Bankruptcy Litigation

Bankruptcy Court Enforced 20-Year Old Orders Barring Asbestos Claims Against Insurance Company

By: Amanda Hoffman

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Johns-Manville Corporation, the United States Bankruptcy Court for the Southern District of New York enforced orders it issued in 1986, confirming a plan (the “Plan”) of reorganization for Johns-Manville. Pursuant to the Plan, a settlement agreement was reached in which insurers contributed $770 million to a trust benefitting asbestos personal injury claimants. In exchange, the insurers of Johns-Manville, including long-time insurer Marsh USA (“Marsh”), were relieved of all liability related to their insurance of Johns-Manville and the insurers would be protected from claims via injunctive orders of the Bankruptcy Court. Marsh contributed $29.75 million to the trust in exchange for the injunction, which barred future claimants from bringing action against Marsh as an insurer of Johns-Manville. This settlement agreement was approved by the court, resulting in the court entering a confirmation order of the Plan (the “Confirmation Order), and an Insurance Settlement Order, together known as the “1986 Orders”. Under the 1986 Orders, Johns-Manville and its insurers were released from further liability, but present and future claimants could claim against the trust. Part of the settlement agreement included the appointment of a legal representative by the Bankruptcy Court, in order to ensure the rights of future claimants.

The Resurrection of the Eleventh Amendment in Chapter 9 Cases

By: Christopher J. Pedraita

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Reversing the bankruptcy court, in In re City of San Bernardino, a district court recently held that the Eleventh Amendment barred a chapter 9 debtor’s claims against certain state agencies. In San Bernardino, the City of San Bernardino (the “City”) sought to protect funds, which the State of California (the “State”) demanded that the City remit to the State. The funds at issue in San Bernardino had been parceled out to the City’s redevelopment agency (“RDA”) and earmarked for redeveloping urban neighborhoods. In light of the fiscal emergency experienced by State in 2011, however, its legislature supplanted the existing RDAs with “successor agencies” to conclude all remaining matters of the RDAs, including returning the funds to the county auditor-controller that the RDAs had not already been committed to a project. As part of this process, the State ordered the City’ successor agency to return millions of dollars in tax revenues to the State’s Department of Finance (the “DOF”). If the successor agency failed to remit the funds to the DOF, the State warned that it could withhold tax revenue from the successor agency or the City. The warning prompted the City to commence adversary proceedings against the various state agencies seeking injunctive and declaratory relief to, among other things, prevent the State agencies from withholding tax revenue from the successor agency (and the City itself). The State agencies moved to dismiss the City’s complaint on several grounds, including that claims were barred under the Eleventh Amendment. While the bankruptcy court granted the State agencies’ motion to dismiss with leave to amend, believing that the City could show imminent injury if the state agencies withheld the tax money, the court rejected the state agencies’ Eleventh Amendment defense. In particular, the bankruptcy court ruled that when the subject of litigation was unquestionably within the court’s control state sovereign immunity could not prevent the adversary proceeding. On appeal, the district court reversed the bankruptcy court holding the Eleventh Amendment to apply in order to protect the State’s rights to run its own finances.

Judicial Estoppel: Essentially Locking a Litigation Trust into Representations Made During Prior Bankruptcy Proceedings

By: Sophie Tan

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in Adelphia Recovery Trust v. Goldman Sachs & Co., the Second Circuit held that a fraudulent conveyance claim brought by a litigation trust, created to recover assets for the benefit of unsecured creditors of Adelphia Communications Corp. (“ACC”), was barred by the doctrine of judicial estoppel because the funds at issue were transferred from an account that the plaintiff’s predecessor-in-interest scheduled as an asset of one of the predecessor’s subsidiaries, not the predecessor itself. The litigation trust commenced a fraudulent conveyance claim against Goldman, Sachs & Co. under sections 548(a)(1)(A) and 550(a) of the Bankruptcy Code to recover certain payments made to Goldman from a concentration account held in the name of Adelphia Cablevision Corp. (“Adelphia Cablevision”), a subsidiary of ACC. Goldman later moved for summary judgment on the grounds that (1) the plaintiff lacked standing to assert the fraudulent conveyance claim because the payments were not transfers of ACC's property; and (2) the plaintiff failed to raise a material issue of fact as to whether the payments were made with an actual intent to hinder, delay or defraud ACC's creditors. In response, the litigation trust argued that “ACC was the real owner of, and payor from, the Concentration Account” because ACC exercised complete control over the collective cash of ACC and its subsidiaries in the concentration account. While the district court recognized that the money in the concentration account may have been attributed to ACC prior to the bankruptcy proceedings, the district court ruled that “the easy attribution of money to whatever entity may at the moment be convenient stopped with the bankruptcies.” Therefore, the district court granted Goldman’s motion for summary judgment, stating that “it [wa]s admitted by [the litigation trust’s] own revised pleading that the margin loan payments were not made by ACC but by Adelphia Cablevision LLC, an ACC subsidiary on whose behalf [the litigation trust] does not have standing to sue.” The Second Circuit affirmed, holding that the litigation trust did not have standing to sue because it was judicially estopped from arguing now that ACC owned the account.

The Inapplicability of Section 922(d): Interest Rate Swap Agreements Do Not Qualify as Special Revenue Bonds

By: Debra March

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in Syncora Guarantee Inc. v. City of Detroit,[1] a federal district court held that the exception to the automatic stay contained in section 922(d) of the Bankruptcy Code did not apply to casino tax revenues pledged to secure the debtor’s swap obligations because the court opined that the swap agreements were not the type of special revenue bonds that the statute was intended to protect, and the debtor’s swap obligation was not a form of indebtedness owed to the swap counterparties or the swap insurer.[2] In 2005, the City of Detroit (the “City”), in order to strengthen its finances and secure pensions, issued debt by forming two not-for-profit service corporations to issue Certificates of Participation (“COPs”) since state law prohibited the City from directly issuing more debt.[3] These service corporations sold the certificates and gave the capital to the City to fund its pensions.[4] The City needed to protect itself against the risk of floating interest rates of COPs[5] because if the rates increased, the amount of interest the City would owe would also increase.[6] In order to protect the City against this risk, the service corporations executed interest-rate swaps with two banks.[7] Since the City had major debt problems, however, investors would not buy the COPs and the banks would not execute the interest-rate swaps without an insurer guaranteeing the City’s obligations.[8] Syncora, a monoline insurer, promised to make payments under the certificates and the swaps if the City failed to do so.[9] After the City defaulted, Syncora allowed the City to enter into a collateral agreement with swap counterparties.[10] Pursuant to this agreement, the City gave swap counterparties an optional termination right and created a “lockbox” system the caused casino tax revenues to be paid into a designated bank account, which could be frozen if the City failed to make it swap payments.[11] The swap counterparties could access this casino tax revenue by obtaining the City’s permission.[12] In June 2013, Syncora notified the bank that the City had defaulted, and the bank froze the casino tax revenues in the account.[13] The City sued in state court to recover the funds.[14] After the state court ordered the bank to release the funds, Syncora removed the case to the federal district court.[15] The district court then transferred the case to bankruptcy court after the City subsequently filed for bankruptcy in July 2013.[16] In August 2013, the bankruptcy court decided that the casino tax revenue was property of the estate and protected by the automatic stay.[17] In April 2014, the district court sua sponte stayed Syncora’s appeal of the bankruptcy court’s decision regarding the lock box funds until the Sixth Circuit ruled on whether the City was eligible to file.[18] Subsequently, the Sixth Circuit granted Syncora’s request for a writ of mandamus and directed the district court to rule on Syncora’s appeal.[19] Ultimately, the district court affirmed the bankruptcy court’s ruling.[20]

Prime Brokers May Be Liable for Customers Fraudulent Transfer

By: Michael Maffei

St. John's Law Student

American Bankruptcy Institute Law Review Staff

In a good news, bad news decision for prime brokers, the District Court in In re Manhattan Investment Fund v. Gredd

[1]

held that a prime broker is an initial transferee of funds held in a customer’s margin account, but recognized a “robust” good faith defense to transferee liability.  In this appeal from an award of summary judgment,

[2]

Bear Sterns had receive approximately $141 million to cover margin calls for a hedge fund that, in reality, was a “Ponzi” scheme.  In a holding that spells trouble for prime brokers, the Court rejected the argument that a prime broker is a “mere conduit” and lacks “dominion and control” over the funds in a margin account.  Applying the Second Circuit’s “nuanced” approach, the Court rejects the narrow view that a party must have unfettered control over funds in order to be an initial transferee.

[3]

  Since Bear Sterns could use the margin funds to protect itself against possible losses, it did not qualify as a mere conduit.  Further, the discretionary authority given it as prime broker to close out positions, which was standard in the industry, was sufficient “control” to trigger transferee status.