Business Reorganization

Overpayment of Secured Creditor Violates Absolute Priority Rule

By: Peter N. Chiaro

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

The United States Bankruptcy Court for the Eastern District of Pennsylvania, in In re Brewery Park Associates, L.P.,[1] recently affirmed that the “absolute priority rule” is violated when a secured creditor receives more than the value of its claim under a chapter 11 plan.  Following the expiration of the debtor’s exclusivity, the Retirement Fund (“TRF”), a secured creditor, proposed its own chapter 11 plan.[2]  After failing to gain approval from all classes of impaired creditors, it sought to cramdown its proposed chapter 11 plan under section 1129(b).[3]  TRF’s plan allowed TRF to obtain a parcel of property that was worth, by its own estimate, between $5 million and $6 million in exchange for a credit bid of $2 million.[4]  Further, because TRF’s secured claim was roughly $5.2 million, TRF’s low credit bid would also give it deficiency claims against the loan guarantors.[5]  The court determined that TRF’s plan would likely overpay TRF’s allowed claim, and therefore the plan could not be confirmed because it was not fair and equitable.[6]

Class Certification Continues to Gum up the Works in Bankruptcy

By: Ravi Vohra

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Motors Liquidation Co.,[1] the Bankruptcy Court for the Southern District of New York denied class certification and disallowed two claims set forth by the Botha and Balintulo claimants (the “Class Claimants”) in General Motors Corporation’s (“Old GM”) chapter 11 proceedings.[2] The claims were first raised prepetition by 26 named plaintiffs in two separate groups, (the “Botha Plaintiffs” and the “Balintulo Plaintiffs”), and Old GM filed its chapter 11 petition while those lawsuits were still pending. The Botha and Balintulo Plaintiffs then filed proofs of claims against the corporation.[3] More than twelve months after Old GM’s chapter 11 filing and eight months after the bar date, the Class Claimants moved for class treatment and Old GM then sought to disallow the class claims.[4] Among other things, the Class Claimants alleged that they were victims of the infamous system of apartheid in South Africa, and that Old GM aided and abetted the perpetrators of the apartheid system in causing the claimants’ injuries.[5]

In re Lothian Oil Inc. Non-Insider Debt Claims May Be Recharacterized as Equity Under Section 502(b)(1)

 By: David N. Saponara

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Shifting the focus of the recharacterization analysis, the Fifth Circuit in Grossman v. Lothian Oil Inc. (In re Lothian Oil Inc.)[1] relied upon section 502(b)(1) and applicable state law, instead of the section 105(a) federal equitable power, to recharacterize non-insider debt claims as equity.[2] In doing so, the Fifth Circuit reversed the district court, which had found that recharacterization is only appropriate where the claimant is a corporate insider.[3]   

State Law Determines Alter Ego Liability for Federal Tax Liens

By: Edmund Witter
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently, in Old West Annuity and Life Ins. Co. v. Apollo Group,[1] the Eleventh Circuit held state law determined whether a court could pierce the corporate veil under an alter ego theory even though a federal tax lien was at issue.[2] In reaching its holding, the Eleventh Circuit had to decide whether the need for a uniform federal rule justified applying the federal common law standard for determining alter ego liability or if state law applied by virtue of a state’s right to define property interests of its taxpayers.[3]

Attorney-Client Privilege Transfers to the Post-Bankruptcy Company

By: Melissa Schneer
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently, in Schleicher v. Wendt,[1] a magistrate judge in Indiana held that a post-bankruptcy corporation that acquired substantially all of the pre-bankruptcy corporation’s business operations also acquired the pre-bankruptcy corporation’s right to assert the attorney-client privilege.[2]  Schleicher involved a class action against four senior executives of a company, based on that company’s decline into bankruptcy.[3] The plaintiffs moved to compel the production of thousands of documents, which the defendants claimed were privileged.[4] The parties disputed whether control of the pre-bankruptcy corporation (the “Old Corporation”) — accompanied by the attorney-client privilege — passed through bankruptcy proceedings to the post-bankruptcy corporation (the “New Corporation”).[5] The court noted that the reorganized New Corporation did not obtain every aspect of the Old Corporation.[6] The New Corporation, however, did acquire all of the Old Corporation’s assets, sources of revenue and expense, and management as part of the reorganization.[7] As a result, the court opined that the New Corporation essentially gained control over the Old Corporation’s business operations.[8] Consequently, the court held that the New Corporation acquired the Old Corporation’s right to assert the attorney-client privilege.[9]

Section 1129(d)s Firm Stance The Effect of Reorganization as a Vehicle for Tax Avoidance

By: Jon H. Ruiss, Jr., CPA
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently, in In re South Beach Securities, Inc., the Seventh Circuit affirmed the old adage that a bankruptcy court could not confirm a chapter 11 plan when the plan’s sole purpose is designed to make use of the debtor’s net operating losses (NOLs) as a tax benefit for the creditor.[1] The plan intended to obtain a tax deduction for the debtor’s sole creditor through the plan.[2] In a scolding opinion by Judge Posner, the court held that the plan violated of section 1129(d), and therefore, was proposed in bad faith.[3]  Section 1129(d) states that a plan cannot be confirmed when its principal purpose is tax avoidance.[4]

Chapter 11 Gives Retirees More Than They Bargained For

By: Daniel J. Opisso
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently, in In re Visteon, the Third Circuit held that a chapter 11 debtor had to follow section 1114 of the Bankruptcy Code when terminating a retiree benefit plan, notwithstanding the terms of an existing collective bargaining agreement (“CBA”) that permitted unilateral termination.[1] At the time Visteon filed for chapter 11, the CBA provided that retired employees would receive medical benefits until death.[2] However, the CBA gave Visteon the discretionary power to unilaterally terminate or modify any retiree benefits at any time.[3] Despite Visteon’s apparent reservation of the right to terminate retiree benefits, the Third Circuit held that Visteon could not do so in its bankruptcy case without complying with section 1114, which sets forth a specific procedure for termination or modification of retiree benefits.[4]

Sixth Circuit Affirms Bankruptcy Courts Retroactive Conversion Order

By: Brandi Sinkovich
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
The Sixth Circuit recently held that a bankruptcy court had the equitable power under section 105(a) of the Bankruptcy Code (the “Code”) to retroactively convert a chapter 11 case to chapter 7.[1] In Mitan v. Duval (In re Mitan), debtor Kenneth Mitan filed a chapter 11 petition in the Bankruptcy Court for the Central District of California that unsecured creditors, which had been awarded judgments against debtor in connection with a fraudulent business scheme the debtor operated, successfully moved to transfer to the Bankruptcy Court for the Eastern District of Michigan, where debtor resided and several creditors’ businesses were located.[2] After none of the parties appeared at either the status conference or the subsequent hearing to show cause why the case should not be dismissed or converted to chapter 7, the court dismissed the case. Later the court granted the creditors’ reconsideration motion in which the creditors argued that their absence was inadvertent while debtor's absence was calculated to result in dismissal of the case, which had been previously denied to the debtor.[3] At the hearing on the reconsideration motion, the bankruptcy court reopened the case and sua sponte converted it to chapter 7 after finding that it was necessary for a trustee to investigate debtor’s affairs in light of debtor’s alleged scheme to avoid his obligations and abscond with assets hidden overseas.[4]
 

RCRA Clean-Up Injunction Is Not Dischargeable in Bankruptcy

By: Christopher J. Palmese
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
The Federal Resource Conservation and Recovery Act (the “RCRA”) allows the government and private citizens to force parties responsible for the “handling, storage, treatment, transportation or disposal of any solid waste or hazardous waste” to take appropriate action to prevent the potential dangers posed by materials that may “present an imminent and substantial endangerment to health or the environment”.[1] In 2008, the district court for the Southern District of Illinois awarded the Environmental Protection Agency an injunction under section 6973 of the RCRA that ordered Apex Oil Corp. Inc. (“Apex”) to mitigate groundwater contamination at a site where Apex’s corporate predecessor had caused millions of gallons of oil to be trapped underground.
 

Triangular Setoff Not Permissible in Bankruptcy

By: Paul Clancy
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
Recently, the United States Bankruptcy Court for the District of Delaware held that the Bankruptcy Code does not permit triangular setoff of debts, notwithstanding pre-petition contracts among parties that contemplate such an exchange.[1]   In In re Semcrude, L.P., Chevron Products Company (“Chevron”), the creditor, had entered into separate petroleum-related contracts with three affiliated debtors: Semcrude, L.P., SemFuel, L.P., and SemStream, L.P.[2] Each contract expressly allowed the parties to setoff debts related to the contract or to any other contract between the parties and their affiliates.[3] At the time of the debtors’ bankruptcy filings, Chevron owed a debt to Semcrude, L.P., and was owed a debt from each of SemFuel, L.P. and SemStream, L.P.[4] Chevron moved for relief from the automatic stay to effect a triangular setoff of the debts among itself and the debtors, arguing that the terms of the contracts permitted such a setoff.[5] The court denied Chevron’s motion and held that, regardless of the contract language at issue, section 553 plainly does not allow triangular setoff.[6] The court determined that the contract arrangement did not satisfy the section 553 requirement that debts be mutual in order to be setoff, and that no exception existed that would allow parties to contract around the mutuality requirement.[7]
 

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