Business Reorganization

Mandatory Mediation Expanded

By: Seth Meyer

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

In a major expansion of the use of mandatory mediation, the Michigan Bankruptcy Court ordered mediation of nearly 1170 preference actions filed in conjunction with Collin& Aikman’s

[1]

Chapter 11 reorganization plan.

[2]

In re Collins & Aikman Corp., 376 B.R. 815 (Bankr. E.D. Mich. 2007.  The court concluded that mediation “will promote the just, speedy and inexpensive resolution of these adversary proceedings.”

[3]

  The court went further and both required defendants to share the costs of mediation and provided for default judgment to be entered against parties failing to engage in the mediation process.

[4]

Expanding the Settlement Payments Exception in LBOs

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).

[1]

 The Plassein trustee sought to avoid transfers to the selling shareholders under Delaware fraudulent transfer law and section 544 of the Bankruptcy Code.

[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. 

Non-Consensual Third Party Releases Permitted in Chapter 11 Reorganizations

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.

[1]

   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]

Should Escrow Accounts Funded by the Debtor be Property of the Estate

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.

[1]

  Only the debtor’s contingent right to recover the funds upon satisfying the escrow conditions is considered estate property.

[2]

Jewelry Retailer Debtor May Not Include Consignment Goods as Part of Section 363 Sale

By: Jonathan Borst

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

In In re Whitehall Jewelers Holdings, Inc.,

[1]

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]

 

The Presumption Against Patient Care Ombudsman

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

[1]

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]

and four other factors listed

[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]

Pension Termination Premiums Are Dischargeable

By: Thomas Rooney
St. John’s Law Student
American Bankruptcy Institute Law Review Staff

The Second Circuit Court of Appeals heard arguments this past week

[1]

on appeal of the Bankruptcy Court for the Southern District of New York’s decision in Oneida Ltd. v. Pension Benefit Guaranty Corporation.

[2]

  In Oneida, the Bankruptcy Court held that the debtor’s liability for pension termination premiums (DRA Premiums)

[3]

is a dischargeable pre-petition “claim” even though the pension termination occurs during the debtor’s chapter 11 case.  This appeal’s outcome will directly impact debtors seeking relief from pension obligations.

Failed Mitigation Requires Recalculation of Claim

By: Courtney Pasquariello
St. John’s Law Student
American Bankruptcy Institute Law Review Staff

 

Injecting uncertainty into the claims process, the Sixth Circuit Court of Appeals held that a lessor’s lease rejection claim must be recomputed if it fails to realize the projected mitigation amount used to compute its claim.  In Giant Eagle, Inc., v. Phar-Mor, Inc., [1] Giant Eagle, Inc. and Valu Eagle Associates (“GE”) entered into long-term equipment leases with Phar-Mor.  Phar-Mor filed Chapter 11 during the lease term and rejected the equipment leases.  As a result of Phar-Mor’s rejection, GE made claims for undisputed administrative expenses as well as claims for future rent minus rent recovered from mitigation.  Upon recovering the equipment from Phar-Mor, GE attempted to fulfill its duty to mitigate damages by releasing the equipment under a new agreement with Snyder’s Drugstores, Inc.  However, during Synder’s new lease term, Snyder too sought relief under Chapter 11 and rejected the equipment leases.  After recovering the equipment, GE was unable to re-let it and sought to recover additional future rental damages in the Phar-Mor bankruptcy case.[2]  Although the lower courts sided with Phar-Mor, stating that “once a lessor mitigates its damages by re-letting the equipment, the lessor cannot claim damages from the debtor for the period covered by the new lease,”[3] the Sixth Circuit disagreed.[4]  Instead, the appellate court focused on the fact that once a lease was rejected, the debtor was liable for damages resulting from the breach regardless of mitigation or attempted mitigation.[5] 

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