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July 11, 2011  | Posted by Adam C. Rogoff & Anupama Yerramalli, Co-Editors | Permalink
Welcome to Broken Bench Bytes, a weekly blog covering notable, recent decisions affecting corporate bankruptcy, restructuring and turnarounds. The goal of this blog is frequency of postings while, in a time of information overload, being selective on what we think is of most interest to our readers. In three sections, each week's blog postings succinctly cover the latest court developments impacting today's bankruptcy and restructuring process. "The Bottom Line" is the decision's sound-byte. For more detail, "What Happened" covers key background and the court's reasoning -- a bit more flavor for your Byte. And finally, in "Why this Case is Interesting," we put the case into context for practical issues affecting distressed situations. Our weekly Bytes are not law review articles; they are bite-sized nuggets of important decisions.
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January 6, 2015 | Posted by Andrew Pollack | Permalink

             With FIBA being approved by the House of Representatives and moving on to review in the Senate, interested parties will be closely monitoring the Act’s progress. Should FIBA be enacted into law, financial institutions and creditors alike will keep a close eye on the application and interpretation of the new sections of the Bankruptcy Code – particularly §1192, allowing courts to consider the implications that any decision may have on the “financial stability of the United States.” With a broad purpose, how FIBA cases play out in practice will shape the future of financial institution bankruptcies.

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November 13, 2014 | Posted by Nathaniel Allard | Permalink

The Bottom Line:


In In re Caribbean Petroleum Corp., et al., No. 13-4415 (3d Cir. Sept. 18, 2014), the Third Circuit affirmed that tort claimants did not have priority over other general unsecured creditors in the distribution of certain insurance proceeds, based on the plain language of the Bankruptcy Court’s order approving the buyback of an insurance policy and the related terms of a confirmed plan of liquidation which provided for pro rata distribution of the purchase/settlement proceeds to all holders of general unsecured claims (including tort claims who otherwise had direct action claims against the insurer). In its ruling, the Third Circuit overruled arguments by an alleged joint tortfeasor named as a co-defendant in lawsuits against the Debtors that tort claimants (including itself) had priority over insurance settlement proceeds because Puerto Rico provides tort victims a statutory right of direct action against the insurance company. In rejecting such arguments in favor of a plain reading of the plan and confirmation order, the Third Circuit also noted the arguments should have been raised previously, as an objection to the relevant Bankruptcy Court order and proposed plan, rather than a year and a half after confirmation.

Why the Case is Interesting:


On a broad level, the case reinforces the power of a plain language reading of operative documents, with any party wishing to overcome such a reading facing an uphill climb. The case also highlights the necessity to timely raise issues and the consequences of delay – even if the claim might have had merit: “In sum, while sharing liability insurance proceeds with other unsecured creditors may be unpalatable for Tort Claim holders, and if timely raised, arguably implicated public policy concerns in light of Puerto Rico’s direct action statute, that is what the Buyback Order and Plan unambiguously provided.” (Emphasis added). Unrelatedly, the decision declines to address certain issues that were not raised below and thereby waived; notably, arguments that the Buyback Order and Plan improperly discharged third party (tort) direct claims against a non-debtor (the insurer). The structure used in Caribbean Petroleum is not uncommon to settle coverage disputes with insurers in tort cases – whereby insurance companies will seek to settle such coverage disputes by repurchasing their policies under section 363 “free and clear” of claims and obtaining plan discharges in exchange for the settlement payment. The facts of Caribbean Petroleum would have required considering that the third party claims being discharged are direct action claims and not derivative rights of the estate. Likewise waived by not being timely raised, these issues remain for another day.

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April 8, 2014 | Posted by Tuvia Peretz | Permalink

The Bottom Line:


In Law v. Siegel, No. 12-5195 (U.S. Mar. 4, 2014), the United States Supreme Court ruled that the bankruptcy court cannot use its general “equitable powers” under section 105 in a way which contravenes another specific section of the Bankruptcy Code. In Law, an individual debtor engaged in misconduct that led to hundreds of thousands of dollars in litigation costs being incurred by the Chapter 7 trustee. Despite this behavior, the Supreme Court ruled that it was erroneous to effectively surcharge the individual debtor for these costs by using section 105 to charge those administrative costs against the debtor’s homestead exemption, which exemption is specially protected by the Bankruptcy Code. Although the case involves a narrow issue – an individual debtor’s homestead exemption – the Supreme Court’s admonishment on the broad use of section 105’s equitable powers could be expanded to Chapter 11 cases.

Why the Case is Interesting:

 
The facts of the case were very specific to improper conduct by an individual debtor. In Law, the court addressed a direct conflict between the application and interpretation of two provisions – section 105 and section 552. However, the impact of the decision remains to be seen in expanding the scope of the prohibition on the use of section 105 to another not-quite-conflicting context. Bankruptcy courts are routinely asked to use section 105 to permit payments or take actions as part of a Chapter 11 case. For example, payments of prepetition amounts under the so-called “Doctrine of Necessity” are based upon the use of section 105 in conjunction with section 363. Stay tuned for if/how the principle of Law is expanded.

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January 9, 2014 | Posted by Nathaniel Allard | Permalink

The Bottom Line:


Looking at global economics, cross-border restructurings are predicted to be a larger focus in the United States in 2014 as U.S. affiliates or assets are addressed in connection with foreign-based insolvencies. Chapter 15 of the Bankruptcy Code -- established in 2005 -- allows an ancillary proceeding to be commenced in the United States, rather than requiring a separate full bankruptcy action to be filed here, when the “main” proceeding is brought in another country. In ABC Learning Centres, No. 12-2808, 2013 U.S. App. LEXIS 17844 (3d Cir. Aug. 27, 2013), the Third Circuit affirmed the recognition of an Australian liquidation proceeding as a “foreign main proceeding” within the ambit of Chapter 15, even though the debtor’s assets were fully encumbered, leaving no value anticipated to be distributed to unsecured creditors. This case involved separate receivership and liquidation proceedings in Australia and a competing U.S. creditor seeking to obtain judgment liens over U.S. assets. In its ruling, the Court overruled arguments by the U.S. unsecured creditor that the Australian liquidation proceedings were essentially for the sole benefit of the secured creditors and did not warrant judicial recognition by U.S. courts. The Third Circuit’s decision provides a nice summary of the purposes of Chapter 15 and the recognition (no pun intended…) that unsecured creditors should not force a race to U.S. courthouses to enhance their position over U.S. assets and disregard foreign insolvency proceedings. Such behavior ignores basic principles of international comity.

Why the Case is Interesting:


This case is notable for a couple of reasons. On a broad level, it illustrates how U.S. courts apply Chapter 15 to support cross-border comity/recognition and promote a more effective handling of multinational bankruptcies. On a more granular level, it is notable that the Third Circuit acknowledged that Chapter 15 mandates recognition when the recognition requirements of Section 1517 are met – here, a “liquidation proceeding” was recognized to obtain a stay of a U.S. creditor’s actions against the debtor’s assets, even though those assets would be sold by a receiver for the benefit of the secured creditor. Perhaps it is a case of “forum” over substance….

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October 24, 2013 | Posted by Mary Kate Guccion | Permalink

The Bottom Line:  

An important aspect of structuring a transaction or investment is seeking to avoid liability for the obligations of the underlying entity being acquired or invested in. A recent decision of the First Circuit in Sun Capital Partners III, LP v. New England Teamsters and Trucking Industry Pension Fund, 724 F.3d 129 (1st Cir. 2013), highlights potential risk. The court found that private equity funds could be jointly and severally obligated for the withdrawal liability (i.e., unfunded pension obligations) of a company in which the equity funds invested if the equity funds are considered to be heavily involved in management and day-to-day operations. Due to the position of the litigation, the appellate court did not actually require either fund to pay the withdrawal liability; however, it adopted a test to determine one of the two requirements to impose pension liability under ERISA – specifically, whether the equity funds were in a “trade or business.” Separately, the First Circuit ruled that the ERISA provision prohibiting transactions from being orchestrated to “evade or avoid” withdrawal liability does not allow a court to create new business terms or transactions in order to impose liability.

Why the Case Is Interesting:

This case is a cautionary tale for any fund that invests in a portfolio company with exposure to ERISA claims for MEP withdrawals or termination of underfunded single-employer plans, unless that investment is purely passive.
Although not addressed by the decision, it is worth observing that Sun Capital’s analysis of the investor’s management role could transfer from pension liability to income tax liability. For example, foreign investors in private equity funds generally do not pay U.S. income tax on gains from the sale of corporate securities on the grounds that they are not engaged in a “trade or business.” However, if a court is persuaded by Sun Capital’s analysis and holds that a U.S. fund is engaged in a “trade or business” for income tax purposes, then a foreign investor in that fund could be considered engaged in a “trade or business” and owe U.S. income tax on gains from securities transactions.

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