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By: Naffie Lamin

St John’s University Law Student

American Bankruptcy Institute Law Review Staff

In In re Nortel Inc. , the Bankruptcy Court denied a motion filed by former Canadian employees of the debtor Nortel Networks’ Canadian affiliates (the “Canadian Employees”) seeking leave to file proofs of claim after the expiration of the final date to file a proof of claim in the United States (the “Bar Date”).[1] On January 14, 2009, the United States Nortel affiliates (the “U.S. Debtors”) filed voluntary petitions of relief under chapter 11 of the Bankruptcy Code.[2] On the same day, the Canada affiliates (the “Canadian Debtors”) filed insolvency proceedings under Canada's Companies' Creditors Arrangement Act (“CCCAA”).[3] Pursuant to the rules of the CCCAA, the Ontario Superior Court appointed Ernst & Young Inc. (the “Monitor”) as monitor and Koskie Minsky, LLP (“Koskie Minsky”) as the law firm to represent the interests of all former employees of the Canadian Debtors, including the Canadian Employees.[4]

January 5 2016

By: Corey Trail

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Monticello Real Estate Investments, LLC, a bankruptcy court held that a creditor did not act in bad faith when it purchased unsecured debt from another creditor in order to have the votes necessary to veto a debtor’s reorganization plan. In Monticello, the debtor was a realty investor that took out a $1.185 million loan to finance the purchase of an office center. After the debtor failed to satisfy the loan by its five year maturity date, the bank and the debtor entered into two loan modifications that extended the maturity date of the loan. The debtor soon failed to adhere to the loan modifications and the bank began foreclosure proceedings. In response, the debtor filed a chapter 11 bankruptcy petition and requested authority to use cash collateral. The court granted the debtor’s request and instructed the parties to submit an agreed upon order authorizing the use of cash collateral that set forth a tentative agreement to restructure the bank’s debt. As part of the agreement, the bank required the debtor to sign two promissory notes that it claimed contained “standard loan documents.” However, the debtor rejected the standard loan forms and responded with a modified loan agreement, which the bank rejected. The debtor filed the new agreement (“the Plan”) without the required new loan documents. The court issued a second cash collateral order, which was again dependent on the execution of new loan documents. Subsequently, the court scheduled a hearing to confirm the Plan. Both the bank and a credit card company filed claims against the debtor. In order to ensure that the debtor’s Plan was not able to acquire the requisite amount of votes, the bank purchased the claim from the credit card company to obtain enough votes to block the Plan’s confirmation. The bank explained that had the Plan been confirmed, the FDIC would negatively rate the debt. The debtor moved to have the bank’s ballots designated pursuant to 11 U.S.C. section 1126(e), stating that the bank’s desire to dictate the terms of the new loan documents, the cessation of negotiation on the new terms before the expiration deadline, and the purchasing of other claims exhibited a lack of good faith required by the statute. The court however, disagreed, finding that because the execution of a new loan agreement on the bank’s terms was crucial to protecting the bank’s interests, the purchase of other claims to ensure that the Plan would not receive the necessary votes was not in bad faith.

January 5 2016

By: Joanna Matuza

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Pavers & Road Builders District Council Welfare Fund v. Core Contracting of NY, LLC, the Eastern District Court of New York exercised its discretion with regard to automatic stays in its holding that a corporation’s alter ego status does not permit an automatic stay for non-debtors. In Pavers & Road Builders District Council Welfare Fund, administrators of an Employee Retirement Income Security Act (“ERISA”) pension fund brought suit against four related corporate defendants for “delinquent contributions and shifting of assets to avoid having to pay workers.” Canal Asphalt, the defendant-debtor, filed a voluntary petition for chapter 11 relief in the Southern District of New York. Thus, the cause of action was automatically stayed against the debtor, pursuant to section 362(a)(1) of the Bankruptcy Code. The other defendants argued in a letter to the District Court of Eastern District of New York that because they are alter egos of one another, the automatic stay arising in the debtor’s case should prevent the action from proceeding against all defendants. The Eastern District court disagreed, and instead, issued an order stating that the automatic stay only enjoined actions against debtors or their property.

January 5 2016

By: Melanie Lee

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

At the Constitutional Convention, the States agreed not to assert any sovereign immunity defense “in proceedings pursuant to ‘Laws on the subject of Bankruptcies.’”[1] The agreement was made to “prevent competing sovereigns’ interference with discharge[ing]…” debts. [2] The Seventh Circuit, in In re Bulk Petroleum , held that Kentucky could not assert sovereign immunity as a defense to a debtor’s request to an excise tax refund.[3] There, Bulk Petroleum Corp., prior to filing its chapter 11 petition, had lost its license as a “gasoline and special fuels dealer” in the state of Kentucky.[4] As a gasoline and special fuels supplier, the debtor, pre-petition, was entitled to a refund for the excess fuel taxes it paid.[5] The loss of the license did not require the debtor to cease business in Kentucky or permit the debtor to ignore its tax obligations.[6] However, according to the Kentucky Department of Revenue (“KDOR”), only a “taxpayer” within the meaning of the statute was entitled to a refund.[7] The KDOR refused to refund the fuel taxes to the debtor because the debtor “was unlicensed” and therefore, not a ’taxpayer.’[8] The Seventh Circuit disagreed and found that while the debtor was unlicensed, the debtor was still required to pay the fuel taxes to its upstream suppliers.[9] The suppliers were authorized to add the fuel tax to the debtor’s invoices because of their capacity as “trust officer[s] of the state” under Kentucky Revised Statute 138.280.[10] Because this statute required suppliers to collect, hold, and turn over the tax collected to Kentucky, the court held that the debtor had paid the fuel tax, via its suppliers, despite being unlicensed.[11] Consequently, the debtor was entitled to any excess tax paid on the gasoline, which ended up being sold outside of Kentucky.[12] Despite having not been raised by either party, the Seventh Circuit considered the possibility of Kentucky asserting sovereign immunity, under the Eleventh Amendment, as a defense to the state having to issue the refund.[13] According to the Seventh Circuit, that defense would have failed because the States “agreed in the plan of the [Constitutional] Convention not to assert any sovereign immunity defense they might have had in proceedings brought pursuant to ‘Laws on the subject of Bankruptcies.’”[14]

January 5 2016

By: Aaron Z. Leaf

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

For over a decade, courts have struggled with how to reconcile sections 363 and 365(h) of the United States Bankruptcy Code (the “Code”). While neither statute working alone in bankruptcy cases presents much challenge, when invoked together some courts have found them to be incompatible. A court cannot simultaneously allow a trustee to sell property “ free and clear of any interest in such property” and allow a lessee to retain all rights that are “appurtenant to the real property for the balance of the term.” The United States Bankruptcy Court for New Jersey recently addressed sections 363 and 365(h) in In re Reval. After years of poor financial performance, Revel AC, Inc. and its partners, filed petitions under chapter 11 of the Code. Debtors subsequently filed a motion under section 365(a) to reject lease agreements with its tenants. In response, IDEA Boardwalk and other lessees gave a notice of their intent to continue to exercise their “possessory leasehold rights under section 365(h).” Upon the debtor’s request, the court thereafter approved a sale of the debtors’ property to Polo North under section 363 of the Code. After finding that the agreement between the Debtors and Tenants were true leases, the court addressed how the sale would affect Tenants section 365(h) possessory rights. The court held that the tenants possessory rights under section 365(h) eviscerates a debtor’s right under section 363of the Code to sell its property free and clear of any interest.

January 5 2016

By: Kristen Lasak

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re SemCrude L.P., the U.S Court of Appeals for the Third Circuit found that the claims of breach of fiduciary duty, negligent misrepresentation, and fraud set forth by limited partners against the co-founder and former President and CEO of SemCrude L.P. were derivative of the claims held by SemCrude’s Litigation Trust. SemCrude L.P. is an Oklahoma-based oil and gas company co-founded by Thomas Kivisto, who allegedly drove the company into bankruptcy due to self-dealing and speculative trading strategies. In July 2008, SemCrude, along with its parent company and certain subsidiaries, filed petitions for relief under chapter 11 with the United States Bankruptcy Court for the District of Delaware. On October 28, 2009, the bankruptcy court issued an order confirming SemCrude’s plan of reorganization, which established a Litigation Trust. The plan specifically transferred the claims belonging to SemCrude’s bankruptcy estate to the Litigation Trust and authorized the Litigation Trust to pursue SemCrude’s claims and distribute any money attained to SemCrude’s creditors. The Litigation Trust asserted thirty claims, including breach of fiduciary duty, breach of contract, fraudulent transfer, and unjust enrichment, against Kivisto and certain Semcrude officers. On November 19, 2010, the bankruptcy court approved a $30 million settlement agreement, which also incorporated a mutual release of all claims. Particularly, the Litigation Trust released Kivisto and the other officers from being accountable to any party for “contribution or indemnity relating to the released claims.”

January 5 2016

By: Justin A. Klingenberg

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Boellner v. Dowden, the Eighth Circuit held that it is within the discretion of the bankruptcy court to order substantive consolidation of spouses’ bankruptcy estates when they file separate petitions for chapter 7 bankruptcy. In Boellner, the debtors, Samuel and Marilyn Boellner, who were married and living separately, each filed their own petition for chapter 7 bankruptcy on the same day. James Dowden was assigned as trustee in their respective cases. In addition to living apart and having individual credit card debt, the debtors “had separate insurance policies, separate interests in business, separate annuities, and separate IRAs….” However, the debtors shared a checking account, several credit cards, a leased car, and had jointly withdrawn funds from IRAs. Additionally, the debtors shared obligations for state and federal taxes and attorney’s fees from a previous civil case. The trustee filed a motion for joint administration and substantive consolidation, arguing that the debtors’ “assets, liabilities, and handling of financial affairs were substantially the same,” and permitting them to “maintain separate bankruptcy estates would prejudice the creditors.” The debtors disagreed and argued that they should be permitted to maintain separate bankruptcy estates because it would allow Samuel, the husband, to choose federal exemptions and Marilyn, the wife, to choose state exemptions. After comparing the schedules filed by each spouse, the bankruptcy court ruled in favor of the trustee, and ordered substantive consolidation. The debtors appealed to the Bankruptcy Appellate Panel and the trustee removed the appeal to the district court, which affirmed the bankruptcy court’s order. Subsequently, the debtors appealed to the Eighth Circuit, contending that the substantive consolidation order was an abuse of the bankruptcy court’s discretion. In determining whether substantive consolidation was appropriate, the Eighth Circuit adopted a two-prong factor test articulated by the Eleventh Circuit that considered “(1) whether there is a substantial identity between the assets, liabilities, and handling of financial affairs between the debtor spouses; and (2) whether harm will result from permitting or denying consolidation.” In assessing the first factor, the Eighth Circuit found that the bankruptcy court’s reliance on the debtor’s statements of financial affairs and bankruptcy schedules was appropriate. In concluding the first factor had been fulfilled and, thus, substantial identity had been established, the Eighth Circuit emphasized the bankruptcy court’s finding it peculiar that Marilyn claimed ownership of the home while Samuel claimed ownership of the household’s goods. In its analysis of the second factor, the Eight Circuit affirmed the bankruptcy court’s finding that the evidence was sufficient to establish harm to creditors, particularly because the debtor’s “separate estates would have significantly less value than if their cases were substantively consolidated and [they] were forced to choose either federal or state exemptions.” Ultimately, the Eighth Circuit held that, since substantial identity had been established and separate estates would greatly prejudice the debtor’s creditors, the bankruptcy court was within its discretion in ordering substantive consolidation.

January 5 2016

By: James M. Kerins

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Pensco Trust Co. v. Tristar Esperanza Props., LLC (In re Tristar Esperanza Props., LLC), the U.S. Court of Appeals for the Ninth Circuit held that a creditors claim, based upon a debtor’s failure to pay an arbitration award, must be subordinated pursuant to section 510 (b) of the Bankruptcy Code. In Tristar, Jane O'Donnell purchased a minority membership interest in Tristar, a limited liability company, and exercised her right to withdraw her membership interest. Subsequently, debtor filed a chapter 11 bankruptcy petition and commenced an adversary proceeding against O'Donnell seeking to subordinate her claims under section 510 (b) of the Bankruptcy Code. O'Donnell insisted that section 510 (b) of the Bankruptcy Code did not apply because the claim was “not for damages, but for a fixed, admitted debt.” Additionally, O'Donnell claimed that section 510 (b) should not apply because the claim “does not arise from the purchase or sale of securities” because she converted her equity interest to a debt claim before debtor filed its bankruptcy petition. The bankruptcy court rejected O'Donnell’s arguments and held that the subordination clause of section 510 (b) “sweeps broadly.” Consequently, the bankruptcy court “broadly interpreted” the phrase “arises from” to mandate subordination whenever there is a “causal relationship between the claim and the purchase” or sale of securities. Furthermore, although O'Donnell did not “enjoy the benefits of equity ownership on the date of the petition,” according to the bankruptcy court, since O'Donnell bargained for an equity position she therefore, “embraced the risks that position entails.” On appeal, the Bankruptcy Appellate Panel for the Ninth Circuit[xiii] and the United States Court of Appeals for the Ninth Circuit both affirmed.

January 5 2016

By: Anthony J. Ienna

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Bayou Shores SNF, LLC, a district court found that a bankruptcy court lacked subject matter jurisdiction to thwart the regulation of Medicare and Medicaid funds of a non-compliant debtor. In particular, the district court, siding with the majority view, determined that 42 U.S.C. 405(h) bars bankruptcy courts from interfering with decisions made by the Centers for Medicare and Medicaid Services (“CMS”) relating to Medicare and Medicaid.

January 5 2016

By: Micaela Manley

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Northshore Mainland Services, Inc. , the Bankruptcy Court for the District of Delaware dismissed Bahamian companies’ chapter 11 cases, relating to the construction of the Baha Mar Resort, under the abstention provision of the United States Bankruptcy Code (the “Code”), and refrained from dismissal of the Delaware companies’ chapter 11 case.[1] Construction of the Baha Mar Resort, which included four new hotels, a Las Vegas style casino, and a premier Jack Nicklaus Signature 18-hole golf course, broke ground in February 2011 with completion estimated by November 20, 2014.[2] By 2013 it was clear that the contractors were not going to meet the planned schedule.[3] Almost two years later, the Baha Mar Resort remained incomplete.[4] Subsequently, the debtors filed chapter 11 petitions under the Code with the Delaware bankruptcy court.[5] In addition, the debtors requested recognition of the chapter 11 cases in the Bahamas.[6] The Bahamian Attorney General opposed the debtors’ request for recognition and asked the Bahamian court to issue an order winding up of all the Bahamian debtors’ business.[7] The Bahamian court concluded that subordinating the local proceedings to the Delaware proceedings where the locale had little connection to the debtors would not be equitable.[8] The Bahamian Court thereafter dismissed the winding up proceedings for certain debtors and appointed joint provisional liquidators to seven others.[9] In the meantime, two of the debtors filed motions in the bankruptcy court to dismiss their chapter 11 cases.[10] According to the debtors, the best interests of the debtors and creditors would be served by dismissal of the chapter 11 cases and the continuation of proceedings in the Bahamas.[11] Ultimately, the United States bankruptcy court dismissed the cases of the Bahamian debtors under Section 305(a) of the Code.[12] The bankruptcy court, however, refused to dismiss the chapter 11 case filed by Northshore Mainland Services, Inc., a Delaware corporation.[13]

January 5 2016