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When a Priority is Not a Priority

By: Lindsay Lersner


St. John’s Law Student


American Bankruptcy Institute Law Review Staff


The culmination of a chapter 11 case is typically a plan that provides for payment to creditors in accordance with the priority scheme in Section 507 of the United States Bankruptcy Code (“Code”).[1] In In re Jevic Holding Corp. , the Third Circuit held that in certain rare circumstances, bankruptcy courts have the discretion to approve structured dismissals, which do not comply with Section 507 of the Code.[2] A structured dismissal is a settlement proposed to the court that provides for the distribution of the debtor’s assets to creditors.[3] In In re Jevic , the debtor proposed a structured dismissal after reaching a consensus with a majority of its creditors.[4] The Jevic truck drivers (“Drivers”), former employees of Jevic with a Worker Adjustment and Retraining Notification (“WARN”) claim,[5] however, did not agree to the settlement.[6] In opposing bankruptcy court approval of the settlement and the structured dismissal, the Drivers argued that (1) the Code does not allow for structured dismissals and (2) the settlement paid the creditors with claims junior to the Drivers’ WARN claims and therefore violated the priority scheme established under Section 507.[7] Bankruptcy settlements generally follow the absolute priority rule, which requires that creditors be paid in the order of their priority under Section 507.[8] The bankruptcy court overruled the Drivers’ objection and approved the settlement providing for the dismissal of the debtor’s chapter 11 case upon payment of certain administrative and tax expenses which were lower in priority than the Drivers’ claims.[9] On appeal, the district court affirmed the bankruptcy court’s decision.[10] The Drivers appealed again, and the Court of Appeals for the Third Circuit also affirmed.[11]

A Showing of Gross Recklessness Satisfies Section 523(a)(2)(A): Denying Deceivers the Ability to Discharge Debts Related to Fraudulently Obtained Funds

By: Megan Kuzniewski

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

11 U.S.C. Section 523 lists certain debts that may not be discharged by a debtor’s bankruptcy.[1] In particular, 11 U.S.C. Section 523(a)(2)(A) (“Section 523(a)(2)(A)”) provides that a debtor who files a bankruptcy will not be discharged of debts that were obtained by “false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.”[2] False representations, such as those described in Section 523(a)(2)(A), carry a scienter requirement which requires that it be shown that an individual knowingly made false statements or representations.[3] In In re Bocchino , the Court of Appeals for the Third Circuit found that gross recklessness satisfies the scienter requirement of Section 523(a)(2)(A).[4] In S.E.C. v. Bocchino , the Securities and Exchange Commission (the “SEC”) filed a lawsuit against Bocchino, a stockbroker, in the District Court of the Southern District of New York.[5] The district court found Bocchino civilly liable for “inducing investors via high pressure sales tactics and material misrepresentations” and entered a judgment against him totaling $178,967.55, including disgorgement of fees, interest, and civil penalties.[6] Thereafter, Bocchino filed for chapter 13 bankruptcy protection.[7] The SEC petitioned the bankruptcy court for a judgment declaring the judgments against Bocchino nondischargeable under Section 523(a)(2)(A).[8] The SEC argued that Bocchino had obtained the funds “by… false pretenses, a false representation, or actual fraud.”[9] Bocchino had sought investors for two ventures that turned out to be fraudulent.[10] He began seeking out investments without doing any independent research into the ventures, despite there being cause for suspicion.[11] The bankruptcy court found that, although “Bocchino did not knowingly make any false statements,” the scienter requirement of Section 523(a)(2)(A) “may be satisfied by grossly reckless behavior.”[12] The bankruptcy court discharged the civil penalty portion of the judgment but concluded that the remaining portions of the judgment were nondischargeable under Section 523(a)(2)(A).[13] Bocchino appealed this finding.[13] On appeal, the district court affirmed the bankruptcy court’s decision,[15] and thereafter, the Third Circuit also affirmed the lower court.[16]

The Great Euro Siphoning Stratagem: In re Hellas Telecommunications (Luxembourg) II SCA

By: Peter Collorafi

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In August 2015, the United States Bankruptcy Court for the Southern District of New York determined, inter alia, that the Joint Compulsory Liquidators for Hellas Telecommunications (Luxembourg) II SCA (“Hellas II”) could amend their original complaint to include a foreign fraudulent transfer claim under Section 423 of the United Kingdom Insolvency Act of 1986 (“Section 423”) against certain United States defendants. The plaintiffs filed their initial complaint seeking to avoid and recover an initial transfer of approximately €1.57 billion made by Hellas II to its parent entity and a subsequent series of transfers totaling €973.7 million made to several named defendants and an unnamed class of transferees. The plaintiffs’ initial complaint contained actual and constructive fraudulent transfer claims under New York law in addition to an unjust enrichment claim under unspecified law. The court dismissed the plaintiffs’ New York law fraudulent transfer claims for lack of standing and, consequently, the plaintiffs sought to amend their complaint.

Contract Interpretation Governs Success Fee Dispute

By: Nicolas Berg

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In certain instances, a professional, such as a financial advisor, may contract the right to receive a “success fee” from a debtor in bankruptcy.[1] The courts have established different tests for awarding a success fee.[2] In In re Valence Technology , the United States District Court in the Western District of Texas held that KPMG was entitled to a success fee from Valence Tech for closing a $50 million dollar debt-equity conversion, but it was not entitled to a similar fee for closing a $20 million capital loan.[3] After filing for chapter 11 bankruptcy, Valence Tech hired KPMG to assist with necessary financial restructuring advice.[4] Pursuant to their agreement, if KPMG’s work resulted in “any consideration” from Valence Tech’s primary financier, Berg & Berg, KPMG would be entitled to a “success fee” of 1.25% of the value of that consideration or no less than $500,000.[5] Valence Tech received two payments from Berg & Berg: (1) a $50 million debt-to-equity conversion and (2) a $20 million capital loan.[6] While KPMG contended that it was entitled to the 1.25% success fee for both payments, Valence Tech argued that it should not have to pay the success fee for either payment.[7] The bankruptcy court concluded that under the agreement KPMG was entitled to the success fee for the debt-to-equity conversion.[8] The court, however, denied KPMG’s request for the success fee for the capital loan.[9] Valence Tech appealed the bankruptcy court’s ruling to the district court maintaining that KPMG was not entitled to a success fee for either transaction while KPMG cross-appealed to argue for payment of the success fee in connection with the capital loan.[10] To settle the dispute, the district court analyzed the agreement to determine whether the capital loan should be included in the meaning of “any consideration.”[11] Noting the sophistication of the parties, the district court found the contract described two potential scenarios: (1) a “Private Placement” coming from any party other than Berg & Berg resulting in a 2.5% fee for KPMG, and (2) a “Private Placement” coming from Berg & Berg reducing KPMG’s fee to 1.25%.[12] The district court reasoned that either way the contract defined “Private Placement” as having “Private Placement Value,” which necessarily included equity linked financing.[13] Therefore, according to the district court, the $50 million debt-equity conversion qualified as a “Private Placement,” which entitled KPMG to the agreed upon 1.25% “success fee.”[14] The $20 million capital loan did not qualify because it was not linked to any equity.[15]

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