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By: James Duckham

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Hurvitz,[1] the Bankruptcy Court for the District of Massachusetts granted Blue Grace Franchise (“Blue”) relief from an automatic stay because Blue’s right to enforce the noncompetition and nonsolicitation provisions in its franchise agreement were not claims under section 101(5) of the United States Bankruptcy Code (the “Code”).[2] In February 2015, Blue and Carl Hurvitz entered into a franchise agreement that gave Hurvitz a nonexclusive and limited license to use Blue’s services and technology.[3] This agreement contained restrictive covenants that prohibited Hurvitz from competing or soliciting business away from Blue for two years after the agreement was terminated.[4] In January 2016, Blue terminated the agreement and Hurvitz began to work for Freight Management Company (Freight), a direct competitor of Blue.[5] In April 2016 Blue filed suit in Massachusetts Superior Court, and in May 2016 Blue was granted a temporary restraining order that enjoined Hurvitz from continued employment at Freight and from soliciting or contacting Blue’s former, current, or perspective clients.[6] On May 16, 2016, Hurvitz filed a petition for relief under chapter 7 of the Code, which pursuant to section 362 of the Code, resulted in an automatic stay of the restraining order.[7] Blue then made a motion to the bankruptcy court requesting relief from the automatic stay.[8] Ultimately, the bankruptcy court granted relief from the automatic stay finding that the franchise agreement’s provisions were not considered claims under the Code.[9]

December 17 2016

By: Samantha Guido

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

The use of a blocking director is a common practice by creditors looking to mitigate the risk of a debtor’s bankruptcy filing.[1] In In re Lake Michigan Beach Pottawattamie Resort LLC,[2] the United States Bankruptcy Court for the Northern District of Illinois held that a blocking director provision was invalid because it impermissibly eliminated the fiduciary duty owed by the creditor to the debtor.[3] In interpreting Michigan corporate governance law, the court reasoned that the use of blocking directors is generally permissible. The provision in this case, however, contracted away the fiduciary duty on the part of the blocking director, and that is impermissible.[4] The debtor granted a mortgage and assignment of rents to BCL – Bridge Funding (“BCL”) to secure a loan and a line of credit given by BCL to the debtor.[5] The debtor defaulted on his payment and created a Third Amendment establishing BCL as a “Special Member” with the right to approve or disapprove any material action by the debtor.[6] The provision requires the debtor to obtain BCL’s consent, which can be withheld for any reason, before filing for bankruptcy.[7] The agreement also contained a waiver of the fiduciary duty owed by the special member to the debtor by stating that BCL was not obligated to consider any interests but their own and has no obligation to give any consideration to the debtor’s interests.[8] When the debtor filed for bankruptcy, four out of five creditors voted in favor of the filing, with BCL withholding its vote.[9] BCL, in its motion to dismiss the debtor’s chapter 11 case, argued that the debtor was not authorized to file for Chapter 11 bankruptcy because the debtor did not have the consent of the blocking director.[10]

December 17 2016

By: Eileen Ornousky

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Although bankruptcy courts have broad equitable powers, including the power to substantively consolidate debtors, these powers cannot be used to circumvent other sections of the Bankruptcy Code. Substantive consolidation pools separate legal entities’ assets and liabilities and allows each entity’s liability to be satisfied out of the common pool of assets.[1] In In re Archdiocese of Saint Paul and Minneapolis,[2] the United States Bankruptcy Court for the District of Minnesota held that it lacked the authority to substantively consolidate the debtor Archdiocese with over 200 Catholic nonprofit, non-debtor entities.[3] Additionally, the Court stated that even if it had the authority to do so, the Archdiocese and the other entities were not sufficiently interrelated to warrant consolidation.[4]

December 17 2016

By: Tyler Levine

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Hellas[1] the United States Bankruptcy Court for the Southern District of New York stayed an adversary proceeding on the ground of forum non-conveniens.[2] Plaintiffs, the [liquidators of] Hellas Telecommunications (Luxembourg) II SCA (“Hellas II”), filed a complaint in the Bankruptcy Court following recognition of the foreign liquidators of Hellas II under Chapter 15 of the Bankruptcy Code. The plaintiffs sought to avoid and recover an initial transfer from Hellas II to its parent’s entity of approximately $1.57 billion and also to avoid and recover $973.7 million that was later transferred to several named defendants and an unmanned class of transferees.[3] Initially, the court denied the forum non-conveniens motion because it had the jurisdiction to adjudicate the claims under Sections 213 and 423 of the U.K. Insolvency Act.[4] Thereafter, plaintiffs commenced a similar action under U.K. law, in the U.K., against nine dismissed defendants.[5] In response to this new avoidance action filed in the U.K., the defendants filed another forum non-conveniens motion on January 19, 2016, and the court concluded that in light of this new U.K. action it is now best to litigate all the claims in one forum.

December 17 2016

By: Derek Piersiak

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re: Arctic Glacier International, Inc v. Arctic Glacier Income Fund, the United States Bankruptcy Court for the District of Delaware ruled that distributions would be made to unitholders as of the bankruptcy plan’s “Unitholder Distribution Record Date,” and not to the persons who held the units as of FINRA’s ex-date, which fell after the record date.[1] The ex-date is the date on and after which a security is traded without a specific dividend or distribution.[2] Under Arctic Glacier’s reorganization plan, “any distribution, no matter its size, must be made to those who [held] units as of the Unitholder Distribution Record Date, which must be at least 21 days prior to the date on which the distribution is actually paid out, i.e., the payable date.”[3] The plaintiffs purchased units after the plan’s record date.[4] When Arctic Glacier made distributions to those who held units as of the record date, the plaintiffs sued Arctic Glacier, alleging that under U.S. securities laws, Arctic Glacier should have made distributions to the plaintiffs.[5]

December 17 2016

By: Dylan Lackowitz

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Like other states, New Jersey allows third parties to purchase tax liens at auction.[1] These liens against real property are a result of property owners failing to pay local property taxes.[2] Successfully bidding on the lien at auction gives the purchaser the right to foreclose on the property and to seek a judgment on the debt note.[3] In New Jersey, the bidding begins at 18% interest, and each bid lowers the interest rate that would have been assessed on the tax debt.[4] Once the bidding reaches 0%, the bidding parties will then bid on a premium payable to the municipality holding the lien.[5] The party that wins at auction pays the municipality the tax debt owed by the delinquent property owner and any premium incurred during the bidding process in exchange for the tax lien, as evidenced by a tax sale certificate and its accompanying rights.[6] New Jersey law, however, also provides that any holder of a tax sale certificate, who knowingly charges or exacts an excess fee in connection with the redemption of any tax sale certificate, shall forfeit such tax sale certificate to the person who was charged such excessive fee.[7] In In re Princeton Office Park, L.P., the United States Court of Appeals for the Third Circuit held that the United States Bankruptcy Code (the “Code”) does not preempt state law regarding the allowance of claims.[8] Therefore, the Third Circuit held that Plymouth Park Tax Services LLC’s (“Plymouth”) claim in bankruptcy against Princeton Office Park L.P. (“Princeton”) was disallowed because Plymouth charged Princeton an excessive fee in connection with the redemption of a tax sale certificate.[9]

December 17 2016

By: Colleen Angus-Yamada

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Almost thirty years after the Bankruptcy Court for the Southern District of New York confirmed the Chapter 11 plans of Johns-Manville Corporation (“Manville”) and Manville Forest Products (“MFP”), pursuant to which creditors were enjoined from pursuing asbestos claims against them, a plaintiff sought to recover from Graphic Packaging International (“Graphic”), a purported successor of MFP. In In re Johns-Manville Corp.,[1] the Bankruptcy Court enjoined Ms. Berry from pursuing asbestos claims arising from her exposure to asbestos on her husband’s work clothes.[2] According to the Bankruptcy Court, because Graphic is a successor of MPF, a bankruptcy debtor and a wholly-owned subsidiary of Manville, Ms. Berry must first pursue her asbestos claims against the Manville Personal Injury Trust (the “Trust”) in accordance with the Chapter 11 Plan (the “Manville Plan”).[3]

December 17 2016

By: William Accordino

St. John’s Law Student

American Bankruptcy Institute Law Review Staffer

In In re Lehman Brothers Holdings Inc. (“Lehman”), Judge Shelley C. Chapman of the United States Bankruptcy Court for the Southern District of New York dismissed a complaint filed by Lehman Brothers Holding Inc. (“LBHI”) and Lehman Brothers Special Financing Inc. (“LBSF”) challenging the early termination of forty-four credit default swap agreements.[1] The complaint alleged the subsequent liquidation of the collateral underlying those agreements after the early termination and the distribution of those proceeds violated the Bankruptcy Code (“Code”) despite LBSF’s default.[2] Of the forty-four swap agreements, the court found five contained provisions that “effected an ipso facto modification of LBSF’s rights . . . .”[3] However, the distributions from those transactions were protected by the Code’s safe harbor provision.[4] Judge Chapman found the priority provisions in the other thirty-nine swap agreements did not operate as ipso facto clauses because they did not modify any rights of LBSF.[5] The payment priority for those agreements was not set at any time prior to the termination of the swap, thus no right to payment priority could be modified by a termination.[6] As a result, all nineteen counts of the complaint were dismissed for failure to state a cause of action.[7]

December 16 2016

By: Andrew Brown

St. John’s Law Student

American Bankruptcy Institute Law Review Staffer

Educational loans made, insured, or guaranteed by a governmental unit are not dischargeable in a chapter 7 bankruptcy case, unless the debtor obtains a hardship determination.[1] Thus, it is very difficult to discharge student loans through a bankruptcy case. This is true even if the loan is made, insured, or guaranteed by a foreign governmental unit. In the case of In re Mulley, the Bankruptcy Court for the Central District of California determined that government guaranteed student loans, made pursuant to the Canada Student Loans Act (“CSLA"), were non-dischargeable under the United States Bankruptcy Code.[2]

December 16 2016

By: Lisa Strejlau

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Chapter 11 airline cases, a court will typically balance the interests of debtors and creditors in determining the method, timing and condition of collateral returns and whether or not the parties must comply with the underlying contractual obligations. In In re Republic Airways Holdings, Inc.,[1] the United States Bankruptcy Court for the Southern District of New York held that a debtor is not required to comply with underlying contractual requirements for the return of aircraft and engines as collateral.[2] After filing for Chapter 11, Republic Airways Holdings, Inc. (“Republic”) sought to surrender or abandon certain aircrafts and engines subject to liens of Citibank, pursuant to an agreement to secure Republic’s obligations with respect to a credit and guaranty agreement.[3] Republic moved for an order authorizing them to (i) transfer title to and abandon certain aircrafts and engines and reject a related aircraft lease, and (ii) to fulfill their obligations under a certain engine purchase agreement and directing Citibank to cooperate with the closing of that agreement.[4]

November 20 2016