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By: Nicholas Marcello

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Genesys Research Institute, the United States Bankruptcy Court for the District of Massachusetts denied motions for reconsideration holding there was no error in approving the sale and disposition of research equipment and biological samples free and clear of liens, claims, and interests.[1] In support of its motion to sell research equipment by public auction and destroy experimental cancers cells, the Trustee of Genesys Research Institute, a debtor, argued that the costs and burdens of maintaining the biological materials warranted the prompt disposition of them.[2] The Trustee noted that no party appeared to take custody and control of the biological materials despite all marketing efforts.[3] The Trustee also represented that he had no ability to reorganize the research lab and that he was required to liquidate the debtor’s assets in furtherance of his duties as a chapter 11 trustee.[4] The Court approved the disposition of the cells and the sale of the equipment free and clear of all interest and liens over the objection of, among others, the Department of Energy (“DOE”).[5] The disposition of the research led to the incineration of (hundreds) of biological samples, backed by thousands of dollars in grants, which were part of vital cancer research.[6] The researcher’s work was considered to be “groundbreaking and paradigm-shifting in the field of cancer biology” because they were able to turn normal human cells into cancer cells.[7]

By: Allison N. Smalley

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Securities Investor Protection Corporation v. Bernie L. Madoff Investment Securities, LLC,[1] the Bankruptcy Court for the Southern District of New York concluded that a recipient should return fictitious profits he gained through the Ponzi scheme operated by Bernard L. Madoff Investment Securities (“BLMIS”).[2] Andrew Cohen withdrew approximately $4 million from his account at BLMIS between January 18, 1996 and December 11, 2008.[3] Of that withdrawal, approximately $1.1 million was fictitious profit.[4] Irving Picard, as the trustee of BLMIS,[5] sought to recover the fictitious profits from several recipients, including Cohen, under Section 548 of the Bankruptcy Code.[6] As a defense, Cohen asserted that he gave “value” to BLMIS when he received the fictitious profits.[7] The bankruptcy court, however, rejected this defense and concluded that the District Court should find in favor of Picard.[8]

By: Christina Mavrikis

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re G-I Holdings, Inc., the Third Circuit of the United States Court of Appeals held that the New York City Housing Authority (“NYCHA”) could not repackage a claim for damages against G-I Holdings in the hopes of circumventing federal bankruptcy laws. G-I Holdings was the manufacturer of housing products containing asbestos. Seeking to address its asbestos related lawsuits, in 2001 GI Holdings filed for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of New Jersey. NYCHA submitted a half-billion dollar claim against G-I Holdings for property damage to its buildings. NYCHA claimed it had to take expensive measures to remove asbestos containing material from its buildings. In 2009, the District Court for the District of New Jersey and the Bankruptcy Court for the District of New Jersey approved a plan of reorganization that disposed all covered claims against G-I Holdings. Claim holders were also barred from reasserting such claims.

By: Parm Partik Singh

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

A “foreign representative” must obtain recognition of a foreign proceeding pursuant to 11 U.S.C. § 1517 prior to “apply[ing] directly to a court in the United States.” However, under § 1509(f), a foreign representative may sue in a United States court “to collect or recover a claim which is the property of the debtor” without first obtaining recognition. The scope of this exception, however, is unclear.

By: Stephanie Hung

St. John’s Law Student

American Bankruptcy Institute Law Review Staffer

In In Re Omni Enterprises, an Alaska Bankruptcy Court held that a bank may enforce the security interest of a prior loan that has already been repaid to cure a new loan that is in default. In 2009, a borrower entered into a loan agreement with a bank for $1.3 million. The loan was partly secured by the borrower’s deposit accounts. After the 2009 loan was repaid, the borrower entered into a new loan agreement with the same bank for $2.6 million. The new loan was secured by, among other things, the borrower’s equipment, furnishings, and fixtures, but did not explicitly include the deposit accounts. In 2015, the borrower defaulted on the loan and the bank swept the deposit accounts, causing the borrower to file for chapter 7 under the Bankruptcy Code. According to the bank, it continued to have a lien on the deposit accounts notwithstanding the repayment of the 2009 loan. The borrower’s trustee then filed suit in the United States Bankruptcy Court for the District of Alaska. The Court ultimately agreed with the bank’s interpretation of the loan agreements, and held that the sweeping of the deposit accounts was permissible.

By: Meghan Lombardo

St. John’s Law Student

American Bankruptcy Institute Law Review Staffer

In In re LMM Sports Management, the United States Bankruptcy Appellate Panel for the Ninth Circuit affirmed the bankruptcy court’s order disallowing a proof of claim that was filed after the deadline to file claims against the debtor (the “Bar Date”). Appellant Warner Angle Hallam Jackson & Formancek, P.L.C. (“Warner Angle”) filed proofs of claim against the debtor, LMM Sports Management (“LMM” or the “Debtor”), for legal services it provided to LLM in connection with a prior state court case against Your Source Pacific Fund I, LLP (“Your Source”). In the state court case, Your Source obtained a $2.4 million judgment against LLM, causing LLM to file for protection under chapter 11 of the Bankruptcy Code. The bankruptcy court approved a settlement of $1.5 million between Your Source and LMM (represented by new counsel) in full satisfaction of Your Source’s judgment over Warner Angle’s objection. Warner Angle filed its objection to the Debtor’s settlement motion on February 17, 2015, two months after the bar date. One day later, Warner Angle belatedly filed the proofs of claim. The Debtor objected to the proofs of claim arguing they should be disallowed as untimely. Warner Angle then filed a cross-motion requesting that the proofs be treated as timely because the late filing was the result of excusable neglect. The bankruptcy court rejected Warner Angle’s excusable neglect argument and denied its reconsideration motion. Warner Angle appealed.

By: Julie Lavoie

St. John’s Law Student

American Bankruptcy Institute Law Review Staffer

In In re Motors Liquidation Co., the Second Circuit reversed the Bankruptcy Court of the Southern District of New York’s holding that the “free and clear” provision in the sale order barred plaintiff’s claims against New GM arising out of ignition switch defects. The Second Circuit acknowledged that the bankruptcy court was correct in concluding that even though the cars were not recalled for ignition switch defects until 2014, five years after the § 363 sale, there was ample evidence that Old GM knew or should have known about the ignition switch defect prior to bankruptcy. Therefore, due process dictates that claimants were entitled to notice of the sale by direct mail or an equivalent means. Unlike the bankruptcy court, the Second Circuit found that ignition switch claimants were prejudiced by this lack of notice. The Second Circuit could not confidently say that, given the circumstances, the outcome of the § 363 sale motion would have been the same if the claimants were notified and thus afforded the opportunity to be heard and partake in the negotiation.

By: James Duckham

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Hurvitz,[1] the Bankruptcy Court for the District of Massachusetts granted Blue Grace Franchise (“Blue”) relief from an automatic stay because Blue’s right to enforce the noncompetition and nonsolicitation provisions in its franchise agreement were not claims under section 101(5) of the United States Bankruptcy Code (the “Code”).[2] In February 2015, Blue and Carl Hurvitz entered into a franchise agreement that gave Hurvitz a nonexclusive and limited license to use Blue’s services and technology.[3] This agreement contained restrictive covenants that prohibited Hurvitz from competing or soliciting business away from Blue for two years after the agreement was terminated.[4] In January 2016, Blue terminated the agreement and Hurvitz began to work for Freight Management Company (Freight), a direct competitor of Blue.[5] In April 2016 Blue filed suit in Massachusetts Superior Court, and in May 2016 Blue was granted a temporary restraining order that enjoined Hurvitz from continued employment at Freight and from soliciting or contacting Blue’s former, current, or perspective clients.[6] On May 16, 2016, Hurvitz filed a petition for relief under chapter 7 of the Code, which pursuant to section 362 of the Code, resulted in an automatic stay of the restraining order.[7] Blue then made a motion to the bankruptcy court requesting relief from the automatic stay.[8] Ultimately, the bankruptcy court granted relief from the automatic stay finding that the franchise agreement’s provisions were not considered claims under the Code.[9]

By: Samantha Guido

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

The use of a blocking director is a common practice by creditors looking to mitigate the risk of a debtor’s bankruptcy filing.[1] In In re Lake Michigan Beach Pottawattamie Resort LLC,[2] the United States Bankruptcy Court for the Northern District of Illinois held that a blocking director provision was invalid because it impermissibly eliminated the fiduciary duty owed by the creditor to the debtor.[3] In interpreting Michigan corporate governance law, the court reasoned that the use of blocking directors is generally permissible. The provision in this case, however, contracted away the fiduciary duty on the part of the blocking director, and that is impermissible.[4] The debtor granted a mortgage and assignment of rents to BCL – Bridge Funding (“BCL”) to secure a loan and a line of credit given by BCL to the debtor.[5] The debtor defaulted on his payment and created a Third Amendment establishing BCL as a “Special Member” with the right to approve or disapprove any material action by the debtor.[6] The provision requires the debtor to obtain BCL’s consent, which can be withheld for any reason, before filing for bankruptcy.[7] The agreement also contained a waiver of the fiduciary duty owed by the special member to the debtor by stating that BCL was not obligated to consider any interests but their own and has no obligation to give any consideration to the debtor’s interests.[8] When the debtor filed for bankruptcy, four out of five creditors voted in favor of the filing, with BCL withholding its vote.[9] BCL, in its motion to dismiss the debtor’s chapter 11 case, argued that the debtor was not authorized to file for Chapter 11 bankruptcy because the debtor did not have the consent of the blocking director.[10]

By: Eileen Ornousky

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Although bankruptcy courts have broad equitable powers, including the power to substantively consolidate debtors, these powers cannot be used to circumvent other sections of the Bankruptcy Code. Substantive consolidation pools separate legal entities’ assets and liabilities and allows each entity’s liability to be satisfied out of the common pool of assets.[1] In In re Archdiocese of Saint Paul and Minneapolis,[2] the United States Bankruptcy Court for the District of Minnesota held that it lacked the authority to substantively consolidate the debtor Archdiocese with over 200 Catholic nonprofit, non-debtor entities.[3] Additionally, the Court stated that even if it had the authority to do so, the Archdiocese and the other entities were not sufficiently interrelated to warrant consolidation.[4]