All items from Basis Points

On March 14, 2014, the Delaware Supreme Court issued its eagerly-awaited decision in Kahn v. M&F Worldwide Corp., No. 334, 2013 (Del. March 14, 2014).  The Court affirmed the Chancery Court’s holding (Strine, C.) that the deferential business judgment standard of judicial review – rather than the rigorous entire fairness standard – will apply to a controlling stockholder transaction if, from the outset, the transaction is (i) subject to negotiation and approval by an independent special committee empowered to say no, and (ii) conditioned on and approved by an uncoerced, fully informed majority of the minority stockholder vote.  Although this framework has been endorsed by several Chancery Court decisions, the Delaware Supreme Court had not had the occasion to resolve the applicable standard of review when both of these minority stockholder procedural protections were employed at the outset.  While the decision appears to provide a roadmap to minimize litigation risk in controlling stockholder transactions, the practical effect of the decision remains to be seen.

Posted 4 weeks 4 days ago

In a closely-watched case, the United States Court of Appeals for the Third Circuit recently affirmed the decision of the Delaware District Court, holding that bankruptcy claims are subject to disallowance under section 502(d) of the Bankruptcy Code despite their subsequent sale to a third-party transferee. In In re KB Toys, Inc., No. 13-1197 (3d Cir. Nov. 15, 2013), the Third Circuit found that the “cloud of disallowance” cannot be parted from the claim. This decision (which can be found here) is noteworthy since it runs contrary to the New York federal district court’s previous decision in the Enron chapter 11 case which found claim disallowance as a personal disability that did not adhere to the claim.    

Posted 21 weeks 5 days ago

In connection with the bankruptcy of a bank holding company (the “Bank Holdco”) and its operating bank subsidiary (the “Bank”), there are often different classes of creditors competing for one tax refund.  If the Bank Holdco is the parent corporation of a consolidated group of corporations (the “Consolidated Group”), the Bank Holdco usually is treated as the agent of the group for federal income tax purposes. In such a situation, the Bank Holdco files income tax returns on behalf of the Consolidated Group, carries back and forward net operating losses of the Consolidated Group and receives from the IRS any refund of taxes paid by the Consolidated Group as the group’s agent. The federal income tax rules do not address the allocation of tax refunds received by the Bank Holdco with respect to the members of the Consolidated Group. Thus, the members of the Consolidated Group typically execute a tax sharing agreement (a “TSA”) that provides that each group member will pay the Bank Holdco its share of the federal income taxes owed by the Consolidated Group and will receive its portion of any tax refunds received by Bank Holdco attributable to the losses generated by such member.

Posted 24 weeks 3 days ago

While newly discovered Element 115 (or “ununpentium” as scientists are temporarily calling it) appears to have vanished quickly in a flash of radiation in front of the eyes of Swedish scientists, the United States Bankruptcy Court for the Western District of Oklahoma confirmed that make-whole is a well-established stable compound and here to stay. See the order here. As our loyal Basis Points followers know, one of our favorite topics of discussion and fodder for the blog is make-whole premiums. Our previous blogs on the American Airlines and Trico Marine make-whole decisions can be found here and here. In GMX Resources Inc., the Court overruled the Official Committee of Unsecured Creditor’s (the “Committee”) objection to the first lien lenders’ make-whole claim. While this decision may not be as groundbreaking as the newly discovered “Element 115,”  it is a win for investors who rely on the make-whole to be made whole. Let’s be the first to call it “make-whole-ium”…

Posted 33 weeks 3 days ago

While the arrival of His Royal Highness Prince George Alexander Louis of Cambridge has dominated the British (and the world) headlines this week, the U.K. Supreme Court delivered its own long awaited bundle of joy earlier today. In the latest decision in the laborious Nortel and Lehman litigations, the U.K. Supreme Court reversed a lower court decision and held that pension claims should not be treated as priority claims and, instead, they should rank equally with general unsecured claims. The full decision can be found here. The bells at Westminster may be silent for this announcement, but U.K. insolvency professionals, along with creditors in current and future U.K. restructurings, are likely rejoicing.
The Nortel and Lehman cases have been making insolvency headlines around the world since the commencement of their respective restructurings. We have previously written about certain aspects of the Nortel litigation that involved the application of the U.S. automatic stay to the U.K. pension plan trustee (our prior blog on that topic can be found here).

Posted 38 weeks 3 days ago

Thanks to Anna Nicole Smith and the June 2011 landmark Supreme Court decision in Stern v. Marshall, there are seemingly more questions regarding a bankruptcy judge’s authority to enter final orders (or even proposed orders) than ever before. Those unanswered questions have created considerable uncertainty and, not surprisingly, lengthier and costlier litigation in bankruptcy. Thankfully, the Supremes decided on June 24, 2013 that they will address two of the many questions left unanswered by Stern. (This is separate of course from the question of who would have ever thought we’d be talking about Anna Nicole Smith and Supreme Court precedent in the same sentence.)
Specifically, the Supreme Court will hear an appeal from the Ninth Circuit Court of Appeals[1] (the same Court that brought the Stern issue to the Supremes in the first place) to address whether a bankruptcy court has authority to (i) submit proposed findings of fact and conclusions of law to the district court in “core” matters; and (ii) enter a final order based upon the parties’ express or implied consent. The Ninth Circuit Court of Appeals ruled in the affirmative on both of these issues.

Posted 42 weeks 2 days ago

Navigating the most recent leg in the Quebecor regatta, the Second Circuit affirmed the judgment of the district court and ruled that prepetition transfers made in connection with a securities contract may qualify for safe harbor from avoidance actions under section 546(e) of the Bankruptcy Code—even if the transferee is a mere “conduit” or “intermediary” financial institution. In re Quebecor World (USA) Inc. (Official Committee of Unsecured Creditors of Quebecor World (USA) Inc. v. American United Life Insurance Co.), No. 12-4270-bk (2d Cir. June 10, 2013). A copy of the decision is available [HERE].

Posted 44 weeks 4 days ago

Social butterfly investors have been anxiously awaiting the Supreme Court’s decision in CompuCredit Holdings on when similarly situated investors can speak to each other without running afoul of antitrust laws. CompuCredit had argued that creditors should Stop! In the Name of Antitrust, but the District Court and Eleventh Circuit sang a different tune. Yesterday, the Supreme Court declined to review the Eleventh Circuit’s lyrics, leaving intact the District Court’s decision confirming investor’s rights to discuss amongst themselves. So go ahead . . . chat it up if there’s Something to Talk About.
By way of background, in 2010 certain holders of CompuCredit Holding’s convertible senior notes (the “Noteholders”) sued CompuCredit alleging that the company’s proposed $25 million dividend to shareholders would be in violation of the Uniform Fraudulent Transfer Act. The court denied the Noteholders’ request for an injunction, and the company made the dividend as planned. The Noteholders amended the lawsuit claiming, among other things, damages caused by the dividend.

Posted 46 weeks 3 days ago

The Delaware Bankruptcy Court recently held that a third amendment to a lease agreement entered into for the purpose of leasing a second building could not be severed from the original lease agreement; and the debtor was not allowed to reject the lease on that second building under section 365 of the Bankruptcy Code. In In re Contract Research Solutions, Inc., (the decision can be found here) the debtor, Allied Research International, Inc., had originally leased one building from a third party, Golden Glades Associates, LLP. Allied and Golden amended the lease agreement twice, each time relating to the first building. A few years later, the lease agreement was amended a third time for purposes of leasing a second building located in the same building complex. The third amendment contained terms that applied to the first building, expanded the definition of premises to include both buildings, and provided that the terms of the original lease remained in full force and effect, except where modified by the third amendment. Allied commenced bankruptcy proceedings on March 26, 2012 and eventually ceased use of the second building, vacated it, and sent the keys to Golden. Golden quickly sent the keys back to Allied.

Posted 48 weeks 5 days ago

It was just an old jalopy legally repossessed by his credit union . . . until he filed a bankruptcy petition and the red lights of the automatic stay started flashing. Smokey pulled the lender over and started issuing citations so be forewarned, put your hazard lights on and drive carefully through the postpetition fog, because this decision is relevant to all secured creditors under all Bankruptcy Code Chapters, not just car lenders under Chapter 13. In a recent Second Circuit decision, the Court affirmed the judgment of the United States District Court for the Northern District of New York, which concluded that a secured creditor violated the Bankruptcy Code’s automatic stay by refusing to return a 4-banger that it had legally repossessed several days before plaintiff filed for relief under Chapter 13 of the Bankruptcy Code. In re Weber (Weber v. SEFCU), No. 12-1632-bk (2d Cir. May 8, 2013). A copy of the decision can be found HERE.

Posted 49 weeks 1 day ago