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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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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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October 16, 2013 | Posted by Daniel Eggermann and Anastasia Kaup | Permalink

The Bottom Line:

The Eleventh Circuit Court of Appeals has now issued two precedential opinions interpreting tax sharing agreements in bankruptcy in as many months. In its latest decision on the subject, In re Netbank, Inc., No. 12-13965, 2013 U.S. App. LEXIS 18774 (11th Cir. Sept. 10, 2013), the Eleventh Circuit held that a pre-petition tax sharing agreement (“TSA”) entered into by chapter 11 debtor Netbank, Inc., and its subsidiary bank in receivership Netbank, f.s.b., established an agency relationship between them, and therefore, a tax refund belonged to the non-debtor subsidiary bank and could be collected by the FDIC as its receiver. The Netbank decision relied on principles of contract interpretation in accordance with its recent opinion in Zucker v. FDIC (In re BankUnited Fin. Corp.), No. 12-11392, 2013 U.S. App. LEXIS 16896 (11th Cir. Aug. 15, 2013). For more information on the BankUnited opinion, visit Kramer Levin’s Broken Bench Bytes blog post, at: http://www.brokenbenchbytes.com/blog.aspx?entry=189. As a result, the tax refund was not an asset of the debtor’s estate and was required to be turned over to the FDIC as receiver.

Why the Case is Interesting:

The Netbank decision adds to a growing body of case law on the interpretation of TSAs in bankruptcy and whether the right to a tax refund is property of the estate or held in trust for the non-debtor. It underscores the important of the words of the TSA itself, and factors a court will look into in interpreting a contract deemed ambiguous (here, reliance on the OTS Policy Statement). It is interesting that the decision also did not address what rights the non-debtor would have to payment in the event that a refund had not been received by the debtor. Because there was an actual tax refund, the Court limited its analysis to ownership of that refund, as opposed to claim entitlement if the Parent had not elected to receive the refund.

Corporate affiliates that are considering entering into TSAs should consult counsel to analyze applicable federal and state law to determine how such agreements should be drafted to best reflect the parties’ intent, especially in the event of a bankruptcy. Additionally, current parties to TSAs should consult counsel to analyze the potential implications and interpretation of such agreements, whether inside or outside of bankruptcy.

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October 11, 2013 | Posted by Benjamin C. Wolf | Permalink

The Bottom Line:


Make-whole provisions occupy considerable attention in bankruptcy cases because they address the extent of a creditor’s claim and, when the claim is oversecured, impact the amount of “equity” in the collateral available to the estate. In In re AMR Corp., 13-1204-CV, 2013 WL 4840474 (2d Cir. Sept. 12, 2013), the Second Circuit recently upheld the inapplicability of a make-whole premium, ruling that, under the plain language of the bond indenture at issue, (i) the bankruptcy filing triggered an event of default and the bond debt was automatically accelerated and (ii) because the debt was accelerated, the “make-whole premium” was not due and that payment after acceleration constituted payment after maturity and not “prepayment.” The decision discusses numerous arguments made by the trustee on the scope of the automatic stay, rights under section 1110, and ipso facto provisions of executory contracts. The decision also analyzes the requirements and consequences of an election under section 1110(a) when the only outstanding default is an ipso facto bankruptcy default.

Why the Case is Interesting:

 
An interesting aspect of the argument was whether a bankruptcy trigger that automatically defaulted and accelerated the debt applied or was subject to treatment as an unenforceable ipso facto clause. The Court declined to invalidate the ipso facto clause, holding that it did not apply to a debt instrument, as opposed to an executory contract. The decision also held that the automatic stay precluded the indenture trustee from rescinding the event of default and automatic acceleration. The decision further analyzes the requirements and consequences of an election under section 1110(a), reasoning that, so long as the Debtor complies with the payment requirements of section 1110(a), the effect is merely to extend the stay. However, section 1110 does not otherwise cure a bankruptcy default, nor is the Debtor required to cure a bankruptcy default.

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