[2] In 2010, Greenwich Sentry Partners, L.P. (“the Debtor”) filed a petition for Chapter 11 relief.[3] The Debtor also filed its schedules and a statement of financial affairs,[4] which listed Christopher McLoughlin Keough, Quantum Hedge Strategies Fund, LP, and SIM Hedged Strategies Trust (the “Purported Limited Partners”) as interest holders. The Purported Limited Partner’s interests were listed on the Debtor’s schedules, but were not listed as disputed, contingent, or unliquidated.[5] The court issued an amended bar date order requiring all interest holders to file proofs of interest, even if their interests were not listed as disputed, contingent, or unliquidated.[6] Despite receiving a copy of the amended bar date order, the Purported Limited Partners did not file proofs of interest by the bar date. Nevertheless, the Purported Limited Partners sought a declaration from the court that they were holders of allowed limited partner interests, entitled to distribution.[7] The court denied the motion, holding that the Purported Limited Partners were required to submit proofs of interest in accordance with the amended bar date order and that they had failed to do so.[8]

Developing Consensus Among Delaware Bankruptcy Courts to Narrowly Construe Stern v. Marshall Concerning Avoidance Claims

Submitted by mdiaz on Tue, 01/08/2013 - 12:53
Posted: 18 weeks 4 days ago

By: Joseph P. Donnelly IV

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 
Adopting a narrow interpretation of the holding of Stern v. Marshall,[1] the Bankruptcy Court for the District of Delaware, in In re DBSI,[2] held that Stern does not preclude a bankruptcy court from adjudicating avoidance claims.[3] In November 2008, DBSI Inc. and several of its affiliates (the “Debtors”) filed for Chapter 11 bankruptcy protection.[4] Following confirmation of the Debtors’ liquidating plan, a litigation trustee commenced several adversary proceedings relating to, inter alia, preferential or fraudulent transfer claims.[5] Certain defendants (the “Movants”) sought to have these adversary proceedings dismissed, arguing that the bankruptcy court lacked jurisdiction under 28 U.S.C. § 157 and the United States Supreme Court’s decisions in Stern v. Marshall and Granfinanciera, S.A. v. Nordberg,[6]to adjudicate causes of action sounding in preference or fraudulent conveyance.[7]

Second Circuit Expands Settlement Payment Defenses

Submitted by mdiaz on Tue, 02/28/2012 - 18:40
Posted: 1 year 11 weeks ago

By: Tianja Samuel

St. John’s Law Student

American Bankruptcy Institute Law Review Staff 

In In re Enron Creditors Recovery Corp.,[1] the Second Circuit greatly expanded the settlement payment defenses of section 546(e) of the Bankruptcy Code (the “Code”)[2] by rejecting Enron’s attempt to avoid a repayment of debt, because the repayment was structured as a redemption.  This case stemmed from a series of transactions in which Enron used a clearing agency—that merely acted as an intermediary and never took title to the commercial paper—to retire commercial paper before the maturity date. Enron later filed bankruptcy and sought to avoid the more than $1.1 billion it paid, in the 90 days prior to its bankruptcy filing, to retire the commercial paper.[3] 

All Tolled, Section 108(c) Preserves a Mortgagee’s Option to Commence a Foreclosure Until After the Automatic Stay is Lifted

Submitted by mdiaz on Thu, 02/23/2012 - 16:15
Posted: 1 year 12 weeks ago

By: Matthew W. Silverman

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Shamus Holdings, LLC v. LBM Financial, LLC (In re Shamus Holdings, LLC),[1] the United States Court of Appeals for the First Circuit held that the tolling provisions of section 108(c)[2] of the Bankruptcy Code preserved a mortgagee’s right to enforce an obsolete mortgage despite failing to seek an extension available under Massachusetts state law.[3] The Massachusetts statute required holders of a mortgage, on pain of forfeiture, to take action against the mortgagor within five years after the end of the mortgage’s stated term, but granted mortgagees the right to seek an extension of that five-year period.[4] Prior to the expiration of the five-year deadline, Shamus filed a chapter 11 petition.[5] After the five year statute of limitations had expired and without having sought an extension of that period, LBM Financial, the mortgagee, took action to enforce its mortgage, relying on the tolling provisions of section 108(c) to preserve its foreclosure rights. Shamus argued that LBM Financial’s failure to seek an extension rendered the mortgage time-barred,[6] but the First Circuit found LBM Financial’s right to enforce its mortgage protected by the tolling provision of section 108(c).[7]

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