All items from Bankruptcy Law Insights

The perception that public employee pension obligations cannot be impaired in bankruptcy suffered a damaging blow several months ago in the City of Detroit bankruptcy case, and has now been fatally wounded by the recent ruling of Judge Christopher Klein in the Chapter 9 case of Stockton, California.  Although Judge Klein’s decision is not likely to lead to a spate of municipal bankruptcy filings in an effort to escape burdensome pension liabilities (indeed, it may not even lead to the actual diminishment of pension claims in the Stockton case itself), this is an important decision.  Unless reversed on appeal, it will alter the legal landscape for distressed municipalities.  Together with the similar Detroit decision, the Stockton ruling will affect negotiations among municipalities, employee unions, pension system representatives and financial creditors across the country. 

Posted 1 week 6 days ago

General Motors LLC (“New GM”) came into being in the summer of 2009, when it acquired substantially all of the assets of General Motors Corporation (“Old GM”) in a sale undertaken pursuant to section 363 of the Bankruptcy Code.  The July 2009 Sale Order approved by U.S. Bankruptcy Judge Robert Gerber transferred the assets to New GM “free and clear” of claims against Old GM (other than a narrow range of expressly assumed liabilities), and contained an express injunction to prevent Old GM creditors from proceeding against New GM.  (Kelley Drye & Warren LLP represents certain major creditors of Old GM.)

Posted 8 weeks 1 day ago

Three years ago, in Stern v. Marshall, a case that arose out of the endless litigation between Anna Nicole Smith and the son of her late husband, the Supreme Court stunned the commercial legal community by reopening what many had believed were long-settled questions regarding the constitutionality of the United States bankruptcy courts.  Although the Court’s opinion in Stern purported to be limited, its analysis made clear that the jurisdictional underpinnings of the entire bankruptcy court system rested on shaky ground.  Since then, practitioners and lower courts have struggled to deal with the ramifications of that decision.   

Posted 12 weeks 6 days ago

Judge Jed S. Rakoff of the Southern District of New York last week ruled that the U.S. Bankruptcy Code does not permit a bankruptcy trustee to recover foreign transfers.  Specifically, Judge Rakoff refused to allow Irving Picard, the trustee of Bernard L. Madoff Investment Securities LLC (“BLMIS”), to recoup monies initially transferred from BLMIS to non-U.S. investment firms that were direct investors in BLMIS, and then subsequently transferred to such firms’ non-U.S. customers.  Picard argued that Section 550(a)(2) of the Bankruptcy Code empowers a bankruptcy trustee to recover fraudulently transferred funds from subsequent transferees of the initial recipient.  Judge Rakoff declined, however, to give that provision extraterritorial application, and denied recovery against the non-U.S. indirect BLMIS investors.  (Kelley Drye & Warren LLP represents certain alleged subsequent transferees.) 

Posted 15 weeks 3 hours ago

The U.S. Supreme Court yesterday, in Executive Benefits Insurance Agency v. Arkinson, limited somewhat the ramifications of its landmark opinion two years ago in Stern v. Marshall.  The Court in Executive Benefits could have thrown the entire federal bankruptcy court system into disarray by advancing Stern’s hard line view on the limited powers of Article I bankruptcy judges.  Instead, it issued a simple and pragmatic decision that will have only minimal impact.  However, by not addressing certain key questions, the Court ensured that uncertainty will continue to hover over issues pertaining to bankruptcy court jurisdiction.    

Posted 20 weeks 2 days ago

A recent ruling in the Chapter 11 case of Free Lance-Star Publishing limited the credit bidding rights of a secured creditor.  The ruling has called into question the ability of the holder of secured debt to utilize such debt to acquire companies on a going concern basis in bankruptcy cases, particularly in instances where the debt was acquired at a discount for such express purpose.  Because this has been a common strategy of numerous hedge funds and investment vehicles that have found no shortage of willing sellers among commercial banks and other traditional lenders holding large portfolios of troubled loans, the Free Lance-Star Publishing decision and an earlier substantially similar ruling in the Chapter 11 case of Fisker Automotive have justifiably received wide attention.

Posted 22 weeks 6 days ago

For the past two years, Charles Ergen, chairman and co-founder of Dish Network, and Philip Falcone, manager of Harbinger Capital Partners, have been doing battle in the Chapter 11 case of mobile communications company LightSquared Inc.  LightSquared, primarily owned by Harbinger and controlled by Falcone, holds spectrum rights potentially worth billions of dollars, but was forced to seek bankruptcy protection in 2012 following its failure to obtain crucial FCC approvals. 

Posted 24 weeks 20 hours ago

A few months ago, a ruling in the Chapter 11 case of Fisker Automotive narrowed a secured creditor’s right to credit bid its debt in connection with a sale of the debtor’s assets.  The decision surprised many observers and resurrected uncertainty about a debtor’s ability to limit a secured lender’s credit bidding rights (a dispute that appeared to have been firmly resolved in favor of secured creditors only two years ago by the Supreme Court’s decision in RadLax Gateway Hotel).  Fisker Automotive put the issue of credit bidding back on the table, particularly in so-called “loan to own” situations where secured debt is purchased at a substantial discount for the purpose of effecting the acquisition of a distressed borrower.  An opinion issued last week in the Chapter 11 case of Free Lance-Star Publishing Co. is certain to further the uncertainty.  

Posted 27 weeks 3 days ago

The chapter 11 filings this month of Sbarro and Quiznos share many similarities.  Both companies are looking to survive in a difficult sector of a tough industry.  Both were forced to seek bankruptcy despite recent successful efforts to reduce debt – an out-of-court restructuring for Quiznos and a 2011 chapter 11 case for Sbarro.  In addition, both cases also continued a strong trend of corporate bankruptcies that look to minimize the duration of the case.  

Posted 30 weeks 6 days ago

The chapter 9 bankruptcy case of the City of Detroit has been as complex and litigious as anticipated.  Nevertheless, Emergency Manager Kevyn Orr has kept plodding forward, and last week filed a proposed plan of adjustment, the road map for the Motor City to emerge from bankruptcy.  There are two key components to the plan.  The first is that it will seek to inflict somewhat less pain on retired employees than on bondholders.  The second is that it will direct approximately $1.5 billion towards Detroit’s future rather than to the payment of creditors.    

Posted 35 weeks 2 days ago