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Section 550(a)(2) and a Lesson in the Presumption Against Extraterritorially

Michael Vandermark

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Madoff Securities, the United States District Court for the Southern District of New York recently held that section 550(a)(2) of the Bankruptcy Code does not apply extraterritorially.[1] There, the SIPA trustee sought to recover both funds transferred from Madoff Securities in New York to several Madoff-related foreign feeder funds[2] and, more specifically, subsequent transfers made by those feeder funds to their foreign investors.[3] The trustee argued that because the defendants had allegedly received several million dollars in fraudulent subsequent transfers from the feeder funds, he was entitled to reclaim those funds under section 550(a)(2) of the Bankruptcy Code.[4] In response, Defendants’ argued that section 550(a)(2) does not apply extraterritorially and therefore does not reach those subsequent transfers made from one foreign entity to another.[5] Ultimately, the Madoff Securities court held that section 550(a)(2) cannot be applied against the foreign defendants on an extraterritorial basis.[6]

The Uncertain Future of the Unfinished Business Doctrine

By: Daniel Teplin

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, a federal district court in California issued a decision in Heller Ehrman LLP v. Davis, Wright, Tremaine, LLP[1], which is of great importance to former partners of dissolved law firms, holding that under California law, the unfinished business doctrine does not apply to hourly fee matters.[2] Therefore, the court concluded that the bankruptcy estate of a dissolved law firm did not retain a property interest in the hourly fee matters that were pending at the time the firm dissolved.[3] Heller Ehrman LLP (“Heller”) was a large global law firm before it dissolved in 2008.[4] After Heller defaulted on its revolving line of credit, the partners were unable to continue operating the firm and therefore voted to dissolve the firm.[5] Their dissolution plan included a “Jewel Waiver,” which waived unfinished-business claims for the profits generated by former Heller attorneys from any pending hourly fee matters.[6] After it filed for bankruptcy, the bankruptcy trustee sought to avoid the “Jewel Waiver” as a fraudulent transfer and recover the profits from the firm’s former members’ new firms for the pending hourly fee matters on two grounds. First, pursuant to California law, the trustee argued that the bankruptcy estate had a property interest in pending hourly matters, citing Jewel v. Boxer,[7] because the former members of the dissolved law firm violated their fiduciary duty “with respect to unfinished partnership business for personal gain.”[8] Second, the trustee asserted that two separate public policy considerations supported his claim.[9] The first consideration asserted by trustee was that “preventing extra compensation to law partnerships ‘prevents partners from competing for the most remunerative cases during the life of the partnership in anticipation that they might retain those cases should the partnership dissolve.’”[10] The idea being, that this would allow the firm to operate as one entity, and dissuade its individual members to act purely with their own interest in mind. The trustee argued that the second consideration was that holding that Heller had a property interest in the hourly matters would prevent former partners of firms from “seeking personal gain” by soliciting the firm’s former clients after its dissolution.[11] Ultimately, the court rejected the trustee’s arguments and granted summary judgment in favor of the defendant law firms and against the trustee.[12]

State Sanctioned and Regulated Community Mental Health Center Is Entitled to Chapter 11 Relief

By: D. Nicholas Panzarella

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Seven Counties Services, Inc.,[1] a bankruptcy court held that a Kentucky non-profit corporation designated as a community mental health center (“CMHC”) was not a “governmental unit” and therefore, was eligible to be a debtor in a chapter 11 bankruptcy case.[2] In Seven Counties, the CMHC debtor filed for bankruptcy under chapter 11 of the Bankruptcy Code after the Kentucky General Assembly raised the contribution rate for participants in a state pension system, which the debtor participated in pursuant to a state statute.[3] After filing, the CMHC debtor sought to reject its executory contract with the pension system.[4] In response, the state pension commenced an adversary proceeding seeking (1) a determination that the CMHC debtor was a “governmental unit,” and not a “person,” and thus was statutorily barred from seeking relief under chapter 11 of the Bankruptcy Code and (2) the issuance of a preliminary injunction compelling the CMHC debtor to continue contributing to the pension.[5] The Seven Counties court held that the CMHC debtor was entitled to chapter 11 relief and permitted the CHMC debtor to reject its executory contract with the pension system.[6]

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