By: Matthew McNamara
St. John's Law Student
American Bankruptcy Institute Law Review Staff
The Delaware district court has affirmed a bankruptcy court decision extending the settlement payment exception to the trustee’s avoiding powers to insulate from attack a leveraged buyout (“LBO”) involving a non-public company in Brandt v. B.A. Capital LP (In re Plassein International Corporation).
The Plassein trustee sought to avoid transfers to the selling shareholders under
[2]
Section 546(e), however, states that a settlement payment falls under an exemption to section 544 and thus the trustee may not void the transfer.
[3]
Plassein follows and expands upon a line of cases adopting a broad interpretation of the term “settlement payment”. The Third Circuit has adopted an extremely broad interpretation of the term, noting that it encompasses “almost all securities transactions”.
[4]
Earlier decisions imposed policy based limitations on the section 546(e) settlement payment exemption in order to exclude payments made to shareholders as part of an LBO.
[5]
The court in In re Resorts International
[6]
, however, made it clear that “a payment for shares during an LBO is obviously a common securities transaction, and [the court] therefore [held] that it is also a settlement payment for the purposes of section 546(e)”.
[7]
The shares in question in In re Resorts, however, were securities of a publicly traded company. The court failed to specify whether the settlement payment exemption in an LBO was limited to shares of publicly traded companies or might also protect LBO’s involving non-public companies.
By: Michael Maffei
St. John's Law Student
American Bankruptcy Institute Law Review Staff
In a good news, bad news decision for prime brokers, the District Court in In re Manhattan Investment Fund v. Gredd
held that a prime broker is an initial transferee of funds held in a customer’s margin account, but recognized a “robust” good faith defense to transferee liability. In this appeal from an award of summary judgment,
[2]
Bear Sterns had receive approximately $141 million to cover margin calls for a hedge fund that, in reality, was a “Ponzi” scheme. In a holding that spells trouble for prime brokers, the Court rejected the argument that a prime broker is a “mere conduit” and lacks “dominion and control” over the funds in a margin account. Applying the Second Circuit’s “nuanced” approach, the Court rejects the narrow view that a party must have unfettered control over funds in order to be an initial transferee.
[3]
Since Bear Sterns could use the margin funds to protect itself against possible losses, it did not qualify as a mere conduit. Further, the discretionary authority given it as prime broker to close out positions, which was standard in the industry, was sufficient “control” to trigger transferee status.
By: Craig Lutterbein
St. John's Law Student
American Bankruptcy Institute Law Review Staff
The Seventh Circuit, in Airadigm Communications, Inc. v. Federal Communications Comm’n. (In re Airadigm Communications, Inc.), has joined the circuits permitting the non-consensual release of a non-debtor third party from its obligations to creditors in chapter 11 reorganization.
The case revolved around Airadigm Communication’s purchase and financing of fifteen personal communication services licenses from the FCC.
[2]
When Airadigm began to fail the company filed for reorganization, and the FCC cancelled the licenses.
[3]
During Airadigm’s first chapter 11 reorganization, it received financing from Telephone and Data Services (TDS), who agreed to repay the FCC the debt owed on the licenses if the FCC reinstated the licensees.
[4]
Although the FCC did not originally reinstate the licenses, in FCC v. Next-Wave Personal Communications Inc., the Supreme Court ruled that FCC could not legally cancel licenses simply because a communication company files bankruptcy.
[5]
Thus, the FCC was forced to reinstate Airadigm’s licenses, which caused Airadigm to file a second Chapter 11 case.
[6]
The plan confirmed by the bankruptcy court contained a release protecting TDS from all liability “in connection with” the reorganization except willful misconduct.
[7]
On appeal, the Seventh Circuit found that the release was necessary and appropriate because the release was narrowly drawn and TDS was making a substantial contribution that was necessary for Airadigm’s reorganization to be successful.
[8]
By: Robert Griswold
St. John's Law Student
American Bankruptcy Institute Law Review Staff
In U.S. v. White,
a debtor owed $8,922.40 to the Internal Revenue Service (“IRS”), $1,780.52 of which was considered priority debt.
[2]
The debtor filed for chapter 13 bankruptcy in February of 2004 and claimed as exempt a $3,148 tax overpayment for the 2003 tax year.
[3]
The IRS moved to lift the automatic stay in order to allow it to setoff the entire 2003 overpayment against its pre-petition tax claim.
[4]
In the decision appealed from, the Pennsylvania bankruptcy court allowed the IRS to setoff only to the extent of the priority debt, requiring the remainder of the overpayment to be returned to the debtor as a tax refund.
[5]
The district court reversed, holding that the IRS could setoff the entire 2003 overpayment.
[6]
The court acknowledged a split of authority regarding whether the IRS’ right to setoff non-priority debt is allowed against exempt assets of the debtor or whether its right to setoff is limited to priority claims,
[7]
but found the reasoning behind the cases allowing setoff of the overpayment against entire pre-petition claim more compelling.
[8]
By: Meagan Mahar
St. John's Law Student
American Bankruptcy Institute Law Review Staff
Despite conflicting New York case law, the Delaware Bankruptcy Court in In re Atlantic Gulf Comtys. held that funds in an escrow account are not property of the estate even where the funds were deposited by the debtor.
Only the debtor’s contingent right to recover the funds upon satisfying the escrow conditions is considered estate property.
[2]
By: Jonathan Borst
St. John's Law Student
American Bankruptcy Institute Law Review Staff
In In re Whitehall Jewelers Holdings, Inc.,
the court held against Whitehall Jewelers Holdings, Inc. (“Debtors”), in favor of approximately 124 consignment vendors (“Consignment Vendors”), where Debtors sought an order permitting the “free and clear” sale of all of their assets and inventory, including consigned goods from Consignment Vendors.
[2]
By: Felicia Rovegno
St. John's Law Student
American Bankrupcty Institute Law Review Staff
Following a growing trend, the California Bankruptcy Court in In re Valley Health System
declined to appoint a patient care ombudsman under section 333(a)(1).
[2]
Although the “shall order the appointment … unless the court … finds” construction of section 330(a)(1) suggests that patient care ombudsmen should be the rule, courts appear to be avoiding such appointments.
[3]
Consistent with this approach, the Valley Health opinion appears to place the burden on the proponent of the appointment to show that an ombudsman is needed because of specific problems at the facility.
[4]
More importantly, the Court overlooked the arguments that an ombudsman functions as an advocate to warn the court if patient care is being compromised and that because financial concerns drove the facility into bankruptcy, patients are placed at a greater risk.
[5]
Instead, the Court considered the “nine non-exclusive factors”
[6]
articulated in In re Alternate Family Care
[7]
[8]
to hold that a patient care ombudsman was not needed under “the specific facts and circumstances of this case.”
[9]
Applying the nine factor balancing test, the Court found that two factors favored appointment of an ombudsman, while seven factors weighed against the appointment.
[10]
By: Renton Persaud
St. John's Law Student
American Bankruptcy Institute Law Review Staff
In a decision of importance to chapter 13 debtors, the Bankruptcy Appellate Panel for the Ninth Circuit in In Re Lopez
held that chapter 13 debtors are permitted to pay post-petition mortgage payments directly to creditors outside of the plan even though the plan cures and reinstates the mortgage. According to the court, the new provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) do not change the law with respect to such direct payments.
[2]
The court drew a distinction between claims “impaired” by the debtor’s plan, which must be made through the chapter 13 trustee, and unimpaired claims, which need not be.
[3]
The court bifurcated the mortgage debt between the cure payments and the regularly scheduled payments accruing post-petition. Under the court’s view, only the cure amount was impaired and must be paid through the plan.
[4]
The importance of the decision to debtors is that it avoids the chapter 13 trustee’s fee on the regular mortgage payment, an amount that was $308 per month in this case.
[5]
Of special interest in light of the currently pending legislation that could permit modification of home mortgages in chapter 13, the court distinguishes Fulkrod v. Barmettler (In re Fulkrod)
[6]
and indicated that, where the mortgage is reamortized, as in chapter 12 cases, the payments must be made through the plan.
[7]
By: Thomas Szaniawski
St. John's Law Student
American Bankruptcy Institute Law Review Staff
In a case of first impression that addressed the intersection of cyberspace and bankruptcy, the Ninth Circuit, in Reynoso v. United States (In re Reynoso),
held that a provider of web-based bankruptcy software was a bankruptcy petition preparer (“BPP”)
[2]
under 11 U.S.C. section 110(a)(1),
[3]
and that, under California law, the features of the petition preparing software went beyond mere typesetting and constituted the unauthorized practice of law.
[4]
By: Ian Park
St. John's Law Student
American Bankruptcy Institute Law Review Staff
In the first appellate court decision on the issue that favors the debtor, the Sixth Circuit Court of Appeals splits with the Fourth and Eleventh Circuits and holds that the repossession of collateral under UCC Article 9 does not alter the debtor’s property rights or remove the collateral from the estate.
The effect of this ruling is that the debtor may retain the collateral by paying its value to the creditor and is not limited to the state law redemption rights, which require payment in full of the secured obligation.