All items from Basis Points

Much has already been written about the “insider trading” aspects of Judge Walrath’s September 13 Opinion denying confirmation of WaMu’s Chapter 11 plan of reorganization (the Opinion can be found HERE). In a nutshell, Judge Walrath expressed the view that a person in possession of MNPI (material non-public information) could be considered to be engaged in insider trading even after the MNPI restriction period ends.
While that part of the Opinion is certainly a blockbuster, we are focusing here on a different aspect of the Opinion, namely Judge Walrath’s view that members of an ad hoc committee can be considered to owe fiduciary duties to other creditors holding the same class of securities. Yikes! The first time she said this, we noted her comments in “The WaMu Double Whammy,” which can be found HERE. We repeat now what we said then, which is that this is a frightening conclusion. Except then, Judge Walrath’s comments were more speculative. In her latest Opinion, although still dicta, all speculation is laid to rest.

Following the Second Circuit’s recent precedent in an Enron appeal (also the subject of a Basis Points blog post), Judge Peck of the United States Bankruptcy Court for the Southern District of New York concluded that the redemption of notes prior to maturity was exempt from preference actions under the safe harbor provision of Bankruptcy Code § 546(e). Official Comm. of Unsecured Creditors of Quebecor World (USA) Inc. v. Am. United Life Ins. Co., No. 08-10152 (Bankr. S.D.N.Y. July 27, 2011). The circumstances surrounding the Quebecor early redemption were different from those in Enron. Unlike Enron’s redemption of public notes through the DTC, Quebecor effected a redemption of private placement notes without the assistance of a clearing agency. Nevertheless, Judge Peck concluded that such factual distinctions have become “indistinguishable” as a result of the Second Circuit’s holding in Enron. Accordingly, he granted summary judgment to the defendant noteholders. A copy of the decision can be found HERE.

Courts have struggled with whether to allow an unsecured creditor’s post-petition attorneys’ fees and have come down on both sides of the issue. In a debate akin to the most grueling of Iron Chef competitions, proponents of the view that an unsecured creditor cannot recover post-petition legal fees point to section 506(b) of the Bankruptcy Code, which allows as part of a creditor’s secured claim the reasonable attorneys’ fees and costs incurred during the post-petition period and note that the rest of the Bankruptcy Code is silent on an unsecured creditor’s right to recover post-petition fees. The theory is that if Congress did not include an unsecured creditor’s post-petition fees as part of the written recipe (the Code), a bankruptcy judge should not improvise and include them in the dish anyhow. Proponents of the alternative view cite the Second Circuit decision United Merchants and its progeny, where those courts have refused to read into the plain language of section 506(b) any limitation on an unsecured creditor’s claim for recovery of post-petition legal expenses. The basic tenant is that if Congress intended to disallow an unsecured creditor’s claim for post-petition legal fees it could have done so explicitly. In the recent decision of In re Seda France, Inc., Justice Craig A. Gargotta of the United States Bankruptcy Court for the Western District of Texas has become the latest bankruptcy cook to enter the kitchen and deny post-petition legal fees to an unsecured creditor.

Enron seems like ancient history but the Second Circuit has just issued an important decision in an Enron appeal confirming that the redemption of commercial paper made through DTC is entitled to the Bankruptcy Code § 546(e) exemption for “settlement payments” and, therefore, exempt from attack as preferential transfers. The Second Circuit held that this is so even though the Enron redemption payments were made prior to stated maturity, becoming the first Circuit Court of Appeal to address this issue. Enron Creditors Recovery Corp. v. Alfa, S.A.B.