In the recent decision of Spizz v. Goldfarb Seligman & Co. (In re Ampal-American Israel Corp.), 2017 WL 75750 (Bankr. S.D.N.Y. Jan. 9, 2017), the United States Bankruptcy Court for the Southern District of New York dismissed a preference complaint filed by a trustee of chapter 7 debtor headquartered in Israel, where the payment was made from the debtor’s Israeli bank to an Israeli supplier.  The Court held that Section 547 of the Bankruptcy Code does not have extraterritorial effect and the transfer did not originate in the U.S.

Within 90 days before bankruptcy, the debtor wired money from the debtor’s Israeli bank account to the supplier’s Israeli bank account, on account of an antecedent debt.  The chapter 7 trustee sued the supplier to avoid and recover the alleged preferential payment.  The supplier asserted that Section 547 could not be applied extraterritorially.

Judge Bernstein observed that the “presumption against extraterritoriality” is a “longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.”  In Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010), the United States Supreme Court outlined a two-step approach to determine whether the presumption forecloses a claim.

First, the court asks “whether the statute gives a clear, affirmative indication that it applies extraterritorially.”  If not, the court must turn to the second step to determine if the litigation involves an extraterritorial application of the statute.  Second, the court determines “whether the case involves a domestic application of the statute, . . . by looking to the statute’s ‘focus.’ . . . [I]f the conduct relevant to the focus occurred in a foreign country, then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory.”

In applying this analysis, the S.D.N.Y. bankruptcy court first held that the avoidance provisions of the Bankruptcy Code (including Section 547) do not apply extraterritorially.  In so holding, the Court disagreed with the Fourth Circuit’s decision in French v. Liebmann (In re French), 440 F.3d 145 (4th Cir. 2006), which held that Congress intended international application of U.S. fraudulent transfer law.

Next, the S.D.N.Y. Bankruptcy Court ruled that the determination of whether the case involves a domestic or extraterritorial application of section 547 depends on whether the initial transfer came from the United States.  Because the transfer here occurred between a U.S. transferor headquartered in Israel and an Israeli transferee through Israeli bank accounts, the transfer occurred in Israel, and was not domestic.

Therefore, the court concluded that it could not be avoided, and dismissed the trustee’s preference complaint.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In the recent decision of Miller v. Zurich American Ins. Co. (In re WL Homes LLC, et al.), Adv. No. 11-50839 (BLS) (Bankr. Del. Jan. 10, 2017), the Delaware Bankruptcy Court addressed the affirmative defense of recoupment asserted by an insurer in defense of an adversary proceeding seeking the return of insurance premium overpayments.

Background

The Trustee determined that WL Homes had overpaid its premium obligations for the 2007 to 2009 term by roughly $2.2 million.  The Trustee filed an adversary proceeding against Zurich, asserting that he is entitled to turnover of approximately $2.2 million in insurance premium overpayments – called a “return premium” – from Zurich American Insurance Company (“Zurich”).  The Trustee also brought preference claims and sought to disallow claims of defendant.

Zurich defended against turnover by asserting the affirmative defense of recoupment for amounts actually spent defending and settling construction defect claims against WL Homes as insured, and Zurich as insurer.  The Trustee moved for partial summary judgment.

Analysis

Judge Shannon denied the Trustee’s motion.  To start, the Court provided a concise summary of the law of recoupment. “Recoupment is an equitable remedy that permits the offset of mutual debts arising from the same transaction or occurrence.” Slip op. at 5, citing In re Communication Dynamics, Inc., 300 B.R. 220, 225 (Bankr. D. Del. 2003).

The Trustee argued that recoupment did not apply because the respective debts arose from different parts of the Zurich policy, and because the policy did not contain an express reimbursement clause.

The Court disagreed with the Trustee’s contentions, and found that recoupment applied to the Trustee’s claims.  The Court held that the SIR amount and the premium “are interdependent economic features of the insurance contract[]”, and “form the economic basis of the insurance contract formed between Zurich and WL.”  In addition, the Court found it was unnecessary for the policy to contain an express reimbursement clause for recoupment to apply.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In the recent decision of In re: Abeinsa Holding Inc. et al., Del. Bankr. Ct. Dec. 14, 2016), Case No. 1:16-bk-10790, the Honorable Kevin J. Carey confirmed clean energy developer Abeinsa Holding Inc.’s Chapter 11 plan, which is part of the $16.5 billion global restructuring for Spanish parent Abengoa SA.  Abengoa, with operations in about 50 nations, is a major figure in clean energy and environmental sustainability engineering.

The plan was confirmed over the objections of the U.S. Trustee’s office, which complained among other things of the liability releases contained in the plan.

The Court agreed with the U.S. Trustee that the liability releases contained in the Chapter 11 plan are broad.  However, the Court found that they do not violate the Bankruptcy Code and were necessary, negotiated-for components of the exit strategy.  Notably, no creditors objected to the releases, which the Court found to be of significance.

The Court found the liability releases to be the result of extensive bargaining, and essential to the deal in which Abeinsa’s parent and other entities would bring in enough new money to make the exit strategy feasible and not cripple a crucial component of Abengoa’s multilayered global restructuring strategy.

One key objection from creditor Portland General Electric Co. (“PGE”), which has a litigation claim against Abeinsa for more than $200 million in damages on breach-of-contract claims. PGE’s objection dealt with the complex structure of Abeinsa’s bankruptcy plan, and a measure that has parent Abengoa retaining ownership of its subsidiary companies that the creditor argues is in violation the Chapter 11 absolute priority rule, which places equity holders at the very bottom when it comes to order of recovery.

Judge Carey overruled PGE’s objection, finding that there is an exception to the absolute priority rule when a stakeholder brings new value to the case.  The Court found that Abengoa was doing so with a new value contribution of nearly $40 million, part of which will be used for creditor distribution.

Abeinsa’s plan, a major component of Abengoa’s global restructuring effort, calls for four separate subplans that will liquidate some Abengoa subsidiaries and restructure others with $1 billion in new investment being injected.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In the recent decision of George L. Miller v. Edward Welke, et al. (In re United Tax Group, LLC), Adv. Pro. No. 16-50088 (LSS), the Delaware Bankruptcy Court considered a motion for judgment on the pleadings in connection with the Trustee’s complaint asserting preference and fraudulent transfer claims.

The Court found that the Trustee failed to adequately plead all counts necessary to give rise to a preference claim.  Specifically, the Court held that the Trustee failed to: (i) identify the transferee of each transfer, and (ii) identify the nature and amount of each alleged antecedent debt.  The Court also declined to consider the Trustee’s factual allegations raised in his answering brief.

As for the fraudulent transfer claims, the Court found that the Trustee failed to allege facts necessary to demonstrate that the debtor was insolvent at the time such transfers were made, which is an element of a fraudulent transfer claim under Section 548 of the Bankruptcy Code.  In addition, the Trustee failed to set forth a factual basis for his contention that the Debtor received less than reasonably equivalent value for certain of the transfers. The Court found that the Trustee’s allegations merely parroted the language of Section 548.

In light of the above, the Court granted dismissal of the Trustee’s claims, but granted leave for the Trustee to amend the complaint to adequately plead facts to support the Trustee’s claims.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In the recent decision of Pacifica L51 LLC v. New Invs., Inc. (In re New Invs., Inc.), No. 13-36194, 2016 WL 6543520 (9th Cir. Nov. 4, 2016), the Ninth Circuit held that Section 1123(d) of the Bankruptcy Code legislatively overruled Great W. Bank & Tr. v. Entz-White Lumber & Supply, Inc. (In re Entz-White Lumber & Supply, Inc.), 850 F.2d 1338 (9th Cir. 1988), and required debtors to pay interest at the default rate to cure a default pursuant to a plan of reorganization.

The debtor defaulted on a mortgage.  The bankruptcy court confirmed a chapter 11 plan that allowed the debtor to cure the default by selling the property and using the sale proceeds to pay the loan off at the pre-default rate.  At the same time, the court required the debtor to escrow nearly $800,000 as a disputed claim reserve should an appellate court require the debtor to pay default interest to effectuate the cure.  On appeal, the Ninth Circuit reversed.

The Circuit Court ruled that “[t]he plain language of § 1123(d) compels the holding that a debtor cannot nullify a preexisting obligation in a loan agreement to pay post-default interest solely by proposing a cure.”  The Circuit Court stated as follows:

What § 1123(d) affects is how a debtor returns to pre-default conditions, which can include returning to a lower, pre-default interest rate. . . . [Under common law, the] borrower does not effectuate a cure merely by paying past due installments of principal at the pre-default interest rate. Rather, the borrower’s cure obligations may also include late charges, attorneys’ and trustee’s fees, and publication and court costs. . . .  It is only once these penalties are paid that the debtor can return to pre-default conditions as to the remainder of the loan obligation.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

On November 28, 2016, Judge Laurie Selber Silverstein of the Delaware Bankruptcy Court ruled on a motion for relief from the automatic stay (we she treated as a motion for relief from the discharge injunction) in the Altegrity bankruptcy, Case No. 15-10226.  The “Opinion” is available here.  The Opinion was issued following legal argument and, by agreement of the parties, based only upon undisputed facts.  Opinion at *1.

While various other arguments are addressed by Judge Silverstein, the primary issue within the Opinion boils down to two simple issues – (1) what is a “Claim” in bankruptcy, and (2) did all of the relief sought by the movant (who did not file a claim) constitute “Claims”.  Opinion at *11.

In the Opinion, Judge Silverstein adopts the broad interpretation of a Claim that is routinely used, any “right to payment” constitutes a Claim.  Holding that substantially all of the movant’s claims would be resolved through payment, and because the movant filed no claim in the bankruptcy case, Judge Silverstein denied the Motion in all respects but one – the movant can continue an existing suit to seek to obtain non-monetary relief, including the expungement of his commercial driving report (DAC Report).

A number of other interesting issues are briefly addressed in the Opinion, and I encourage you to follow the above link and read it for yourself.  It is an easy 19-page read.  I note that once again, the Delaware Bankruptcy Court continues to take an expansive view of “Claims” and would advise any party to a bankruptcy to take note of any claims bar date orders.  If a cash payment *could* resolve your grievance with the Debtor, it would be wise to file a claim out of an abundance of caution.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

On August 29, 2016, the Third Circuit released a precedential opinion (the “Opinion”) which opined that a “[redemption] premium, meant to give the lenders the interest yield they expect, [does not] fall away because the full principal amount is now due and the noteholders are barred from rescinding the acceleration of debt.”  The Third Circuit’s Opinion is available here.  This Opinion was issued in an appeal from a decision made in the Energy Future Holdings Bankruptcy Case No. 14-10979.  The District Court and Bankruptcy Court both ruled that the make-whole premium did not survive bankruptcy, and this Opinion reversed those of the lower courts.

Because we represent a party at interest in the EFH bankruptcy, I won’t be providing a summary of this Opinion.  I will say, however, that this Opinion represents a major change in the way that redemption premiums will be considered in the Delaware Bankruptcy Court.  This is not an opinion that can be overlooked, and practitioners in the Delaware Bankruptcy Court should make sure they are familiar with the analysis applied by the Opinion written by Judge Ambro.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

In a lengthy opinion published November 7, 2016, Judge Sontchi of the Delaware Bankruptcy Court provided a thorough analysis of the interaction between the Stored Communications Act (“SCA”) and the Bankruptcy Code.  Judge Sontchi’s opinion is available here (the “Opinion”).  The Opinion was issued in the Chapter 15 case In re Irish Bank Resolution Corporation Limited, Case No. 13-12159.  In this case, the Chapter 15 foreign representative of Irish Bank Resolution Corporation Limited (the “Debtor”) sought entry of an order directing Yahoo! Inc. (“Yahoo”) to turn over all electronically stored information (“ESI”) in a specific email account belonging to an individual who had evaded the proceeding and failed to comply with discovery orders.

This is one in a series of several opinions which has ruled that the SCA prohibits certain disclosures.  Opinion at *37-38 (“Other courts have come to similar conclusions regarding judicially-manufactured consent over the steadfast objection of an email user. That is, that the SCA does not provide for a mechanism in civil litigation to compel disclosure of a user’s private email contents through a subpoena or a court order directed at the service provider when none of the parties to the communication gave their consent.”)

The SCA allows only a small number of people to consent to the disclosure of the contents of an email account.  And despite no other contact information existing for the owner of this account, as their real identity is unknown, the Court found itself constrained by the limits of the SCA.  This is a particularly offensive situation as the owner of the email account shut it down for the apparent purpose of avoiding service.  As Judge Sontchi stated, “the Foreign Representatives rightly indicate that the only logical conclusion is that Rasimov (or someone on his behalf) terminated it upon receiving the 2004 Motion.”  Opinion at *16 (emphasis added).  To get a full flavor of the efforts the Foreign Representative engaged in to try and obtain this discovery, I recommend you read the 13 pages of history laid out in the Opinion.

This Opinion supports the principle that the will of Congress,  as understood by the courts, will be upheld.  See, e.g., Opinion at *44.  “[T]he Court reaches its conclusion based on clear principles laid down by Congress in the Bankruptcy Code and the SCA.”  Thus, it is my opinion that the most certain way for Congress to ensure they make the laws, rather than having judge made law, is to make it very clear what the intent of the law is as well as any limitations when creating the record of the law’s enactment.  Many may argue that the SCA’s provisions were created in an effort to prevent the government from becoming “Big Brother”, but the unfortunate result of how courts have applied it, is that those who should have their communications uncovered can shelter behind its broad protection.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

On November 8, 2016, Judge Kevin Gross of the Delaware Bankruptcy Court issued an opinion (the “Opinion”) that affects nine different bankruptcy cases.  The Opinion was issued in response to the request of Honeywell and Ford for access to asbestos claimants’ Rule 2019 exhibits.  A copy of the Opinion is available here.

Before diving deep into this Opinion and these cases, it is worthwhile to review In re Motions for Access of Garlock Sealing Techs. LLC, 488 B.R. 281 (D. Del. 2013).  The Garlock Sealing opinion is cited extensively by Judge Gross, and is the controlling precedent in Delaware for this issue.  In that case, the District Court limited the use to which the movants could use the requested information, allowing it to be used solely in the Garlock Sealing bankruptcy proceeding.  Opinion at *10.  In this case, the requested documentation included: The Rule 2019 Exhibits include the following:

(1) the names and addresses of the clients of the submitting attorney; (2) exemplars or actual copies of the relevant retention agreements; (3) identification of disease; (4) claim amounts if liquidated; (5) sometimes full or partial social security numbers; (6) sometimes medical records, with information including full or partial social security numbers; family histories (including causes of death of family members), results of physical examinations, chest x‐rays, and lung function tests, and other similarly sensitive medical information; and (7) sometimes other records that the law firm maintained in connection with or commingled with the required information.

Opinion at *6.  Honeywell and Ford indicated in their papers and during the hearing on their motion that they want access to the Rule 2019 Exhibits, as well as to retain the information indefinitely, to “ferret out invalid or fraudulent asbestos claims”.  What came across in oral argument is that an important purpose for both Honeywell and Ford in seeking the Rule 2019 Exhibits is to aid in their lobbying efforts.  Opinion at *12.  While Honeywell and Ford sought limitless access to use the information outside of bankruptcy, Judge Gross was not sympathetic, putting significant limitations on their use of the information.  Judge Gross ruled that the information

“may not be used for “lobbying efforts.”  Honeywell and Ford may use the Rule 2019 Exhibits to investigate fraud in the claims process and may share the information with the NARCO Trust in an aggregate format.  In other words, Honeywell and Ford may not share the identity of individuals by name or other identifying means with the NARCO Trust.  Honeywell and Ford are granted three months to complete their work and must comply with the Protocol Order which requires the destruction of the Rule 2019 Exhibits at the conclusion of the work.  Honeywell’s and Ford’s efforts will be at their expense.  In addition, the Court will appoint a party to oversee the production of the Rule 2019 Exhibits.

Opinion at *15.  While Judge Gross did find that “the presumption of public access applies” to the 2019 Exhibits, Opinion at *13, he did cited to Garlock Sealing in deciding that they did not adequately state a proper purpose.  Opinion at *14.

In summary, while a court may give you the information you request, it may also limit it in such a manner that the information is no longer worth the expense incurred in obtaining it.  Prior to making these types of requests, it is important to determine what the controlling precedent says on the issue.  In the Delaware Bankruptcy Court, the judges read the entirety of cited opinions, so it is vital that briefs distinguish them, or rely upon them, appropriately.

John Bird is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  John is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach John at (302) 622-4263 or at jbird@foxrothschild.com.

On October 27, 2016, Chief Judge Brendan L. Shannon of the Delaware Bankruptcy Court issued an opinion overruling objections to the claims of Seegrid’s former CEO.  A copy of the Opinion is available here.

This is a relatively short Opinion considering the number of issues that it discusses.  The first issue was whether Mr. Horbal, the CEO at the relevant time had authority to use the Debtors; private jet.  The second issue was whether Mr. Horbal was under contract at the time of his termination, and whether such termination was for cause.

The first issue hinges upon what the applicable policies of the Debtor were at the time of Mr. Horbal’s use of the jet.  In this case, the applicable corporate policy required the approval of the CEO prior to using the corporate jet.  In this instance, the Court held that as the CEO, Mr. Horbal had the authority to approve of his use of the jet.

The second issue was the more interesting one.  The essential facts are as follows: Mr. Horbal was a President at the Debtor prior to becoming its CEO.  During his time as a President, he was employed under a contract that provided specific remuneration and benefits upon termination.  However, when he accepted the role of CEO, his contract was never revised.

While the Debtors argue that the change in position effected the termination of the agreement, Opinion at *14, Mr. Horbal argued that the parties continued to comply with the terms of the agreement, thereby ratifying it, despite the change in position, Id.  In this instance, Judge Shannon held that “Mr. Horbal has the better argument.”  Id.

My  $.02

This case provides a solid reminder of the importance of documentation.  In this case, the Debtors did not have documentation to support the allegations made in their claim objection.  The Debtors argued that the policy concerning the corporate jet was recently changed – but failed to produce any evidence to support the allegation.  The Debtors also argued that Mr. Horbal was fired for cause – but failed to produce any evidence to support the allegation.  As Judge Shannon noted, “when a company (and especially a company as actively represented by counsel as Seegrid) fires a senior executive for cause, somebody usually writes it down.”  Opinion at *17.  

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.