In a May 15, 2017 Bankruptcy Court decision (Gardens Decision) from California’s Central District (In re Gardens Regional Hospital and Medical Center, Inc. (Bankr. C.D.Cal., May 15, 2017, No. 1617463), Judge Ernest M. Robles wrote that the grant of oversight and approval authority given to California’s Attorney General over buy/sell and change-in-control transactions between nonprofit sellers of health facilities and for-profit buyers of health facilities (see, California Corporation Code Section 5914 (Section 5914)) is limited to those situations in which a nonprofit seller has an active California health facility license at the time of closing. As written by Judge Robles, the Gardens Decision concludes that transactions between nonprofit sellers and for-profit buyers fall outside the scope of Section 5914 if the assets at hand do not include an operating, California-licensed health facility. As a nonoperational, unlicensed health facility, the transaction at issue is not a health facility transaction subject to Section 5914 and, in turn, Attorney General oversight and approval.
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Other Nationally Significant Cases
Lenders Cannot Prevent Borrowers From Filing Bankruptcy By Owning Minority Equity With Veto Power Over Borrower’s Decision To File Bankruptcy
In a recent decision, the U.S. Bankruptcy Court for the District of Delaware refused to enforce a provision in the debtor’s LLC operating agreement requiring a unanimous vote of the debtor’s members to authorize the debtor to file for bankruptcy. In re Intervention Energy Holdings, LLC, et al., 2016 Bankr. LEXIS 2241 (Bankr. D. Del. June 3, 2016). The provision at issue required the consent of all the debtor’s LLC members to file for bankruptcy, including the consent of a member that was a secured creditor holding one unit of ownership in the debtor’s LLC which it bargained for and received pursuant to a forbearance agreement. In refusing to dismiss the debtor’s bankruptcy case, the Court concluded that such an arrangement giving the secured lender a so-called “golden share” was “tantamount to an absolute waiver” of the debtor’s right to seek bankruptcy protection and therefore void as a matter of federal public policy.
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Ninth Circuit Rulings on Equitable Mootness in Transwest and Sunnyslope Impact Third Party Investors
The doctrine of equitable mootness provides that Chapter 11 reorganization plans will be deemed moot, and therefore not subject to appellate review, if a plan has been substantially consummated and granting appellate relief would impair the rights of innocent third parties relying on the confirmation order. Since the development of the court-created mootness doctrine nearly a quarter century ago, courts have grappled with applying it in such a way as to strike an adequate balance between the need for finality, and the need to exercise the court’s jurisdiction and preserve the right to appellate review. The standard interpretation in bankruptcy was that once the debtor took definitive steps to put the Chapter 11 plan in place (i.e., “substantial consummation”), and the objecting creditor neglected to gain a stay of the plan confirmation order pending appeal, then any appeal was presumed to be “equitably moot” and therefore subject to dismissal by the appellate court.
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Federal Court Limits Tribe’s, Secretary’s Options When States Balk at Gaming Compact
A federal district court in New Mexico has issued a decision finding that the U.S. Department of the Interior’s regulations permitting the Secretary of the Interior to adopt Class III gaming procedures for a tribe lacking a Tribal-State Compact are invalid and violate the Indian Gaming Regulatory Act, 25 U.S.C. §§ 2701 et. seq. (“IGRA”). If upheld, the decision in New Mexico v. Dept. of Interior could be expected to shift the balance of power to the states in the negotiation of new compacts and renewed compacts. The decision also may result in pressure on the Department of the Interior to exercise its role as trustee for tribes and sue states that fail to negotiate compacts in good faith.
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When Goods Are Shipped from Overseas, When Are They Considered “Received by the Debtor” for Purposes of Asserting a Section 503(b)(9) Administrative Claim?
A bankruptcy court in Pennsylvania recently held that trade creditors who supplied goods to a debtor prior to its bankruptcy filing were not entitled to administrative priority status under Bankruptcy Code section 503(b)(9) because the goods were “received by the debtor” at the time they were placed on the vessel at the port overseas more than 20 days before the debtor’s bankruptcy filing, although the debtor took possession of the goods within the 20 day period. In re World Imports, Ltd. — B.R. —-, 2014 WL 2750258 (Bankr. E.D. Pa., June 18, 2014).
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Continuity of Enterprise is Enough for Successor Parties to be Liable
Successor liability is often a concern for the acquirer when purchasing substantially all of a seller’s assets. While this risk is well known, the circumstances under which an acquirer will be found liable under the theory of successor liability are less clear. The recent decision in Call Center Techs., Inc. v Grand Adventures Tour & Travel Pub. Corp., 2014 U.S. Dist. Lexis 29057, 2014 WL 85934 (D. Conn. 2014), sheds helpful light on this issue by defining the continuity of enterprise theory of successor liability.
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Dodd-Frank’s Intersection with the Bankruptcy Code Could Have Significant Impact for Unsecured Creditors
On February 11th, the three private plaintiff-appellants and eleven State plaintiff-appellants in State National Bank of Big Spring, et al. v. Jacob J. Lew, et al. filed briefs with the U.S. Court of Appeals for the District of Columbia Circuit in their appeal of the District Court’s decision that the plaintiffs lacked standing to challenge certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (the “Dodd-Frank Act” or the “Act”). The plaintiff-appellants challenged the “Orderly Liquidation Authority” granted to the FDIC under Title II of the Dodd-Frank Act on the basis that such authority supplants Chapters 7 and 11 of the Bankruptcy Codeand thereby strips the plaintiff-appellants of the statutory protections, amounting to property rights, afforded by the Bankruptcy Code to unsecured creditors. Judge Huvelle found this argument insufficient to satisfy the standing requirement imposed by Article III of the Constitution, stating that “[while] it is true that Dodd-Frank empowers the FDIC to treat creditors’ claims somewhat differently than they are treated in traditional bankruptcy proceedings…no one can know if this will ever happen.” The plaintiff-appellants argue that the challenged provisions are facially invalid, rendering the probability of harm test irrelevant, because “[f]or creditors of large financial institutions, Title II of the Dodd-Frank Act expressly ends one of the Bankruptcy Code’s core statutory rights: creditors’ express right to be repaid equally with other similarly situated creditors.”
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Attacking LBO Payouts as State Law Fraudulent Transfers
The United States Bankruptcy Court for the Southern District of New York (the “Court”) in Weisfelner v. Fund 1 (In Re Lyondell Chemical Co.), 2014 WL 118036 (Bankr. S.D.N.Y. Jan. 14, 2014) recently held that the safe harbor provision of 11 U.S.C. § 546(e) did not bar unsecured creditors from seeking, under state fraudulent transfer law, to recover payouts made to former shareholders of a company acquired in a leveraged buyout. This case highlights the limitations in section 546(e)’s so-called safe harbor provision, which protects settlement payments made to complete pre-bankruptcy securities contracts from later being attacked and avoided by the bankruptcy estate representative as fraudulent transfers.
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Equityholder’s Strategy for Shifting Tax Burdens to Creditors Upheld by Third Circuit
In re Majestic Star Casino, LLC, F.3d 736 (3rd Cir. 2013), the U.S. Court of Appeals for the Third Circuit broke from other courts by holding that S corporation status (or “qualified subchapter S subsidiary” or “QSub” status) is not property of the estate of the S corporation’s bankruptcy estate. Other Circuits have routinely held that entity tax status is property of the estate.
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Cherry Picking Contract Provisions in Bankruptcy: Not so Taboo After All?
One of the quintessential principles of the Bankruptcy Code is that when a debtor assumes an executory contract, it must assume the contract as a whole – a debtor cannot cherry pick the contract provisions it wants to assume while rejecting others. Two recent bankruptcy court decisions – In re Hawker Beechcraft, Inc. and In re Contract Research Solutions, Inc. – demonstrate a growing trend among debtors to test the parameters of this general rule. But they also provide guidance to parties on how they can structure their agreements to limit or expand a counterparty’s ability to selectively assume contract provisions in bankruptcy.
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Committee’s Attack upon Lender’s Make-Whole Premium Denied
The United States Bankruptcy Court for the District of Delaware (the “Court”) recently upheld a $23.7 million make-whole payment (the “Make-Whole Payment”) in In re School Specialty (Case No. 13-10125), denying the assertion by the Official Committee of Unsecured Creditors (the “Committee”) that the fee is unenforceable under the United States Bankruptcy Code and applicable state law.
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