All items from Business Finance & Restructuring News - Weil

An important factor in many successful chapter 11 reorganizations is the debtor’s ability to procure necessary goods and services postpetition.  Without some additional incentive, however, third parties would be unlikely — if not altogether unwilling — to do business with a debtor postpetition.  To this end, the Bankruptcy Code includes a number of provisions aimed at encouraging third parties to conduct business with chapter 11 debtors.  One of the Bankruptcy Code’s most powerful incentives in this regard is section 507(a)(2)’s grant of priority for the “actual, necessary costs and expenses of preserving the estate” allowed as administrative expenses under section 503(b)(1).  These provisions ensure that vendors providing postpetition goods and services to the debtor will generally receive payment ahead of the debtor’s prepetition unsecured creditors.



Posted 9 hours 47 min ago

Recently, the Eleventh Circuit Court of Appeals issued a decision in Menotte v. United States (In re Custom Contracting LLC) that serves as a harsh reminder of the consequences of being on the wrong side of unfavorable facts (if not unfavorable law).  In Menotte, a chapter 7 trustee attempted to recover estimated income tax payments made by an insolvent debtor, on behalf of its principal, to the IRS.  The problem?  The IRS had already refunded the money to the debtor’s principal, who never returned the money to the debtor.  Though the bankruptcy court found in favor of the trustee, the district court reversed the decision.  On appeal, the Eleventh Circuit held that the IRS could not qualify as an “initial transferee” under section 550 of the Bankruptcy Code on account of estimated income tax payments because the IRS already had refunded the payments.
Background
In 2006, Brian Denson formed Custom Contracting, LLC as a single-member LLC structured as an S-corporation.  As an S-corporation, the debtor did not pay federal income tax.  Instead, profits—if any—passed through to Denson who then paid taxes on income earned through the Custom Contracting.



Posted 1 day 10 hours ago

NORTH OF THE BORDER UPDATE
This article has been contributed to the blog by Caitlin Fell and Jamie Rosenblatt. Caitlin Fell is an associate in the Insolvency & Restructuring group of Osler, Hoskin & Harcourt LLP and Jamie Rosenblatt is an articling student at Osler, Hoskin & Harcourt LLP.
In Re Colossus Minerals Inc. (2014), 2014 CarswellOnt 1517, 2014 ONSC 514 (Ont. S.C.J.), a debtor company filed a notice of intention to make a proposal under section 50.4(1) of the Bankruptcy and Insolvency Act (the “BIA”). Pursuant to section 65.13 of the BIA, the Ontario Superior Court of Justice approved the debtor’s proposed sale and investor solicitation process (the “SISP”). The Court also granted the other relief sought, including: a DIP Loan and DIP Charge, an Administration Charge, and a Directors’ and Officers’ Charge.
Proposals under the BIA



Posted 2 days 6 hours ago

As we have noted in number of previous posts, auctions under section 363(b) of the Bankruptcy Code end with the bankruptcy judge’s gavel, not the auctioneer’s.  To the dismay of many readers, the delay between concluding an auction and court approval leaves open the possibility of post-auction bids that leaves the debtor/trustee to choose between a higher and/or better offer and preserving the integrity of its auction process.  In a recent decision, the United States Bankruptcy Court for the District of New Mexico allowed a higher post-auction bid and re-opened the auction, reasoning that the winning bid at auction could not be approved because the court could not make a finding that a sale pursuant to that bid was in the best interests of the estate.
The Facts



Posted 5 days 8 hours ago

In our last Bitcoin Bankruptcy post, we discussed some of the questions that Mt. Gox’s chapter 15 filing raises.  Today, we begin to consider what a bankruptcy of a hypothetical U.S.-based bitcoin exchange might look like. 
The U.S.-Based Bitcoin Exchange and Its Filing
Hypothetical debtor: Our hypothetical debtor is a Delaware corporation having its headquarters office in New York, New York.  It operates a website with a “.com” top-level domain, which it has registered through a U.S.-based domain name registrar.  The website offers two services to its users: (i) bitcoin wallet services and (ii) a bitcoin exchange.  Like Mt. Gox our hypothetical U.S. bitcoin exchange maintains both customer and proprietary bitcoin wallets.  Assume that our debtor has deposit accounts at banks within New York State.  And to keep matters simple, assume that all of our debtor’s obligations were issued in U.S. dollars.



Posted 6 days 8 hours ago

Distressed asset purchasers should be aware of a recent decision, In re Marko, in which the bankruptcy court for the Western District of North Carolina called into question a trustee’s ability to sell estate assets free and clear of certain claims and interests, including claims and interests held against co-owners of the target assets.
The dispute in that case centered on a lake house property that was co-owned by the debtors, Bruce and Elizabeth Marko, and Mr. Marko’s parents by joint tenancy.  At the petition date, the property was subject to a secured mortgage debt of approximately $1.4 million.



Posted 1 week 9 hours ago

JUDGE MARKELL’S SPICKELMIER!
Spickelmier fans, raise your impeccable bracket in the air for all the naysayers to see!  In the championship round, Spickelmier cruised into the number one spot with 60% of the votes.  Judge Markell’s witty reference to contemporary vernacular combined with his detailed account of counsel Mondejar’s “lowest moment in attorney representation the court has ever witnessed” was simply dynamite.  Now that Spickelmier is done jumping through hoops and has been rightfully crowned the 2014 Champion, the moment has come to satisfy your curiosity.  We know you are on the edge of your seat eagerly awaiting the finale to Mr. Mondejar’s three-part saga.  Did Mr. Mondejar violate any other sections of Rule 9011?  Did Mr. Mondejar have to disgorge his fees?  Was Mr. Mondejar sanctioned?  If so, how?
Don’t fret Spickelmier fans!  The answers are mere scrolls away.  Read on for “Part III: The Mr. Mondejar Saga Continues and then, Unfortunately, Ends.”  (If you were one of the Grydzuk fans and simply don’t remember the Spickelmier saga, catch up by reading “Part I: The Saga” and “Part II: The Saga Continues”.)
PART III: THE SAGA CONTINUES AND THEN, UNFORTUNATELY, ENDS
Rule 9011(b)(3)



Posted 1 week 1 day ago

Distinguishing itself from the Sixth Circuit’s holding in In re Omegas Group, Inc., in In re Mississippi Valley Livestock, Inc., the Seventh Circuit recently held that, under some circumstances, the bankruptcy court may impose a constructive trust to find that prepetition funds transferred by the debtor never constituted property of the debtor.
Background & Issues
The debtor, Mississippi Valley Livestock, housed — but did not own or retain the option to buy — cattle from multiple ranchers, including J&R Farms.  The debtor acted as the middleman in cattle sales; it housed ranchers’ cattle that were ready for sale, sold the cattle into the market, collected the proceeds from the sale, deposited those proceeds into its general operating account, and then paid the various ranchers the respective amounts owed to them from funds on deposit in its operating account.   



Posted 1 week 2 days ago

What is the price of confidentiality?  This is the question the District Court for the Southern District of New York recently answered in In re Lyondell Chemical Co. when the court explored whether a debtor’s former employee was entitled to recover an administrative expense under a settlement agreement with a confidentiality provision.  In a decision that runs the bankruptcy gamut—from analyzing the specific terms of a settlement agreement to considering the meaning of language found in a reorganization plan, the District Court for the Southern District of New York has issued a decision that teaches some key lessons to debtors and creditors, alike: (i) potentially, any prepetition agreement may be elevated, to some extent, to “administrative expense” status simply by virtue of it containing a confidentiality clause, if a court finds that maintaining the confidentiality of the agreement “conferred a benefit” on the debtor; and (ii) a debtor’s informal objection to a claim may be treated, for all relevant purposes, as a formal objection—highlighting the years’ long battle of form versus substance. 
Background



Posted 1 week 5 days ago

What constitutes sufficient “cause” requiring the appointment of a chapter 11 trustee?  In In re Dew, the United States Bankruptcy Court for the Eastern District of North Carolina granted the motion of the creditors’ committee to appoint a chapter 11 trustee after finding that the debtors-in-possession had grossly mismanaged their records and finances, which resulted in the creditors losing faith in the ability of the debtors to continue operating their business.  Of particular interest is the fact that nearly all the creditors filed ballots rejecting the debtors’ proposed plan, an act that the bankruptcy court found indicated such a severe level of distrust between the creditors and the debtors-in-possession that the appointment of a trustee was warranted.



Posted 1 week 6 days ago