Recent Developments

Showing: 71 - 77 of 152 Articles
Business Bankruptcy Issues Recent Developments

Two Ways To Get The Updated Bankruptcy Code Online For Free

Looking for a free, online and updated version of the entire Bankruptcy Code, reflecting the amendments made by the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA")? Now there are two ways to access it.

These are handy resources for attorneys and others who need to find the up-to-date Bankruptcy Code online.

Business Bankruptcy Issues Recent Developments

First Appellate Court Decision Addresses Question Left Open In The Supreme Court’s Travelers Opinion: Can Unsecured Creditors Recover Post-Petition Attorney’s Fees?

Happy New Year to everyone. I’m back from a holiday blogging break with a report on the first appellate decision to address the question left open in last year’s U.S. Supreme Court decision in Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co. — whether post-petition attorney’s fees can be added to unsecured claims. Although unrelated, this new decision also tackles the interesting question of whether a guarantor of a debt can become liable if the payment of the debt by the primary obligor later is returned in a preference settlement.

The Travelers Case. As a brief refresher, the U.S. Supreme Court overruled the Ninth Circuit’s so-called Fobian rule in the Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co. decision (available here) in March 2007. However, it did not decide whether unsecured creditors could recover, as part of their unsecured claims, post-petition attorney’s fees incurred during the course of the bankruptcy case. For more on the Travelers decision, you may find this earlier post of interest.

A Developing Split. Since the Travelers decision, two bankruptcy courts issued decisions on the open issue, coming to different conclusions. 

  • In May 2007, in the In re Qmect, Inc. decision (available here), the U.S. Bankruptcy Court for the Northern District of California held that unsecured creditors could recover post-petition attorney’s fees. For more on that decision, see this earlier post on the case and its analysis. 
  • In July 2007, in the In re Electric Machinery Enterprises, Inc. case (available here), the U.S. Bankruptcy Court for the Middle District of Florida came to the opposite conclusion, following a majority of courts that had addressed this issue unrestrained by the Ninth Circuit’s Fobian decision. See this previous post for more on the Florida decision.
  • Commentators, including with the recent article written by the American Bankruptcy Institute‘s Scholar in Residence Professor Mark Scarberry, have joined the fray as well.

The SNTL Corp. Ruling. On December 19, 2007, the Ninth Circuit Bankruptcy Appellate Panel ("BAP") issued its decision in the In re SNTL Corp. case (available here). After carefully reviewing both the Qmect and Electric Machinery decisions, as well as pre-Travelers case law, the BAP chose to follow Qmect, holding that "claims for postpetition attorneys’ fees cannot be disallowed simply because the claim of the creditor is unsecured." Judge Dennis Montali, writing for the unanimous BAP panel, first explained its analysis of the interplay between Sections 502 and 506(b):

We are not persuaded by the approach of the Electric Machinery court and, like Qmect, we reject the argument that section 506(b) preempts postpetition attorneys’ fees for all except oversecured creditors. While we cannot predict how the Ninth Circuit will decide this issue in Travelers, we do find a clue in Joseph F. Sanson Inv. Co. v. 268 Ltd. (In re 268 Ltd.), 789 F.2d 674, 678 (9th Cir. 1986), where the Ninth Circuit observed that section 506(b) defines secured claims and does not limit unsecured claims:

When read literally, subsection (b) arguably limits the fees available to the oversecured creditor. When read in conjunction with § 506(a), however, it may be understood to define the portion of the fees which shall be afforded secured status. We adopt the latter reading.

268 Ltd., 789 F.2d at 678.

Next, the BAP discussed Section 502(b)(1)’s requirement that the court determine the amount of an unsecured claim as of the petition date: 

The Electric Machinery court, like the bankruptcy court here and many of the pre-Travelers majority courts, disallowed the postpetition fees of an unsecured creditor because section 502(b)(1) provides that a bankruptcy court  “shall determine the amount of such claim . . . as of the date of the filing of the petition” and the postpetition fees did not exist as of that date. Elec. Mach., 371 B.R. at 551; Pride Cos., 285 B.R. at 373. Because the amount of fees incurred postpetition cannot be determined or calculated as of the petition date, section 502(b) purportedly precludes their allowance. Id. We disagree with this approach, as it is inconsistent with the Bankruptcy Code’s broad definition of “claim,” which — as discussed previously — includes any right to payment, whether or not that right is contingent and unliquidated. See 11 U.S.C. § 101(5)(A); Qmect, 368 B.R. at 884.

The BAP then held that the Supreme Court’s 1988 Timbers decision did not apply:

We believe that Electric Machinery’s reliance on Timbers is misplaced. Timbers provided that an undersecured creditor could not receive postpetition interest on the unsecured portion of its debt. Timbers, 484 U.S. at 380. This holding is consistent with section 502(b)(2), which specifically disallows claims for unmatured interest. Inasmuch  as section 502(b) does not contain a similar prohibition against attorneys’ fees, the comparison between the current issue and that presented in Timbers is not persuasive.

Finally, the BAP held that it was unnecessary to reconcile the competing public policy considerations advanced by the Electric Machinery and Qmect decisions:

Because we find that the Bankruptcy Code itself provides the answer to this issue (by not specifically disallowing postpetition fees), we do not attempt to reconcile these policy concerns. In the end, it is the province of Congress to correct statutory dysfunctions and to resolve difficult policy questions embedded in the statute.

A Ninth Circuit Decision To Come? In the first quote above, you may have picked up the BAP’s reference to the Ninth Circuit having this issue before it in the Travelers case. That case, on remand from the Supreme Court, appears to have been fully briefed. Any decision from the Ninth Circuit itself on the issue would, of course, supersede this BAP decision and be controlling authority in the circuit, but it may be months before such a ruling comes down.

A Bonus Issue: Guarantor’s Liability Revived After A Preference Settlement. The facts of the SNTL Corp. case are complex, but the key facts are fairly straightforward. In short, one of the debtor’s insurance company subsidiaries owed money to the creditor and the debtor guaranteed the debt. Although the subsidiary paid the creditor, the subsidiary was later placed into state insolvency proceedings. The state insurance commissioner sued the creditor for return of the payment on preference grounds. The creditor settled the preference case and returned most of the payment ($110 million of a $163.4 million original payment). The creditor thereafter amended its proof of claim in the debtor’s Chapter 11 case, seeking recovery under the guaranty of the returned preference.

  • After first determining that the guaranty’s language permitted the creditor to assert a claim to the extent provided by law, the BAP next held, "[w]hile we located no Ninth Circuit or California case precisely on point, we agree that the return of a preferential payment by a creditor generally revives the liability of a guarantor."
  • The BAP cited to various case and restatement authority for the proposition that although a guarantor is discharged on payment of a debt, a preferential payment is deemed to be no payment at all.
  • The BAP also held that repayment of a preference in a settlement, following a preference lawsuit, is not a voluntary payment that would avoid the guarantor’s liability.
  • Given the risk of a preference recovery, the creditor’s revival claim under the guaranty was a contingent claim as of the petition date and became allowable once the contingency occurred following the petition. As a result, the creditor’s claim for the full $110 million of the preference settlement was an allowed claim.

An Important Decision. BAP decisions are not binding precedent in the Ninth Circuit, but this first appellate decision on the open, post-Travelers question may encourage unsecured creditors to include post-petition attorney’s fees as part of their allowed unsecured claims when their contracts or a statute provides for them outside of bankruptcy.  We may see creditors begin to include such amounts in unsecured claims at an increasing pace, while we wait for the Ninth Circuit’s decision on this issue in the remanded Travelers case. The added bonus of the SNTL Corp. court’s guaranty analysis and holding makes this decision an even more interesting, and important, read.

Recent Developments

Morgan Stanley Now Predicts A Recession For U.S. Economy

Morgan Stanley has became the first major Wall Street firm to predict that the U.S. economy will fall into recession. In an article entitled "Recession Coming," Morgan Stanley economists Richard Berner and David Greenlaw forecast that the U.S. economy will suffer a mild recession in 2008:

We’re changing our calls for US growth and monetary policy.  Since the shock of tighter financial conditions surfaced in August, we’ve incrementally reduced our outlook for future growth.  But the time for incremental changes is over.  A mild recession is now likely: We expect domestic demand to contract by an average 1% annualized in each of the next three quarters, no growth in overall GDP for the year ending in the third quarter of 2008 and corporate earnings to contract by 5-10% over that longer period.  Three factors have tipped the balance to the downside: Financial conditions continue to tighten, domestic economic weakness is broadening into capital spending, and global growth — for us, long the key bulwark against a downturn — is slowing. 

Berner and Greenlaw likewise see the potential for a "perfect storm" for consumers brought on by the continuing housing downturn (they predict a 10% decline in home prices next year), a weakening job market, and higher energy and food costs. To avoid an even sharper downturn, they expect the Federal Reserve to cut interest rates by 100 basis points over the next seven to nine months, moves they believe will help keep the recession short and mild.

To date, most Wall Street economists have stopped short of predicting a recession. If the Morgan Stanley forecast comes true, it would almost certainly accelerate the predicted rise in corporate debt defaults, especially on high-yield debt. That would very likely bring about an even bigger increase in Chapter 11 bankruptcy filings than has already been predicted. 

Business Bankruptcy Issues Recent Developments

Delaware Bankruptcy Court Opts Out Of Newly Amended Rule 3007’s Procedures For Omnibus Claim Objections

As described in a post earlier this week, one of the major changes made by the new amendments to the Federal Rules of Bankruptcy Procedure that took effect on December 1, 2007 was the inclusion of limits on the use of omnibus claim objections. Newly revised Rule 3007 restricts omnibus objections to certain situations and imposes formatting standards on the motions that can be filed. 

When describing the amended rule, I commented that the Delaware Bankruptcy Court, through Local Rule 3007-1, has had its own omnibus objection procedures for some time and that they seemed to be in conflict with the new national rule. Well, taking advantage of the "unless otherwise ordered by the court" language in amended Rule 3007(c), Chief Judge Mary F. Walrath of the Delaware Bankruptcy Court issued this General Order noting the conflict but directing that the amended Rule 3007(c) "shall not be applicable to omnibus objections that are filed in accordance with Local Rule 3007-1." As a result, barring an individual judge choosing to apply the national Rule 3007 procedure in a particular situation, omnibus objections in Delaware cases will continue to be governed by Delaware’s own local procedures.

Special thanks to Chuck Kunz of MorrisJames, publishers of the Delaware Business Bankruptcy Report, for alerting me to Delaware’s new General Order.

Business Bankruptcy Issues Recent Developments

Don’t Miss The Important Business Bankruptcy Rule Amendments That Just Took Effect

On December 1st of almost every year, amendments to the Federal Rules of Bankruptcy Procedure — the ones that govern how bankruptcy cases are managed — take effect to address issues identified by an Advisory Committee made up of federal judges, bankruptcy attorneys, and others. Often the changes are relatively minor and of interest only to bankruptcy practitioners, but this year’s set has made some significant changes that will directly impact debtors, creditors and other stakeholders.

A Look At The Amendments. You may find it interesting to see the entire group of amendments together, so I have included two links. The first is to the full "clean" set of the amended rules. The second is to a redline showing the changes made by these amendments to the existing rules, together with the Advisory Committee’s comments.

The Omnibus Objection Problem. One of the most significant amendments will make changes to the popular practice of filing omnibus objections. In large cases the debtor or other estate representative has so many claims to address that they have combined objections to dozens — sometimes hundreds — of different claims in one single motion. The objection may have a name such as “Debtors’ Fourteenth Omnibus Objections To Claims (Substantive)” or some similarly titled document. Click here for one example. In a post last year called "Objections To Claims: Ignore Them At Your Peril," I discussed how it can be hard to tell which claims an omnibus objection is targeting.

  • The format has often meant that the only reference to an individual creditor is buried within the objection’s many pages of text and exhibits, typically in an attached list or chart.
  • If the creditor doesn’t respond to the objection timely, its claim will likely be disallowed and it will recover absolutely nothing from the bankruptcy estate.

The Amended Rule 3007: An "Anti-Gotcha" Solution. The new rules restrict the use of omnibus objections to certain limited circumstances and impose formatting standards. Otherwise, each claim will require its own separate claim objection unless the combined objection covers claims filed by the same person or entity. What grounds for objection can be made by an omnibus objection under the newly revised Rule 3007?

  • Duplicate claims;
  • Claims filed in the wrong case;
  • Original claims that were amended by later claims;
  • Claims that were not timely filed;
  • Claims that have already been paid or released;
  • Claims filed in a form that does not comply with applicable rules;
  • Claims that are really asserting an equity interest in the debtor; and
  • Priority claims that assert an amount in excess of the maximum amount in the Bankruptcy Code.

In short, if the claim is being challenged on substantive grounds, rather than more technical or procedural ones, then the objection will have to be filed one claimant at a time.

When an omnibus objection does make the permitted objections, it will now have to list claimants in alphabetical order, cross-reference claim numbers, give the ground for the objection and cross-reference that to the text of the objection, describe the objector and the reason for the objection in the document’s title, and combine no more than 100 claims in a single objection. This is all designed to make it easier for the creditor to figure out whether its claim is included and the basis for the objection.

Amended Rule 4001: The Clearer Disclosure Rules. Changes have been made to the rule that governs motions and stipulations for use of cash collateral and obtaining debtor in possession (DIP) financing. The amended rules now require that more details about the key provisions of cash collateral and DIP financing terms and conditions be stated in the motion, that proposed forms of order be filed with the motion, and that cross-references be made in the motion to where in the cash collateral or DIP financing agreements and proposed orders the key provisions are reflected. Since some financing agreements can run hundreds of pages long, with complex formulas and provisions, this rule change is designed to make it easier for the court and the parties to understand their material features without wading through the entire document.

New Rule 6003: Putting The Breaks On Some "First Day" Orders. Another major change is the addition of Rule 6003. This new rule provides that "except and to the extent that relief is necessary to avoid immediate and irreparable harm, the court shall not, within 20 days after the filing of the petition, grant relief" regarding three key areas:

  • The employment of professionals;
  • A motion to pay any prepetition claims (read: critical vendors) or to use, sell, lease (Section 363 sales), or incur an obligation for property of the estate, other than cash collateral or DIP financing motions; or
  • Assumption or assignment of any executory contract or unexpired lease (including commercial real estate leases).

As drafted, unless there is an emergency, and then only to the extent it’s really necessary, the bankruptcy court should defer these decisions until after the 20th day following the filing of the Chapter 11 bankruptcy petition (although technically these apply under the other chapters of bankruptcy). One reason for the rule is to give time for a creditors committee to be appointed and retain counsel before important decisions are made. That said, the exceptions for cash collateral and DIP financing, as well as for rejection of leases and other executory contracts, means a lot can still be done during the early part of a case. When Section 363 sale or critical vendor motions come up on an emergency basis, it’ll be interesting to see how often courts, in applying this new rule, find the existence of irreparable harm.

Amended Rule 6006: Assumption, Assignment, And Rejection Of Executory Contracts. Similar to Rule 3007, Rule 6006 has been changed to put limits on when omnibus motions can be used to deal with executory contracts and leases. Under new Rule 6006(e), absent special court authorization, omnibus motions may be used for multiple executory contracts or leases only when all of the executory contracts to be assumed or assigned are (1) between the same parties, or (2) being assigned to the same assignee. This latter provision likely covers most Section 363 asset sales, so non-debtor contracting parties should continue to carefully review those motions, as discussed in this earlier post. An omnibus motion may also be used when a debtor or trustee seeks to assume, but not assign to more than one assignee, real property leases. In addition, omnibus motions may be used to request rejection of multiple executory contracts or leases.

New Rule 6006(f) provides that, when allowed, these omnibus motions can list no more than 100 executory contracts or leases in any one motion (unlike the chart on this fairly typical pre-amendment motion), and multiple motions will need to be numbered consecutively. The new rule also requires that permitted omnibus motions provide a variety of new information, including:

  • An alphabetical listing by party name;
  • The terms of the assumption or assignment, including for curing defaults; and
  • The identity of the assignee and the adequate assurance of future performance to be provided.

A Few Other Changes. The other amendments this year (1) permit a court to consider a change of venue, (2) clarify when corporate ownership disclosure needs to be made, (3) address constitutional challenges to statutes, and (4) specify procedures for protecting social security numbers and other private information in court filings. Check the clean or redline sets linked above to read these additional rule amendments.

Conclusion. This year’s amendments to the Federal Rules of Bankruptcy Procedure have more than their share of real changes and they will have an impact on business bankruptcy cases. The omnibus motion changes should help creditors from missing when their claim is the target of an objection and contract parties from failing to see that their executory contract or lease is part of a motion to assume and assign. Although cash collateral and DIP financing motions are not affected, the new irreparable harm standard for certain relief in the first 20 days of a case may prove interesting when emergency Section 363 sales are attempted. Stay tuned.

Recent Developments

How The Credit Crunch May Affect Corporate Debt Refinancings And Bank Lending

The Economist has two new articles on how the current troubles in the credit markets may impact the broader economy. The first is on the topic of "Business and the Credit Crunch." After discussing how several private equity buyout deals have unraveled, it offers an interesting observation:

What happens to private equity may be a leading indicator of how the crisis in the financial system will affect the rest of the business world, both because private-equity deals are so dependent on large amounts of debt, and because many of the shrewdest judges of corporate value work for private-equity funds. The number of new private-equity deals has plunged with the financial crisis, and nobody expects activity to pick up again soon. The collapse of deals suggests that the business climate has changed sharply.

While the article stops short of forecasting a recession in the United States, it notes that $160 billion of leveraged loans will come due in 2008 and "refinancing them may be a struggle in today’s financial markets." As one analyst commented, a severe recession — if it were to happen — could push the default rate on corporate bonds as high as 20%.

A second article focuses on the capital needs of commercial and investment banks as a result of recent and predicted write-downs. The open question is what impact these reductions in capital will have on future lending, in particular if banks seek to maintain capital ratios in the 10% range often seen. One prediction: write-downs through next year could reduce lending by as much as $2 trillion.

What does all this mean for business bankruptcy? A lot will depend on how long the credit crunch lasts and how widespread its impact extends.

  • It’s been almost five months since early signs first emerged of a turn in the buyout debt market that presaged the credit crunch and few are ready to predict when it will end.
  • Many insolvency professionals believe a significant increase in Chapter 11 bankruptcy filings is coming, even without a recession.
  • If the economy falls into an actual recession, the number of defaults on corporate bond issuances and other debt would rise dramatically.

With most economists still predicting that the U.S. economy will slow but not dip into recession, the most interesting question may be what would the default picture look like in such a low growth economy. These Economist articles suggest it may not be a pretty sight. 

Business Bankruptcy Issues Recent Developments

Assumption Of Trademark Licenses In Bankruptcy: An Update On The N.C.P. Marketing Case

Over a year ago, I posted on a first of its kind decision in In re: N.C.P. Marketing Group, Inc., 337 B.R. 230 (D.Nev. 2005), in which the U.S. District Court for the District of Nevada held that trademark licenses are personal and nonassignable absent a provision in the trademark license to the contrary. Click here for a copy of the N.C.P Marketing Group decision and here to read the earlier post on the case.

The N.C.P. Marketing Court’s Analysis. In reaching its conclusion, the District Court held that under the Lanham Act, the federal trademark statute, a trademark owner has a right and duty to control the quality of goods sold under the mark:

Because the owner of the trademark has an interest in the party to whom the trademark is assigned so that it can maintain the good will, quality, and value of its products and thereby its trademark, trademark rights are personal to the assignee and not freely assignable to a third party.  

The trademark owner in that case, Billy Blanks of the Billy Blanks® Tae Bo® fitness program, successfully moved the court to compel rejection of the trademark license because under the "hypothetical test" analysis of Section 365(c)(1) of the Bankruptcy Code adopted by the U.S. Court of Appeals for the Ninth Circuit, contracts that cannot be assigned by the debtor without the nondebtor party’s consent cannot be assumed by the debtor either. (For a full discussion of these issues, take a look at this earlier post entitled "Assumption of Intellectual Property Licenses In Bankruptcy: Are Recent Cases Tilting Toward Debtors?")  

The Ninth Circuit Appeal. In December 2005, the parties appealed this decision to the Ninth Circuit. The appeal was fully briefed and had been scheduled for oral argument on November 5, 2007.

  • In July 2007, however, the N.C.P. Marketing Chapter 11 case was converted to Chapter 7. 
  • On October 24, 2007, the Chapter 7 trustee asked the Ninth Circuit to reschedule the oral argument because of a pending settlement in the case.
  • In response, the Ninth Circuit took the oral argument off calendar and directed the parties to move to dismiss the appeal if the settlement is approved by the Bankruptcy Court.

Still No Court Of Appeals Decision. If the settlement is approved, no Ninth Circuit decision will be issued. Instead, this case seems to be headed to an ending similar to that in In re Wellington Vision, Inc. (see this earlier post on the Wellington Vision case for more details), perhaps the only other bankruptcy decision to date to address this trademark issue. There, conversion of the case to Chapter 7 also led to a settlement without an appellate decision. With these recent developments in the In re N.C.P. Marketing case, trademark licensors and licensees will have to wait longer still for an appeals court decision on this important issue at the intersection of trademark and bankruptcy law.