Bankruptcy Law Commons^™

An Exercise In Economics: Determining “Value” Under § 548 Of The Bankruptcy Code, Gregory R. Bruno

Bankruptcy Research Library

(Excerpt)

Determining whether a debtor receives value for a constructively fraudulent prepetition transfer under section 548 of the Bankruptcy Code can prove troublesome when a debtor receives only an indirect, intangible benefit. Section 548 allows a bankruptcy trustee to avoid and recover a debtor’s prepetition transfers for which the debtor did not receive “reasonably equivalent value.” However, judicial interpretation of the term “value” has greatly limited the kinds of benefits to the debtor that might qualify.

Gold v. Marquette (In re Leonard) both illustrates the limitations that courts have placed on the term “value” for purposes of section …

Avoidability Of Foreclosure Sales Under Section 547 Of The Bankruptcy Code, Adam Cohen

Bankruptcy Research Library

(Excerpt)

Should foreclosure sales that comply with state law be subject to avoidance under federal bankruptcy law? In BFP v. Trust Resolution Corp., the Supreme Court said no, at least when dealing with alleged section 548 fraudulent conveyances, as doing so would, inter alia, undermine state interests and raise substantial federalism concerns. Some courts have taken this reasoning and applied it to section 547 preferences as well, while others feel that the plain language of section 547 prohibits such an application. One recent case in the latter category is In re Whittle Development, Inc.

In general, transfers are …

Exploring The Enforceability Of Pre-Petition Hindrance Mechanisms To Prevent Bankruptcy, Joshua Eisenson

Bankruptcy Research Library

(Excerpt)

Insolvency and bankruptcy pose great risks to a creditor’s investments. Although business entities can never be truly bankruptcy-proof, certain techniques are commonly deployed to make debtors as bankruptcy-remote as possible. Creditors and practitioners have devised and employed a multitude of “hindrance mechanisms” to significantly discourage bankruptcy petitions, while not directly causing debtors to waive their right to voluntarily file for bankruptcy. Creditors will often require debtors to accept these contractual provisions to make it more difficult, or practically impossible, for debtors to declare bankruptcy. However, as a rule of law, courts will render a hindrance mechanism per se invalid …

The Challenge Of Retaining Interest For Original Equity Owners, Michael Harary

Bankruptcy Research Library

(Excerpt)

Bankruptcy reorganization plans can pose a challenge for old equity shareholders wanting to retain their interests in a reorganized entity, Under the Bankruptcy Code these plans give most creditors a higher priority to receive equity in the reorganized company before shareholders. However, shareholders have different options that can aid them in retaining interests in the company; one such option is the contribution of new value that is subject to market evaluation.

Recently, in H.G. Roebuck & Son, Inc. v. Alter Communications, Inc., (“Roebuck”), the United States District Court for the District of Maryland reversed the bankruptcy …

Assumption Under Section 365(C)(1) Creates Uncertainty For Debtors, Heather Hili

Bankruptcy Research Library

(Excerpt)

The assumption and assignment of executory contracts raises many issues in Chapter 11 bankruptcies. One issue is whether the trustee can assume an executory contract, thus forcing the non-debtor party to accept performance from the debtor-in-possession. Section 365(c)(1) of the Bankruptcy Code (“Code”) attempts to resolve this issue by providing that a trustee may not assume or assign an executory contract when applicable law would excuse the non-debtor party from accepting performance from someone other than the debtor-in-possession. But courts relying on Section 365(c)(1) to resolve this issue have interpreted it in different ways, creating a split among the …

Judicial Enforcement Of Default Interest Rates, Michael Lutfy

Bankruptcy Research Library

(Excerpt)

Although secured creditors use default interest rates to protect their security interest throughout the bankruptcy process, courts are not required to enforce those contractual provisions. Secured creditors can legitimately use default interest rates to provide an offset for the “costs and delay of the bankruptcy process.” Equitable considerations may require judicial nullification of default interest rates. Inequitable default interest rates directly contradict the policy goals of bankruptcy. The difficulty in determining the reasonableness of default interest rates results from competing policy interests within bankruptcy. Courts favor enforcing contractual obligations and preserving rights inside of bankruptcy, as they would have …

In Re Pichhi; Modifications Of Multi-Family Home Mortgages, Patrick Mcburney

Bankruptcy Research Library

(Excerpt)

In a decision with important implications for lenders in the real estate business, the Bankruptcy Appellate Panel for the First Circuit determined that debtors can strip down a creditor’s under-secured claim in a multi-family dwelling to the appraised value of the property. While the Bankruptcy Technical Corrections Act of 2010 (“BTCA”) were in effect at the time of the decision, the panel decided the issue under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) because both parties argued the issue under the BAPCPA definitions and declined to raise the applicability of BTCA to the issue. Specifically …

The Evolution Of The Settlement Payment Defense?, Tianja Samuel

Bankruptcy Research Library

(Excerpt)

Each year U.S. bankruptcy courts decide hundreds of cases in which debtors, or their trustees, seek to avoid preferential payments. In many of these cases, creditors successfully defend themselves by convincing the court that a statutory safe harbor provision is applicable. The settlement payment defense is one safe harbor provision that—although frequently utilized by creditors—has consistently raised questions about its own scope and applicability. The Second Circuit answered some of these questions, for the first time, in In re Enron Creditors Recovery Corp. In what some believe was an expansive decision, the court held that the settlement payment …

In Re Shamus Holdings, Llc And The Automatic Stay, Matthew Silverman

Bankruptcy Research Library

(Excerpt)

The automatic stay is recognized as one of the fundamental protections provided by bankruptcy law. The automatic stay prevents creditors from taking almost any type of formal or informal action against the debtor, including commencing or continuing foreclosure actions. There are, however, certain exceptions to the automatic stay, exceptions that permit the creditor to take action against the debtor despite the pendency of the bankruptcy proceeding. This memorandum focuses on one such exception, contained in section 362(b)(3) of the Code, and the effect courts have held it to have on the automatic tolling provision of the Bankruptcy Code. The …

Priority Treatment Of Employee Severance Compensation Claims, Eric Small

Bankruptcy Research Library

(Excerpt)

When a bankrupt company terminates employees, those former employees often have claims against the estate for severance compensation. Sections 507(a) and 503(b)(1)(A) of the Bankruptcy Code provide for the priority treatment of such claims. Those sections apply to claims arising both pre-petition and post-petition. In the pre-petition context, courts must determine if a claim was earned within the pre-petition period prescribed by section 507(a)(4). For post-petition claims, whether such claims are given administrative expense priority for the full amount claimed turns on courts’ analysis of when the claims were earned, when services were rendered, and if and when the …

Attorney Retention And Disqualification In Bankruptcy, Jessica Stukonis

Bankruptcy Research Library

(Excerpt)

Two essential issues to bankruptcy practitioners are attorney retention and the threat of disqualification. These issues are closely related and are governed by several ethical rules and bankruptcy statutes. Generally, all legal professionals must abide by the standards imposed by their states’ ethical code, which are largely adapted from the American Bar Association Model Rules of Professional Conduct (the “Model Rules”). Bankruptcy practitioners, however, must also abide by section 327 of the United States Bankruptcy Code (the “Code”), which only permits the retention of “disinterested” professionals in a proceeding. If the attorney does not meet these standards, the presiding …

Does Section 329 Grant Exclusive Jurisdiction To Bankruptcy Courts?, Samantha M. Tusa

Bankruptcy Research Library

(Excerpt)

Fee agreements between bankruptcy debtors and their counsel must often be settled in court. In which court those fee disputes can be heard is a question that is not yet settled. One court has looked to section 329 of the Bankruptcy Code for the answer. Section 329 states that if the compensation agreed upon by the debtor and attorney exceeds a reasonable value for the services rendered, “the court” may cancel the agreement or return some of the payment. In re Piccinini is the first case to hold that the phrase “the court” in section 329 confers exclusive jurisdiction …

Intentional Conduct May Be Required To Prove Defalcation Under Section 523(A)(4) In Certain Circuits, Elizabeth Vanderlinde

Bankruptcy Research Library

(Excerpt)

In the average bankruptcy case, individual debtors seek to discharge some, all, or most of their debts. The Bankruptcy Code (the “Code”) sets certain limits on the dischargeability of obligations. For example, section 523 of the Code provides circumstances in which certain debts are not dischargeable. Specifically, section 523(a)(4) provides that an individual debtor will not be discharged from any debt “for fraud or defalcation while acting in a fiduciary capacity.” In the bankruptcy context, defalcation means “the failure to meet an obligation.” However, the Code is silent as to the level of culpability required to prove defalcation. The …

Class Proofs Of Claim And Class Certification In Bankruptcy, Ravi Vohra

Bankruptcy Research Library

(Excerpt)

The Federal Rules of Bankruptcy Procedure (the “Rules”) make class action procedures available to litigants in bankruptcy litigation. However, the Bankruptcy Code (the “Code”) and Rules leave open the question of whether a class representative may file a class proof of claim on behalf of a putative class. Because the Code and Rules are silent, bankruptcy courts have to look to case law to “fill the gaps.” Different courts have adopted different interpretations, and a circuit split has emerged regarding the permissibility of class proofs of claim.

Initially, most bankruptcy courts and the first court of appeal that addressed …

Granting Foreign Representatives Automatic Section 108 Relief In Chapter 15 Cases, Andrew J. Zapata

Bankruptcy Research Library

(Excerpt)

In a matter of first impression, the Bankruptcy Court for the Southern District of New York (the “Court”) in In re Fairfield Sentry Ltd. was confronted with the issue of whether the tolling provisions of section 108 of the Bankruptcy Code (the “Code”) are automatically available to Foreign Representatives in chapter 15 cases. As written, section 108(a) of the Code gives trustees, rather than Foreign Representatives, a minimum two-year extension from when the order for relief is entered to commence claims in the interest of the debtor’s estate. However, in In re Fairfield Sentry Ltd., the Court looked …

The Structural Exceptionalism Of Bankruptcy Administration, Rafael I. Pardo, Kathryn A. Watts

Articles

The current system of administration of the Bankruptcy Code is highly anomalous. It stands as one of the few major federal civil statutory regimes administered almost exclusively through adjudication in the courts—not through a federal regulatory agency. This means that rather than fitting bankruptcy into a regulatory model, the U.S. Congress has chosen to give the courts primary interpretive authority in the field of bankruptcy, delegating to courts the power to engage in residual policymaking.

Although scholars have noted some narrow aspects of the structural exceptionalism of bankruptcy administration, Congress’s decision to locate responsibility for bankruptcy policymaking almost exclusively with …

The Structural Exceptionalism Of Bankruptcy Administration, Rafael I. Pardo, Kathryn A. Watts

Scholarship@WashULaw

The current system of administration of the Bankruptcy Code is highly anomalous. It stands as one of the few major federal civil statutory regimes administered almost exclusively through adjudication in the courts, not through a federal regulatory agency. This means that rather than fitting bankruptcy into a regulatory model, Congress has chosen to give the courts primary interpretive authority in the field of bankruptcy, delegating to courts the power to engage in residual policymaking. Although scholars have noted some narrow aspects of the structural exceptionalism of bankruptcy administration, Congress’s decision to locate responsibility for bankruptcy policymaking almost exclusively with the …

Does Ideology Matter In Bankruptcy? Voting Behavior On The Courts Of Appeals, Rafael I. Pardo, Jonathan Remy Nash

Scholarship@WashULaw

This Article empirically examines the question of whether courts of appeals judges cast ideological votes in the context of bankruptcy. The empirical study is unique insofar as it is the first to specifically examine the voting behavior of circuit court judges in bankruptcy cases. More importantly, it focuses on a particular type of dispute that arises in bankruptcy - debt-dischargeability determinations. The study implements this focused approach in order to reduce heterogeneity in result. We find, contrary to our hypotheses, no evidence that circuit court judges engage in ideological voting in bankruptcy cases. We do find, however, non-ideological factors - …

Cars In Chapter 13: Does Negative Equity Destroy The Jurisdiction Of The Hanging Paragraph, David G. Carlson

Articles

Roughly speaking, the “hanging paragraph” to Bankruptcy Code 1325(a), enacted in 2005, requires that a debtor pay the full debt on any automobile acquired within 910 days before bankruptcy – a boon for car financiers. Prior to 2005 the debtor had to pay only the appraised value of the car – usually a lesser amount. But the privilege bestowed on car financiers by the hanging paragraph depends on the financier providing “purchase money” credit. About one-third of the time, however, the financier advances funds to repay a prior car loan as part of the “trade-in” of an old vehicle for …

Chapter 11 Reorganization And The Fair And Equitable Standard: How The Absolute Priority Rule Applies To All Nonprofit Entities, Pamela Foohey

Articles by Maurer Faculty

In recent years, nonprofit entities increasingly have sought bankruptcy protection. Though the Bankruptcy Code does not prevent nonprofits from reorganizing, Chapter 11 was designed for and applies best to for-profit businesses. This creates challenges for courts evaluating a nonprofit’s reorganization plan. This Article focuses on one crucial aspect of a court’s evaluation — the fair and equitable standard, a necessary, but not sufficient condition of which is satisfaction of the absolute priority rule.

The few courts addressing absolute priority claims in nonprofit reorganizations have held that the rule is categorically inapplicable to nonprofit entities except in limited circumstances. These courts …