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Breach of Pre-petition Contract Claims Not Immune From Core Jurisdiction

By: Matthew S. Smith

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, the United States Bankruptcy Court for the Southern District of New York in In re Charter Commc’ns held that a creditor’s adversary proceeding for an alleged pre-petition breach of contract was one over which the bankruptcy court could exercise its “core” jurisdiction.[1] In deciding whether the creditor’s claims fell within its core jurisdiction, the court was guided by 28 U.S.C. § 157,[2] which provides a list of matters that are characterized as “core proceedings.”[3] The creditor, JPMorgan, alleged that debtor, Charter, had committed non-curable, nonmonetary pre-petition defaults under a pre-petition contract, which would prevent Charter from being able to take additional loans as originally provided in their Credit Agreement.[4] Since JPMorgan refused to consent to adjudication in the bankruptcy court, the court focused on “the close interconnection between the adversary proceeding [at issue] and the bankruptcy process.”[5] The court found that the nature of plaintiff JPMorgan’s proceeding directly affected the confirmation of debtor Charter’s chapter 11 bankruptcy plan – a core administrative function of the bankruptcy court – and thus held that the matter came within the court’s core jurisdiction.[6]

Approving Insider Compensation Under Section 503(c)(3) Court Discretion or Business Judgment Standard

By: Cameron Fee

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, the United States Bankruptcy Court for the Northern District of Texas, in In re Pilgrim’s Pride Corp., held that certain consulting agreements negotiated by chapter 11 debtors with former executives were not the type of insider compensation agreements proscribed by section 503(c).[1] After filing for chapter 11, Pilgrim’s Pride Corporation entered into resignation agreements with its CEO Rivers and COO Wright. The debtors filed a motion pursuant to section 503(c) for “court authority to purchase time-limited noncompetition agreements,” to prevent Rivers and Wright from soliciting the company’s customers.[2] The trustee argued that the proposed consulting agreements violated section 503(c)(1) because the payments were meant to induce Wright and Rivers to remain with the business. The court, however, found that the agreements were meant to induce Rivers and Wright not to work for a competitor for a limited time and therefore the consulting agreements did not implicate either section 503(c)(1)[3] or 503(c)(2).[4] The court also found—after determining an independent assessment of the circumstances was the appropriate standard of review—that the agreements did not violate section 503(c)(3) because they were justified given the facts and circumstances of the case.[5]

Court Holds that Administrative Claims Cannot Be Disallowed Under Section 502(d)

By: Michael Ryan Diaz

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In ASM Capital, LP v. Ames Department Stores, Inc. (In re Ames Department Stores, Inc.),[1] the Second Circuit held that section 502(d), which disallows claims of a party that has failed to return preferential transfers to the debtor,[2] does not bar payment for administrative expenses under section 503(b).[3] The debtor, Ames Department Stores, Inc. (“Ames”), filed a voluntary petition under chapter 11 of the Bankruptcy Code.[4] While in bankruptcy, Ames received a default judgment, for the recovery of preferential transfers,[5] against one of its suppliers, G & A Sales, Inc. (“G & A Sales”).[6] Also facing insolvency, G & A Sales filed a bankruptcy petition and transferred to other entities all of its assets, including two administrative claims against Ames for providing post-petition supplies.[7] These administrative claims were sold to ASM Capital, a distressed-debt investment firm. Meanwhile, Ames’ board of directors eventually decided that liquidation, rather than reorganization, would maximize value for the debtor’s estate.[8] In the midst of liquidation, Ames made distributions for administrative expenses to certain claimants, but withheld payment to ASM Capital on the ground that section 502(d) disallows administrative expense claims that were acquired from a party who had failed to return any preferential transfer or its equivalent value. ASM Capital responded by filing a motion in the bankruptcy court to order the debtor to pay ASM Capital its administrative expense claims. ASM Capital argued that section 502(d) does not apply to administrative expense claims, but the bankruptcy court rejected this argument and denied the motion.[9] Although the district court affirmed the bankruptcy court’s ruling,[10] the Second Circuit reversed and held that section 502(d) does not apply to administrative expense claims.[11]

Severance Payments May Constitute Retiree Benefits

By: Bertrand J. Choe

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Arclin U.S. Holding, Inc.,[1] the Bankruptcy Court for the District of Delaware held that a company, subsequent to its chapter 11 petition, was required to continue health insurance premium payments made to a former employee pursuant to a severance agreement. In so doing, the court limited protections for debtors under section 1114 of the Bankruptcy Code,[2] which requires chapter 11 business debtors to continue “retiree benefit” payments post-petition. Six months prior to filing its chapter 11 petition, Arclin U.S. Holding, Inc. (“Arclin” or “debtors”) instituted a reduction in its work force, whereby thirty-nine of its employees, including Steve Phillips, were terminated. Phillips was given a severance package including separation pay, car allowance, and payment of his health insurance premiums. Upon filing for bankruptcy, Arclin discontinued its payments to Phillips, at which point Phillips brought the present suit. The court looked to the plain meaning of section 1114(a), which requires, inter alia, that for benefits to be considered “retiree benefits,” they must be both medical in nature and for retirees.[3] Since the benefits to Phillips included payments for health insurance, the court deemed them to be “medical” within the meaning of section 1114(a). The court further deemed the payments to be for retirees because of Arclin’s own description of the payments as “an early retirement package.”[4]

The Codes Policies Go Bankrupt When it Comes to Petitions Filed by Same-Sex Couples

By: Jacklyn A. Serpico

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Federal law continues to have a disparate impact on same-sex couples filing bankruptcy petitions. In In re Roll,[1] the debtors, Roll and Currie, were a same-sex couple that filed separate bankruptcy petitions under chapter 7. They were residing together in the same household, along with Roll’s adult niece. The United States Trustee moved to dismiss the debtors’ separate petitions pursuant to section 707(b)(1) of the Bankruptcy Code based on the presumption of abuse of chapter 7.[2] The United States Trustee argued that, despite filing separate petitions noting their own individual finances, the couple’s finances were in fact shared, and thus, the debtors “should be treated as a single economic unit.”[3] The United States Trustee argued that the debtors’ combined income was sufficient to pay off their debts, and as such, their individual petitions listing insufficient separate finances constituted an abuse of chapter 7.[4] Yet, the Bankruptcy Court for the Western District of Wisconsin denied the motion to dismiss because the United States Trustee failed to meet the evidentiary burden demonstrating the debtors’ income and expenses to support a finding of abuse.[5] The court further discussed that the totality of the circumstances did not support a finding of abuse merely because the couple lived together, shared certain resources, and together had the potential ability to pay creditors.[6] More importantly, in emphasizing that only married persons may file joint petitions,[7] the court noted that same-sex marriages are prohibited under the Wisconsin Constitution and that federal law prohibits a federal court from recognizing any such marriage.[8] Consequently, the court reasoned that Roll and Currie had no choice but to file separately, and thus, have their income assessed independently of one another for purposes of determining abuse under chapter 7.

Equities Can Adjust Administrative Claim for Stub Rent

By: Timothy Poydenis

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

The Bankruptcy Court for the District of Delaware recently held in In re Sportsman’s Warehouse, Inc., that landlords who seek payment of administrative claims for stub rent, the rent for the period from the petition date through the first of the following month, are not per se entitled to an administrative priority.[1] In this case, Sportsman’s Warehouse, a retail sporting goods store, filed for bankruptcy under chapter 11 on March 21, 2009. Sportsman’s Warehouse was renting the warehouse in which it operated its business. Despite the fact that rent was due and payable on the first of each month, Sportsman Warehouse failed to pay the rent due on March 1, 2009. Consequently, the landlord sought the allowance and immediate payment of the unpaid stub rent for the period from March 21, 2009, through March 31, 2009.[2] Although the court recently held that a debtor’s post-petition use and occupancy of leased premises, per se, creates an administrative claim,[3] the court held that its previous holding was a “misapplication of the law and will no longer be followed by this Court.”[4] Rather, the court held that a case-by-case analysis “must” be used to determine the amount of the benefit to the estate. The result of that determination will provide the amount of payment the landlord is entitled to as an administrative claim under section 503(b).

Chapter 13 Plan Cannot Avoid Lien Absent Adversary Proceeding

By: Michael Buccino

St. John's Law Student

American Bankruptcy Institute Law Review Staff

In SLW Capital, LLC v. Mansaray-Ruffin (In re Mansaray-Ruffin), the Third Circuit held that a creditor’s lien could not be avoided through the confirmation of a Chapter 13 plan that treated the claim as an unsecured claim.

[1]

Notwithstanding the importance of finality in bankruptcy proceedings and statutory language binding creditors to the terms of a confirmed plan, since the Federal Rules of Bankruptcy Procedure require an adversary proceeding to invalidate liens, the order confirming the confirmed plan was not res judicata with respect to the status of the creditor’s lien.

[2]

Master Repurchase Agreement Penetrates the Automatic Stay

By: Valerie Sokha

St. John's Law Student

American Bankruptcy Institute Law Review Staff

The derivatives provisions of the 2005 BAPCPA amendments greatly enlarged the scope of the financial contracts that are shielded from traditional bankruptcy limitations such as the automatic stay and the prohibition on ipso facto clauses. Those exceptions were reaffirmed in a strong anti-debtor opinion in American Home Mortgage, Holdings, Inc. v. Lehman Brothers Inc.

[1]

Although Lehman may now regret its victory since it is a debtor in its own bankruptcy case, it succeeded in defeating a number of theories that might have limited the scope of the exceptions. In an opinion relying in part on the market protection policy reflected by the exceptions, the Delaware Bankruptcy Court adopted a liberal definition of “repurchase agreement” that turned mostly on the intention of the parties as stated in the four corners of their agreement.

Single Asset Real Estate Tightening the Noose for Developers

By: Anna Drynda

St. John's Law Student

American Bankruptcy Institute Law Review Staff

Recently, the United States Bankruptcy Court for District of New Jersey in In re Kara Homes, Inc. held that affiliated Chapter 11 debtors, each owning separate real estate development projects for the construction of single family residences and condominiums, qualified as single asset real estate (“SARE”) cases, a holding that allowed the lenders expedited relief from automatic stay.

[1]

The case focused on whether the debtors conducted “substantial business” other than operating the real property sufficient to exclude them from the SARE provisions.

[2]

Adopting a “pragmatic approach,” the Court held that even if the business activities would qualify had the debtors performed them for third parties, such activities when performed for the debtor itself, or one of its affiliates, do not constitute substantial business.

[3]

The residential home building business, although involving real estate, arguably has more similarity to a manufacturing operation than to the on-going property management operations of many SARE debtors. The Kara Homes approach makes it very difficult for real estate developers to reorganize in bankruptcy.

Default Interest Rates Apply to Section 363 Sales

By: Caitlin Cline

St. John's Law Student

American Bankruptcy Institute Law Review Staff

Drawing a distinction between Chapter 11 plans and section 363 sales, the Ninth Circuit Court of Appeals held in General Electric Capital Corp. v. Future Media Productions, Inc.

[1]

that when an oversecured creditor is paid off through a section 363 sale, it is entitled to enforce a default interest rate provision and is not limited to the pre-default rate. In contrast, if payment is made through a confirmed plan, the debtor may “cure” the default under section 1124 and avoid the default interest rate.

[2]

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