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Exposing the Lack of Uniformity in U.S. Bankruptcy Law: Puerto Rico’s Own Municipal Bankruptcy Law Preempted by Chapter 9

By: Matthew Repetto

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Franklin v. Puerto Rico , the First Circuit held that Puerto Rico’s effort to restructure the debt of its public utilities through the enactment of its own municipal bankruptcy law, the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (“Recovery Act”), was preempted by Section 903(1) of the United States Bankruptcy Code.[1] Amid the most serious fiscal crisis in its history, Puerto Rico’s public utilities are currently at risk of becoming insolvent.[2] Unlike states, Puerto Rico is a territory and “may not authorize its municipalities . . . to seek federal bankruptcy relief under chapter 9 of the U.S. Bankruptcy Code.”[3] Thus, the Recovery Act was Puerto Rico’s attempt to “fill the gap” by providing relief on its own.[4] The Recovery Act was enacted to mirror chapter 9 and chapter 11 of the United States Bankruptcy Code.[5] Those in favor of the Recovery Act argued that preemption would leave Puerto Rico with no means of relief.[6] However, the First Circuit disagreed, and noted that Puerto Rico could, as it had already, seek relief directly from Congress.[7]

Smoke & Mirrors: Bankruptcy Relief Remains Elusive for Marijuana Businesses and Their Creditors

By: Todd Kingston Plummer

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Medpoint Management , the United States Bankruptcy Court for the District of Arizona held that cause existed under Section 707(a) of the United States Bankruptcy Code (“Bankruptcy Code”) to dismiss an involuntary chapter 7 petition filed against a bankrupt medical marijuana distributor.[1] Although Arizona permits its Department of Health Services to register dispensaries “operated on a not-for-profit basis” for the legal sale of marijuana,[2] the drug remains a Schedule I substance under the federal government’s Controlled Substances Act (“CSA”).[3] Because Arizona law requires dispensaries to maintain a nonprofit nature, there has been a “proliferation of dispensary-management entities which serve as repositories of dispensary revenues.”[4] When Medpoint Management LLC, a marijuana dispensary, defaulted on several loans and obligations, a group of creditors filed an involuntary chapter 7 petition against Medpoint.[5] The petitioning creditors’ claims against Medpoint included unpaid amounts under two promissory notes, unpaid fees arising under two distinct consulting agreements, and over $500,000 in outstanding loans.[6] Medpoint moved to dismiss arguing that the “unclean hands doctrine” prevents not only any marijuana-related business but also any of their creditors from seeking relief from the federal bankruptcy courts.[7] At a hearing on Medpoint’s motion, the United States Trustee voiced staunch concern regarding a trustee’s ability to administer a bankruptcy estate consisting of substances that are illegal under federal law: “So, you’re going to ask a trustee to look at a management contract for illegal activities, essentially. So what is that trustee going to do?”[8] The court agreed with Medpoint and the United States Trustee and dismissed the involuntary petition.[9]

Notice to Employees May be Satisfied by Publication

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]

It’s OK to Be Selfish: In re Monticello and Courts’ Continuing Deference to Creditors’ Interests

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.

Discretionary Automatic Stays “Pave” Way for More Litigation

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.

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