mdiaz's blog

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.

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]

By: Adam Lau

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Overseas Shipholding Group, Inc., a bankruptcy court held that rejection of a lease by a debtor constituted a pre-petition breach of the lease and was not a termination of the lease. The debtor, Overseas Shipholding Group, Inc., entered into a lease agreement with TST/Commerz East Building (“TST”) that was set to expire on December 31, 2020. Two years into the lease, debtor subleased a part of the space to Maritime Overseas Corporation (“Maritime”). After filing voluntary petitions under chapter 11, the debtor and Maritime entered into a stipulation with the assignee of TST whereby the debtor and Maritime agreed to reject the lease and the sublease. Maritime then vacated the premises and proceeded to file a claim against debtor for $30,788.32 for return of its security deposit under the sublease, but amended its claim, adding $367,858 for damages from rejection of the sublease, including moving expenses, increased rent, electricity, and legal fees relating to Maritime’s relocation. The debtor objected to the amended claim, and asked the court to disallow the claim for rejection damages and to limit the recovery to the amount of the security deposit. The debtor argued that the rejection of the lease constituted a termination of the lease, which would, under Clause 2 in the sublease, preclude Maritime from recovering rejection damages. Clause 2 provided that, “this Sublease shall terminate (in whole or in part, as applicable) on the date of such termination as if such date had been specified in this Sublease as the Expiration Date and Tenant shall have no liability to Subtenant with respect to such termination.” The debtor relied on Chatlos Systems, Inc. v. Kaplan, where the court held that a debtor’s rejection of a non-residential lease resulted in termination of the lease. In response, Maritime argued the Bankruptcy Code establishes that the rejection of the overlease was not a termination of the lease but merely a pre-petition breach. The court was not persuaded by the debtor’s argument, finding that the Chatlos case was not applicable because that case involved a lessee of the debtor who chose to remain in possession of the property, whereas Maritime did not elect to remain on the premises. However, while the bankruptcy court agreed with Maritime’s argument that the rejection of the lease constituted a breach and not termination, Maritime was still precluded from claiming rejection damages because Clause 22(j) in the sublease provided that the “subtenant shall look solely to Tenant's interests in the Lease to enforce Tenant's obligations hereunder and shall not seek any damages against Tenant or any of the Tenant's Related Parties.”

By: Amanda Hoffman

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Johns-Manville Corporation, the United States Bankruptcy Court for the Southern District of New York enforced orders it issued in 1986, confirming a plan (the “Plan”) of reorganization for Johns-Manville. Pursuant to the Plan, a settlement agreement was reached in which insurers contributed $770 million to a trust benefitting asbestos personal injury claimants. In exchange, the insurers of Johns-Manville, including long-time insurer Marsh USA (“Marsh”), were relieved of all liability related to their insurance of Johns-Manville and the insurers would be protected from claims via injunctive orders of the Bankruptcy Court. Marsh contributed $29.75 million to the trust in exchange for the injunction, which barred future claimants from bringing action against Marsh as an insurer of Johns-Manville. This settlement agreement was approved by the court, resulting in the court entering a confirmation order of the Plan (the “Confirmation Order), and an Insurance Settlement Order, together known as the “1986 Orders”. Under the 1986 Orders, Johns-Manville and its insurers were released from further liability, but present and future claimants could claim against the trust. Part of the settlement agreement included the appointment of a legal representative by the Bankruptcy Court, in order to ensure the rights of future claimants.

By: Arielle Cummings

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

With certain limited exceptions, an individual debtor may have his debts discharged in bankruptcy. Debts resulting from a debtor’s fraud, however, are generally not dischargeable. In In re Glenn, the United States Court of Appeals Seventh Circuit affirmed the lower court’s holding that if a debt is the result of fraud, the court can discharge the debt in bankruptcy if the debtor was not complicit in the fraud and that the court can still discharge the debt even if the fraud was created by the debtor’s agent, provided, again, that the debtor was not complicit in it. In Glenn, the defendants, the Glenns, asked a loan broker, Karen Chung to get them a short-term “bridge” loan of $250,000. Chung told the Glenns that a bank had agreed to give the Glenns a $1 million line of credit, but that the line for credit would not be available for a few weeks—hence the need for the “bridge” loan. Brian Sullivan, a lawyer and friend of Chung, agreed to lend the Glenns the $250,000. The loan was never repaid and the $1 million line of credit was never approved because Chung never applied for it in the first place. The Glenns declared bankruptcy and the lower court found that neither of the Glenns had committed fraud and refused to impute Chung’s fraud to either of them under an agency theory. The court granted the Glenn’s discharge. The court reasoned that “[p]roof that a debtor’s agent obtains money by fraud does not justify the denial of discharge to the debtor, unless it is accompanied by proof which demonstrates or justifies an inference that the debtor knew or should have known of the fraud.”