Other Nationally Significant Cases

In a recent decision, the United States Supreme Court ruled that asset sales in bankruptcy that occur after plan confirmation will be exempt from certain and often potentially costly state taxes, whereas sales that occur before plan confirmation will not be so exempt. In so ruling, the Court resolved a circuit split regarding the meaning of the statutory phrase "under a plan confirmed under [Chapter 11] of the bankruptcy Code," as codified in 11 U.S.C. § 1146(a).

The case arose from the bankruptcy of Piccadilly Cafeterias, Inc.  At one time among the nation’s most successful cafeteria chains, Piccadilly had fallen on hard financial times.  In 2003, Piccadilly filed for Chapter 11 bankruptcy protection in the Southern District of Florida.  As the centerpiece of its reorganization efforts, Piccadilly sought court authorization to sell virtually all of its assets in a § 363(b)(1) sale pursuant to a settlement agreement reached with creditors.  The bankruptcy court granted this authority.  In authorizing the sale, the bankruptcy court further ruled Piccadilly’s transfer of assets would be "exempt from stamp taxes under § 1146(a)."  (Maj. Slip Op. at 2.)  Piccadilly closed its sale on March 16, 2004.Continue Reading United States Supreme Court Resolves Circuit Split

In a recently-issued Revenue Procedure (Rev. Proc. 2008-28), the IRS states that the modification of certain mortgage loans under foreclosure prevention programs involving, for example, interest rate reductions, principal forgiveness, extensions of maturity and alterations in the timing of changes in an interest rate generally will not cause the IRS either to challenge the tax status of certain securitization vehicles that hold the loans or to assert that those modifications create a liability for tax on a prohibited transaction. This relief is granted to real estate mortgage investment conduits (REMICs) and investment trusts where the mortgage loan meets all of the following conditions: Continue Reading Relief for Securitization Vehicles: Mortgage Modification under Foreclosure Prevention Programs

In the case of The HA2003 Liquidating Trust v. Credit Suisse Securities (USA) LLC, __ F.3d __ (7th Cir. 2008) ("HA2003"), HALO, an acquiring company, hired CSFB, an investment banker, to (i) renegotiate the economic terms of a stock acquisition of the dot-com target company, Starbelly.com, and (ii) issue a fairness opinion on behalf of HALO in connection with the acquisition.  Concluding that CSFB did not act grossly negligent in issuing the fairness opinion even though the fairness opinion was based on numbers known by HALO’s management to be inaccurate, the Seventh Circuit refused to impose liability on CSFB for alleged damages suffered by HALO and its shareholders when HALO became insolvent and filed bankruptcy after the acquisition.Continue Reading Seventh Circuit finds that Issuer of Fairness Opinion Did Not Commit Gross Negligence

By Order, dated January 14, 2008, United States Bankruptcy Judge Martin Glenn for the United States Bankruptcy Court for the Southern District of New York, granted the motion (the "Motion") filed by a group of creditors seeking transfer of venue of the Dunmore Homes, Inc. (the "Debtor") bankruptcy case from the United States Bankruptcy Court for the Southern District of New York (the "Court") to the Eastern District of California, Sacramento Division.  A number of other creditors and the Official Unsecured Creditors Committee joined in the Motion.  The Motion was opposed by the Debtor, bondholders and two bank creditors.Continue Reading Court Orders Case Transferred From New York To California

On May 18, 2007, the Supreme Court for the State of Delaware (the "Court") held that a creditor of a corporation that is operating within the zone of insolvency may not bring a direct action against the corporation’s directors for a breach of fiduciary duty under Delaware law.  The Court agreed with the lower court that (i) the creditors’ existing protections, including negotiated agreements, security instruments, implied covenant of good faith and fair dealing, fraudulent conveyance law and bankruptcy law make an additional layer of protection in the form of a direct cause of action for breach of fiduciary duty unnecessary and (ii) allowing creditors a direct cause of action against the directors may undermine the corporation’s ability to vigorously negotiate with its creditors at a time when the corporation may most need that ability.Continue Reading Delaware Court Holds that Creditors Have No Direct Cause of Action Against Directors of Company Operating in the Zone of Insolvency for Breach of Fiduciary Duty

On March 7, 2007, the Second Circuit Court of Appeals held that "in the Chapter 11 context, whether a pre-plan settlement’s distribution plan complies with the Bankruptcy Code’s priority scheme will be the most important factor for a Bankruptcy Court to Consider in approving a settlement under Bankruptcy Rule 9019."  In re Iridium Operating LLC, No. 05-2236 (2d Cir. March 7, 2007)
Continue Reading Second Circuit Holds That Most Important Factor In Assessing Pre-Plan Settlement Distribution Under Rule 9019 Is Whether It Complies With The Absolute Priority Rule

The defendants were purchasers of certain copyrights and other assets of debtors Luke Records, Inc. and Luther Campbell under a confirmed chapter 11 plan.  Prior to the filing of the debtors’ bankruptcy cases, plaintiff Jeffrey J. Thompkins had conveyed his copyrights in sound recordings and musical compositions to the debtors in exchange for the payment of royalties.  This conveyance was embodied in agreements (the "Agreements") that provided for the "exclusive, unlimited and perpetual rights throughout the world" to the copyrights in sound recordings and musical compositions created by Thompkins, along with "an undivided 50% of the publishing interest" in all such compositions, in exchange for Thompkins’ right to be paid royalties and, in some cases, for one-time cash advances.Continue Reading On February 5, 2007, the United States Court of Appeals for the Eleventh Circuit affirmed defendants L’il Joe Records Inc. et al (“L’il Joe”).

In Enron Broadband Services, L.P. v. Travelers Casualty and Surety Company of America (In re Enron) 2006 WL 2456203 (Bankr.S.D.N.Y. August 25, 2006), the bankruptcy court for the Southern District of New York held that communications between an attorney and a corporate client’s employees, for the purpose of obtaining legal advice, are privileged.  However, the privilege is stripped away when the communications are made in furtherance of contemplated or ongoing criminal or fraudulent activity.

Since the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, there have been discussions about the impact of Bankruptcy Code Section 503(c) a/k/a the "KERP Killer." As long as there have been KERPs (or key employee retention plans), creditors, creditors’ committees and United States Trustees have argued about executive excesses and abuses.  With the enactment of Section 503(c), Congress took on these perceived abuses by adopting a set of rules that makes traditional KERPs difficult, if not impossible, to approve. In response, counsel for debtors immediately began repackaging KERPs as incentive plans ("produce value for pay") rather than retention plans ("pay to stay"). The hope was that incentive plans would be evaluated through the business judgment lens of Bankruptcy Code Section 363, as opposed to the strict new standard of Section 503(c).Continue Reading If it looks like a duck (KERP) and quacks like a duck (KERP), it’s a duck (KERP) [1]

On May 1, 2006, the Supreme Court used an opportunity presented by the Anna Nicole Smith bankruptcy case to resolve some confusion among federal courts about the probate exception to federal court jurisdiction. In Marshall v. Marshall, 126 S. Ct. 1735 (2006), the Court clarified and reaffirmed its sixty-year old holding in Markham v. Allen, 326 U.S. 490 (1946) that limited the cases categorically barred from federal courts under this exception to those that interfered with a state court’s possession of probate property. Marshall’s interpretation of the exception overturned the Ninth Circuit’s opinion, which held that not only were direct challenges to wills and trusts excluded, but so were claims involving questions routinely decided by probate courts in determining the validity of an estate planning instrument.Continue Reading Supreme Court Decision in the Anna Nicole Smith Bankruptcy Case Resolves Confusion About the Probate Exception to Federal Court Jurisdiction