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September 18, 2017 | Posted by Peretz, Tuvia | Permalink

 The Bottom Line

After hearing oral argument at confirmation on August 30, 2017, the bankruptcy court for the Western District of Pennsylvania issued a written opinion in In re rue21, inc., et. al., Case No. 17-22045-GLT (Bankr. W.D. Pa. September 8, 2017), Dkt. No. 1082, approving a third party release of the Debtor’s sponsor over the objection of the Committee where the claims that the Committee sought to retain are currently meritless under Third Circuit precedent.  The Court determined that the Supreme Court’s grant of certiorari to hear a circuit split which could potentially allow a cause of action that is currently meritless in the Third Circuit to go forward in the future, does not create a colorable claim because as the law exists today, no such cause of action exists.  Even though the Supreme Court has granted certiorari to resolve a circuit split on the issue of whether the section 546(e) safe harbor prevents a constructive fraudulent transfer claim where settlement payments are made to or by a financial institution, regardless of whether the financial institution has a beneficial interest in the securities or merely serves as a conduit for payment, stare decisis requires the Court to apply the current ruling of the Third Circuit and since no viable claim currently exists, the Court will not forcibly remove a release where creditors have overwhelmingly voted in favor of the Plan.

Why the Case is Interesting

This case serves as an important lesson regarding the significance of stare decisis and understanding the current state of the law in a particular circuit.  Even where the possibility exists that the law will may change in the near future, judges are still bound by the existing rulings of appellate courts in their circuit and will determine the case based on the law as it exists at that moment of the controversy being decided.  In addition to having an impact on where a case is filed, in some unique instances a pending appeal before a circuit court or the Supreme Court can potentially impact the timing of a bankruptcy filing.  This decision in rue21 also serves to highlight the significance of the Merit case pending before the Supreme Court and how significant issues relating to the scope of the 546(e) safe harbor provision can be in bankruptcy filings following an LBO.  Lastly, it is notable that the court expanded the relevant analysis of the Master Mortgage case to include an analysis of whether the claims at issue are colorable.

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September 11, 2017 | Posted by Alana Katz | Permalink

The Bottom Line

The Seventh Circuit recently held, in Grede v. FCStone, LLC, Nos. 16-1896 & 16-1916, 2017 WL 3470145 (7th Cir. Aug. 14, 2017), that (i) a transfer previously authorized by a bankruptcy court order cannot be avoided due to the court’s later clarifying language, particularly where a higher court previously ruled that such avoidance was improper and (ii) where statutory trust beneficiaries can trace their initial investment in funds held by the debtor, such funds are trust funds, not property of the estate, and cannot be distributed to general unsecured creditors.  This decision is the second time these issues have been before the Seventh Circuit in this case.

Why This Case is Interesting

With this decision, the Seventh Circuit has articulated three key points to take away.  First, the Court underscored the important of adhering to prior higher court decisions.  Given that the Court previously ruled that the “clarification” was ineffective to modify the prior bankruptcy court order, such ruling became the “law of the case,” which must be followed by all lower courts hearing the same issues on remand.  Second, this case highlights the important of carefully crafting language in a chapter 11 plan, which becomes in effect a contract between the parties thereto.  Had the SEG 3 customers fought for language in the plan which would have excepted them from treatment as general unsecured creditors, they could have potentially received recovery from the reserve funds as well.  Finally, the Court focused on the importance of credible evidence and testimony, particularly when tracing trust funds.  Once funds are determined to be trust funds, they cannot lose this characteristic due to the bad behavior of a debtor.  If a trust beneficiary can present credible evidence that the funds are entitled to trust protection, this can greatly benefit the beneficiary’s distributions in a chapter 11 case.

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August 24, 2017 | Posted by Wasson, Megan | Permalink

The Bottom Line:

The Third Circuit, in In re AE Liquidation, Inc., Case No. 16-2203 (3d Cir. Aug 04, 2017) held that the Debtors were not liable under the WARN Act for failing to warn employees of furloughs and layoffs until those furloughs and layoffs occurred, due to unforeseeable business circumstances.  The Court determined that the appellant’s suggested lower standard of unforeseeable circumstances being circumstances which were merely possible, and not probable, imposed too great a burden on companies.  The Court conducted an extensive factual analysis to determine that the Debtors gave WARN Act notice at the appropriate time, i.e. that the Debtors were excused from giving earlier WARN Act notice because unforeseeable business circumstances made sudden layoffs unavoidable.  The Third Circuit joins a majority of other circuit courts by adopting a more practical standard to afford businesses the flexibility of not sending out WARN notices at a sooner point in a sale process that, if such notices were sent, could disrupt the debtor’s ability to preserve operations and sell the business as a going concern.

Why the Case is Interesting:

The Third Circuit now follows the Fifth Circuit and four other Circuits, holding that for an event to be ‘reasonably foreseeable,’ it must be probable.  Id. at 27.  The Third Circuit declined to set the lower suggested standard of whether an event was merely ‘reasonably possible.’  Id at 27-28.  The Court reasoned that setting a lower ‘possibility’ standard would require employers to give WARN Act notice each time a company was in financial distress, and noted that its prior opinions on the subject implicitly supported the ‘probability’ standard.  “This standard strikes an appropriate balance in ensuring employees receive the protections the WARN Act was intended to provide without imposing an ‘impracticable’ burden on employers that could put both them and their employees in harm’s way.”  Id. at 31, citing Halkias v. General Dynamics Corp., 137 F.3d 333 (5th Cir. 1998).  In following its sister circuits, the Third Circuit takes the (practical) view that the potential upside to employees of more frequent WARN Act notices sent each time a company is in financial distress is outweighed by the potential burden and cost to those companies of frequent, and perhaps unnecessary WARN Act notices.  With a lower ‘possibility’ standard, companies might be disincentivized from trying to ‘stay afloat’ or successfully emerge from Bankruptcy, as premature warnings may often accelerate a company’s demise.  In re AE Liquidation, Inc., at 32.  The decision affords companies more flexibility in delaying when notices need to be sent while pursuing a sale transaction even if there are degrees of risk inherent in that sale transaction closing.  Of course, the inquiry is ultimately fact-specific and companies (and creditors affected by WARN claims) need to proceed carefully.

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August 15, 2017 | Posted by Priya Baranpuria | Permalink

The Bottom Line

The Delaware Bankruptcy Court, in In re Nuverra Environmental Solutions, Case No. 17-10949 (Bankr. Del. July 24, 2017), confirmed a chapter 11 plan of reorganization despite separate classification and disparate gifted consideration between classes of general unsecured creditors.  The Court determined the gift from secured creditors to certain classes of general unsecured creditors, but not the class of unsecured bondholders, created a rebuttable presumption of unfair discrimination and did not violate the absolute priority rule.  Because the proposed classification scheme was necessary to foster reorganization and maintain ongoing business relationships, the plan was confirmable.

Why the Case is Interesting

This case confirms (no pun) the Debtors’ flexibility to separately classify unsecured claims as part of a global restructuring that involves a secured creditor gifting a portion of its recovery in favor of certain, but not all, unsecured creditors.  The court did not derail an otherwise consensual restructuring that involved different treatment of otherwise similarly situated unsecured creditors where the objecting creditor belongs to a class that is indisputably out of the money and not otherwise entitled to distribution under the priority scheme under the Bankruptcy Code.  The decision is being appealed, so stay tuned. 

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August 11, 2017 | Posted by Douglas, Rama | Permalink

The Bottom Line

In In re SGK Ventures, LLC, Case No. 15 C 11224, 2017 WL 2683686 (N.D. Ill. June 20, 2017), Judge Durkin of the District Court for the Northern District of Illinois sets out a thorough analysis for addressing recharacterization and equitable subordination of claims. In the process, the court reestablishes a high threshold for the equitable subordination of secured loans by insiders. Pursuant to section 510(c) of the Bankruptcy Code, the Bankruptcy Court for the Northern District of Illinois granted equitable subordination of secured loans made by the debtor’s insiders. The bankruptcy court reached this conclusion because the debtor (i) dealt primarily in steel without adequately hedging against price fluctuations and while routinely distributing excess cash to owners rather than maintaining an equity cushion, (ii) had originally intended the first secured loan by insiders to be a preferred stock issuance, and (iii) kept its financial problems a secret from its trade creditors. However, on appeal, District Judge Durkin reversed the bankruptcy court’s equitable subordination holding after finding no basis for the holding.

Why the Case is Interesting

This case reestablishes a high threshold for the equitable subordination of secured loans by insiders. This threshold was arguably lowered when the bankruptcy court granted equitable subordination based on factors that have not traditionally provided the basis for a finding of inequitable conduct that warrants equitable subordination pursuant to section 510(c). The district court’s decision is subject to an appeal pending before the Seventh Circuit. The Seventh Circuit response to this appeal may affect whether the high threshold is maintained or lowered with respect to equitable subordination of secured loans by insiders. 

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