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Breach of Pre-petition Contract Claims Not Immune From “Core” Jurisdiction

Published by timfox on March 12th, 2010 in Bankruptcy Litigation, Chapter 11

By: Matthew S. Smith
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
Recently, the United States Bankruptcy Court for the Southern District of New York in In re Charter Commc’ns held that a creditor’s adversary proceeding for an alleged pre-petition breach of contract was one over which the bankruptcy court could exercise its “core” jurisdiction.[1] In deciding whether the creditor’s claims fell within its core jurisdiction, the court was guided by 28 U.S.C. § 157,[2] which provides a list of matters that are characterized as “core proceedings.”[3]  The creditor, JPMorgan, alleged that debtor, Charter, had committed non-curable, nonmonetary pre-petition defaults under a pre-petition contract, which would prevent Charter from being able to take additional loans as originally provided in their Credit Agreement.[4] Since JPMorgan refused to consent to adjudication in the bankruptcy court, the court focused on “the close interconnection between the adversary proceeding [at issue] and the bankruptcy process.”[5] The court found that the nature of plaintiff JPMorgan’s proceeding directly affected the confirmation of debtor Charter’s chapter 11 bankruptcy plan – a core administrative function of the bankruptcy court – and thus held that the matter came within the court’s core jurisdiction.[6]
 
 

Approving Insider Compensation Under Section 503(c)(3): Court Discretion or Business Judgment Standard?

Published by timfox on March 11th, 2010 in Chapter 11, Business Reorganization
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By: Cameron Fee
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
Recently, the United States Bankruptcy Court for the Northern District of Texas, in In re Pilgrim’s Pride Corp., held that certain consulting agreements negotiated by chapter 11 debtors with former executives were not the type of insider compensation agreements proscribed by section 503(c).[1] After filing for chapter 11, Pilgrim’s Pride Corporation entered into resignation agreements with its CEO Rivers and COO Wright. The debtors filed a motion pursuant to section 503(c) for “court authority to purchase time-limited noncompetition agreements,” to prevent Rivers and Wright from soliciting the company’s customers.[2] The trustee argued that the proposed consulting agreements violated section 503(c)(1) because the payments were meant to induce Wright and Rivers to remain with the business. The court, however, found that the agreements were meant to induce Rivers and Wright not to work for a competitor for a limited time and therefore the consulting agreements did not implicate either section 503(c)(1)[3] or 503(c)(2).[4] The court also found—after determining an independent assessment of the circumstances was the appropriate standard of review—that the agreements did not violate section 503(c)(3) because they were justified given the facts and circumstances of the case.[5] 
 

Court Holds that Administrative Claims Cannot Be Disallowed Under Section 502(d)

Published by timfox on March 10th, 2010 in Chapter 11, Unsecured Trade Creditors

By: Michael Ryan Diaz
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
In ASM Capital, LP v. Ames Department Stores, Inc. (In re Ames Department Stores, Inc.),[1] the Second Circuit held that section 502(d), which disallows claims of a party that has failed to return preferential transfers to the debtor,[2] does not bar payment for administrative expenses under section 503(b).[3] The debtor, Ames Department Stores, Inc. (“Ames”), filed a voluntary petition under chapter 11 of the Bankruptcy Code.[4] While in bankruptcy, Ames received a default judgment, for the recovery of preferential transfers,[5] against one of its suppliers, G & A Sales, Inc. (“G & A Sales”).[6] Also facing insolvency, G & A Sales filed a bankruptcy petition and transferred to other entities all of its assets, including two administrative claims against Ames for providing post-petition supplies.[7] These administrative claims were sold to ASM Capital, a distressed-debt investment firm. Meanwhile, Ames’ board of directors eventually decided that liquidation, rather than reorganization, would maximize value for the debtor’s estate.[8] In the midst of liquidation, Ames made distributions for administrative expenses to certain claimants, but withheld payment to ASM Capital on the ground that section 502(d) disallows administrative expense claims that were acquired from a party who had failed to return any preferential transfer or its equivalent value. ASM Capital responded by filing a motion in the bankruptcy court to order the debtor to pay ASM Capital its administrative expense claims. ASM Capital argued that section 502(d) does not apply to administrative expense claims, but the bankruptcy court rejected this argument and denied the motion.[9] Although the district court affirmed the bankruptcy court’s ruling,[10] the Second Circuit reversed and held that section 502(d) does not apply to administrative expense claims.[11] 
 

Severance Payments May Constitute Retiree Benefits

Published by timfox on March 9th, 2010 in Employee Benefits in Bankruptcy, Chapter 11
By: Bertrand J. Choe
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
In In re Arclin U.S. Holding, Inc.,[1] the Bankruptcy Court for the District of Delaware held that a company, subsequent to its chapter 11 petition, was required to continue health insurance premium payments made to a former employee pursuant to a severance agreement. In so doing, the court limited protections for debtors under section 1114 of the Bankruptcy Code,[2] which requires chapter 11 business debtors to continue “retiree benefit” payments post-petition. Six months prior to filing its chapter 11 petition, Arclin U.S. Holding, Inc. (“Arclin” or “debtors”) instituted a reduction in its work force, whereby thirty-nine of its employees, including Steve Phillips, were terminated. Phillips was given a severance package including separation pay, car allowance, and payment of his health insurance premiums. Upon filing for bankruptcy, Arclin discontinued its payments to Phillips, at which point Phillips brought the present suit. The court looked to the plain meaning of section 1114(a), which requires, inter alia, that for benefits to be considered “retiree benefits,” they must be both medical in nature and for retirees.[3] Since the benefits to Phillips included payments for health insurance, the court deemed them to be “medical” within the meaning of section 1114(a). The court further deemed the payments to be for retirees because of Arclin’s own description of the payments as “an early retirement package.”[4]
 
 

Equities Can Adjust Administrative Claim for “Stub Rent”

Published by timfox on March 9th, 2010 in Real Estate, Chapter 11
By: Timothy Poydenis
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
The Bankruptcy Court for the District of Delaware recently held in In re Sportsman’s Warehouse, Inc., that landlords who seek payment of administrative claims for stub rent, the rent for the period from the petition date through the first of the following month, are not per se entitled to an administrative priority.[1] In this case, Sportsman’s Warehouse, a retail sporting goods store, filed for bankruptcy under chapter 11 on March 21, 2009. Sportsman’s Warehouse was renting the warehouse in which it operated its business. Despite the fact that rent was due and payable on the first of each month, Sportsman Warehouse failed to pay the rent due on March 1, 2009. Consequently, the landlord sought the allowance and immediate payment of the unpaid stub rent for the period from March 21, 2009, through March 31, 2009.[2] Although the court recently held that a debtor’s post-petition use and occupancy of leased premises, per se, creates an administrative claim,[3] the court held that its previous holding was a “misapplication of the law and will no longer be followed by this Court.”[4] Rather, the court held that a case-by-case analysis “must” be used to determine the amount of the benefit to the estate. The result of that determination will provide the amount of payment the landlord is entitled to as an administrative claim under section 503(b).
 

Default Interest Rates Apply to Section 363 Sales

Published by admin on April 20th, 2009 in Chapter 11, Business Reorganization, 363 Sales

By: Caitlin Cline
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
Drawing a distinction between Chapter 11 plans and section 363 sales, the Ninth Circuit Court of Appeals held in General Electric Capital Corp. v. Future Media Productions, Inc.[1] that when an oversecured creditor is paid off through a section 363 sale, it is entitled to enforce a default interest rate provision and is not limited to the pre-default rate.  In contrast, if payment is made through a confirmed plan, the debtor may “cure” the default under section 1124 and avoid the default interest rate.[2]

 

Means Test Does Not Apply to Individual Chapter 11 Cases

Published by admin on April 14th, 2009 in Consumer Bankruptcy, Chapter 11

By: Steven Saal
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
The case of In re Roedemeier[1] holds that the section 707(b) “means test” expense allowances are not incorporated into the calculation of disposable income for individual chapter 11 debtors. [2]  Instead, a chapter 11 debtor’s “projected disposable income” under section 1129(a)(15) is calculated by the court through “a judicial determination of the expenses that are reasonably necessary for the support of the debtor and his or her dependents.”[3]  Since the means test applies to the calculation of “projected disposable income” in chapter 13 cases, this decision creates a difference between the two chapters.   Use of the “means test” involves a stricter formula of determining income that in many cases would require the debtor to contribute more income to funding the plan, thus creating an incentive for debtors to file chapter 11 in order to use the more flexible judicial calculation.

 

BAPCPA Eliminates the Absolute Priority Rule for Individual Chapter 11 Debtors

Published by admin on April 1st, 2009 in Creditors' Rights, Consumer Bankruptcy, Chapter 11

By: Christina Kormylo
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
The addition of section 1115 to the Bankruptcy Code by the 2005 BAPCPA amendments created an exception to the “absolute priority rule” for individual Chapter 11 debtors according to the bankruptcy court in In re Tegeder.[1]   In Tegeder, the general unsecured creditor class did not accept the Chapter 11 plan proposed by an individual debtor who was engaged in business, thereby triggering the “cram down” provisions of 11 U.S.C. § 1129(b).[2]  Although all other requirements for plan confirmation under section 1129(a) were met, the U.S. Trustee argued that the debtor, as a holder of interests junior to the dissenting class, could not retain any property pursuant to the absolute priority rule of section 1129(b)(2)(B)(ii).[3]  The absolute priority rule, as amended by BAPCPA, states, “the holder of any claim or interest that is junior to the claims of such class will not receive or retain . . . any property, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115.”[4]  Addressing the effect of the cross-reference to section 1115, the Tegeder court held that the absolute priority rule does not prevent a plan’s confirmation where both pre- and post-petition assets are retained by an individual debtor.[5]  The court explained that the 2005 BAPCPA amendment and the addition of section 1115 created an exception to the rule, allowing an individual debtor to retain property included in the estate.[6]