Blogs

By: Matthew McNamara

St. John's Law Student

American Bankruptcy Institute Law Review Staff

The Delaware district court has affirmed a bankruptcy court decision extending the settlement payment exception to the trustee’s avoiding powers to insulate from attack a leveraged buyout (“LBO”) involving a non-public company in Brandt v. B.A. Capital LP (In re Plassein International Corporation).

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 The Plassein trustee sought to avoid transfers to the selling shareholders under Delaware fraudulent transfer law and section 544 of the Bankruptcy Code.

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  Section 546(e), however, states that a settlement payment falls under an exemption to section 544 and thus the trustee may not void the transfer.

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  Plassein follows and expands upon a line of cases adopting a broad interpretation of the term “settlement payment”.  The Third Circuit has adopted an extremely broad interpretation of the term, noting that it encompasses “almost all securities transactions”.

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  Earlier decisions imposed policy based limitations on the section 546(e) settlement payment exemption in order to exclude payments made to shareholders as part of an LBO.

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  The court in In re Resorts International

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, however, made it clear that “a payment for shares during an LBO is obviously a common securities transaction, and [the court] therefore [held] that it is also a settlement payment for the purposes of section 546(e)”.

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  The shares in question in In re Resorts, however, were securities of a publicly traded company.  The court failed to specify whether the settlement payment exemption in an LBO was limited to shares of publicly traded companies or might also protect LBO’s involving non-public companies. 

By: Michael Maffei

St. John's Law Student

American Bankruptcy Institute Law Review Staff

In a good news, bad news decision for prime brokers, the District Court in In re Manhattan Investment Fund v. Gredd

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held that a prime broker is an initial transferee of funds held in a customer’s margin account, but recognized a “robust” good faith defense to transferee liability.  In this appeal from an award of summary judgment,

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Bear Sterns had receive approximately $141 million to cover margin calls for a hedge fund that, in reality, was a “Ponzi” scheme.  In a holding that spells trouble for prime brokers, the Court rejected the argument that a prime broker is a “mere conduit” and lacks “dominion and control” over the funds in a margin account.  Applying the Second Circuit’s “nuanced” approach, the Court rejects the narrow view that a party must have unfettered control over funds in order to be an initial transferee.

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  Since Bear Sterns could use the margin funds to protect itself against possible losses, it did not qualify as a mere conduit.  Further, the discretionary authority given it as prime broker to close out positions, which was standard in the industry, was sufficient “control” to trigger transferee status.

By: Craig Lutterbein

St. John's Law Student

American Bankruptcy Institute Law Review Staff

The Seventh Circuit, in Airadigm Communications, Inc. v. Federal Communications Comm’n. (In re Airadigm Communications, Inc.), has joined the circuits permitting the non-consensual release of a non-debtor third party from its obligations to creditors in chapter 11 reorganization.

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   The case revolved around Airadigm Communication’s purchase and financing of fifteen personal communication services licenses from the FCC.

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  When Airadigm began to fail the company filed for reorganization, and the FCC cancelled the licenses.

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  During Airadigm’s first chapter 11 reorganization, it received financing from Telephone and Data Services (TDS), who agreed to repay the FCC the debt owed on the licenses if the FCC reinstated the licensees.

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  Although the FCC did not originally reinstate the licenses, in FCC v. Next-Wave Personal Communications Inc., the Supreme Court ruled that FCC could not legally cancel licenses simply because a communication company files bankruptcy.

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  Thus, the FCC was forced to reinstate Airadigm’s licenses, which caused Airadigm to file a second Chapter 11 case.

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  The plan confirmed by the bankruptcy court contained a release protecting TDS from all liability “in connection with” the reorganization except willful misconduct.

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  On appeal, the Seventh Circuit found that the release was necessary and appropriate because the release was narrowly drawn and TDS was making a substantial contribution that was necessary for Airadigm’s reorganization to be successful.

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By: Robert Griswold

St. John's Law Student

American Bankruptcy Institute Law Review Staff

In U.S. v. White,

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a debtor owed $8,922.40 to the Internal Revenue Service (“IRS”), $1,780.52 of which was considered priority debt.

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  The debtor filed for chapter 13 bankruptcy in February of 2004 and claimed as exempt a $3,148 tax overpayment for the 2003 tax year.

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  The IRS moved to lift the automatic stay in order to allow it to setoff the entire 2003 overpayment against its pre-petition tax claim.

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  In the decision appealed from, the Pennsylvania bankruptcy court allowed the IRS to setoff only to the extent of the priority debt, requiring the remainder of the overpayment to be returned to the debtor as a tax refund.

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  The district court reversed, holding that the IRS could setoff the entire 2003 overpayment.

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  The court acknowledged a split of authority regarding whether the IRS’ right to setoff non-priority debt is allowed against exempt assets of the debtor or whether its right to setoff is limited to priority claims,

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but found the reasoning behind the cases allowing setoff of the overpayment against entire pre-petition claim more compelling.

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By: Meagan Mahar

St. John's Law Student

American Bankruptcy Institute Law Review Staff

Despite conflicting New York case law, the Delaware Bankruptcy Court in In re Atlantic Gulf Comtys. held that funds in an escrow account are not property of the estate even where the funds were deposited by the debtor.

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  Only the debtor’s contingent right to recover the funds upon satisfying the escrow conditions is considered estate property.

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