October 2021 – Update on recent developments in bankruptcy law – Insolvency / Bankruptcy / Restructuring

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1. AUTOMATIC STAY

1.1 Activities covered

1.2 Effect of stay

1.3 Remedies

2. AVOID POWERS

2.1 Fraudulent transfers

2.1.a The trustee can avoid the transfer as a truly fraudulent transfer only if the final decision-maker has fraudulent intent. Before entering into a two-stage LBO transaction, the debtor formed a special committee of the board of independent directors, which engaged professional advisers. Each step required separate funding. He requested credit ratings for each stage of the transaction. The opinions were based on management’s projections, but prior to issuing the first opinion, management concluded that the company would not be making the projections, but the opinion company was not made aware of this new information. . The first stage of the transaction was completed using borrowed money, and the major shareholders, who were represented on the board of directors, sold their shares. Before the second stage, management again revised its projections. The opinion firm, based on misrepresentation by management, ultimately issued a second credit opinion. Although two other advisers disagreed with the opinion, they did not try to stop the transaction, which was subsequently closed. The company went bankrupt a year later. The liquidator trustee took legal action to prevent the transactions as actual fraudulent transfers. A company can only act through individuals; State law determines who has the authority to act for the company – in this case, the board of directors – which has delegated its authority to the special committee. Actual fraudulent intent can only be established by the intent of those who have the power to control the transfer. Here, management’s projections may have misled the special committee and advisers, but there was no allegation that the board itself intended to obstruct, delay, or defraud. the creditors. Further, it is “unreasonable to assume actual fraudulent intent whenever members of a board [stand] to profit from a transaction that they have recommended or approved. Therefore, the complaint does not adequately allege actual fraudulent intent, and the court dismisses the complaint. In re Tribune Co. Fraudulent Conveyance Litigation, 10 F. 4th 147 (2d Cir. 2021).

2.2 Preferences

2.2.a A critical purchase order does not vitiate preference liability. At the outset of the Chapter 11 case, the debtor in possession was allowed, but not required, to pay certain amounts to critical clients in order to continue to receive necessary services from clients. The liquidator trustee under the confirmed plan of chapter 11 sued a client to avoid and recover a preference. The customer’s order does not vitiate the trustee’s preferential right. The debtor made the payments before the customer’s order and thus, in the absence of specific protection, could not have been protected by the authorization to make future payments. Additionally, the order was permissive, non-binding, and did not specifically identify the customer or require their claims to be paid. Therefore, ordering does not protect prepayments against preference attacks. Insys Liquidation Trust v. McKesson Corp. (In re Insys Therapeutics, Inc.), ___ BR ___, 2021 Bankr. LEXIS 1923 (Bankr. D. Del. July 21, 2021).

2.3 Postpetition transfers

2.4 Compensation

2.5 Statutory privileges

2.6 Strong arm power

2.6.a The trustee cannot avoid an unregistered mortgage that does not transfer an interest in the property. The bank did not register the Puerto Rico mortgage. Under Puerto Rico law, registering a mortgage is a “deed,” and an unregistered mortgage does not transfer any interest in the mortgaged property but only gives the mortgagee an unsecured debt. Under section 544 (a) (3), a trustee can avoid “a transfer of debtor’s property … which is voidable” by a bona fide buyer. Since the failure to register the mortgage prevented the transfer of any interest in the property, the trustee had no transfer to avoid. The court does not address the consequence, which would appear to be that the real estate becomes the unencumbered property of the estate, in the same way as if the mortgage had been canceled. Miranda v. Banco Popular de Puerto Rico (In re Lopez Cancel), 7 F.4th 23 (1st Cir. 2021).

2.7 Recovery

2.7.a Good faith under Sections 548 (c) and 550 (b) (1) is measured by a notice of investigation standard. The debtor broker led a Ponzi scheme and was liquidated under the Securities Investor Protection Act. The SIPA trustee brought an action under section 550 (a) to recover the assets of the clients of subsequent assignees of the debtor’s account holders who withdrew funds in the two years preceding the liquidation. A SIPA trustee has the same avoidance powers as a bankruptcy trustee. Section 550 (a) allows the trustee to collect an evaded transfer from the original assignee or subsequent assignees, but section 550 (b) prohibits a trustee from collecting from a subsequent assignee who has valued, in good faith and without knowing the cancellation of the transfer. “Good faith” is based on a notice of investigation, which is what the transferee should have known, even in a SIPA stockbroker case. However, the test is not purely objective or a standard of negligence. “[W]what the assignee should have known depends on what he actually knew, not what he was instructed to know about a theory of implied notice. the assignee, after investigation, advises of the fraudulent purpose of a transaction, that is, if the facts … have discovered the fraudulent purpose. “Picard v. Citibank, NA (In re Bernard L. Madoff Inv. Secs. LLC), 12 F.4th 171 (2d Cir. 2021).

3. BANKRUPTCY RULES

3.1.a Bankruptcy rule 3002.1 does not allow punitive penalties. The mortgagee added additional charges to the debtor’s account statement without complying with Bankruptcy Rule 2002.1, which requires a mortgagee to provide notice of these charges to the trustee and the debtor. The mortgagee ignored the trustee’s requests to drop the charges, after which the trustee filed a contempt and penalty petition. The mortgagee then withdrew the charges and opposed the sanction motion. Rule 3002.1 provides remedies for non-compliance. If the creditor does not give the required notice, the court may prohibit the creditor from presenting evidence in support of the charge and “grant other appropriate remedies, including reasonable expenses and legal fees. lawyer caused by failure “. “Other appropriate remedy” should be interpreted in accordance with the other terms of the same provision. The expenses and fees are compensatory, suggesting that other relief measures are limited to non-punitive sanctions. PHH Mortgage Corp. vs. Sensenich (In re Gravel), 6 F.4th 503 (2d Cir. 2021).

3.1.b The bankruptcy rules apply in a related action in the district court. A tort plaintiff sued a defendant who he said was responsible along with the debtor for the plaintiff’s injuries. The action in the state court was transferred to the Federal District Court on the grounds that it was related to the debtor’s bankruptcy case and transferred to the district where the debtor’s case was pending. Among other reasons, because the case was a tort claim for personal injury, the district court did not send it to bankruptcy court. The respondent requested dismissal on jurisdictional grounds. The court allowed the request. The applicant requested a review 28 days later. The court refused the reconsideration and the plaintiff appealed. Bankruptcy Rule 1001 provides that the rules “govern the proceedings in Title 11 cases”. While the term is ambiguous as to whether it includes related procedures, practicalities dictate that it be read that way. Otherwise, a district court dealing with both essential and non-essential proceedings in a single case would have to apply two different sets of rules. Bankruptcy Rule 9023 requires that a petition for reconsideration be filed within 14 days of the order or judgment. It applies here. Therefore, the filing 28 days after the order was late. Under rule 9023, a timely filed motion sets the time limit for filing a notice of appeal. Because the motion did not set the deadline for filing a notice of appeal, the notice of appeal was late and the court of appeal does not have jurisdiction to hear it. Roy v. Canadian Pac. Ry. Co. (In re Lac-Mégantic Derailment Litig.), 999 F.3d 72 (1st Cir. 2021).

3.1.c The e-mail service of a blackout date notice is not adequate. The claims officer mailed the notice of non-payment to the creditor’s address shown on the schedules, which the parties have stated was not the creditor’s last known address. He also emailed the notice to the creditor’s email address, which the creditor used regularly, including for communications relating to the case. The parties stated that the creditor had not received the notice by mail, and the creditor claimed that he had not seen the notice by email. Due process requires a reasonably calculated minimum notice to notify. Although due process is necessary, it may not be sufficient. Bankruptcy Rule 2002 (a) (7) requires notice of a blackout date to be mailed. Since the parties have stipulated that the address to which the notice was sent was not the last known address of the obligee, the notice did not comply with Rule 2002 (a) (7). The 9005 bankruptcy rule incorporates the Fed. R.Civ. P. 61, which obliges the court to disregard errors and defects which do not affect substantive rights – the doctrine of harmless error. To demonstrate a harmless error here in the absence of a properly posted notice, the debtor would have to show that the creditor had actual knowledge of the statute of limitations. Because the debtor could not prove this, the court rejects the limitation date objection to the claim. In re Cyber ​​Litigation Inc., ___ BR ___ (Bankr. D. Del. October 21, 2021).

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The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


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