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.

In the decision of Motors Liquidation Co. Avoidance Action Trust v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Co.), 552 B.R. 253 (Bankr. S.D.N.Y. 2016), the SDNY bankruptcy court held that prepetition interest payments on a term loan did not qualify as “settlement payments” under Section 546(e) of the Bankruptcy Code.  The court also found that the record did not establish whether they qualified as transfers in connection with a securities contract within the meaning of section 546(e).

By way of brief background, the debtor filed preference actions against holders of interests in a term loan, to recover interest payments made within the 90 days before the bankruptcy filing.  Defendants moved to dismiss, asserting that the interest payments were shielded from avoidance under section 546(e) as (i) settlement payments, and (ii) transfers in connection with a securities contract.

In denying the motion to dismiss, the bankruptcy court ruled that the interest payments did not qualify as protected “settlement payments” under section 546(e).  Relying on Official Comm. of Unsecured Creditors of Quebecor World (USA) Inc. v. Am. United Life Ins. Co. (In re Quebecor World (USA) Inc.), 719 F.3d 94, 98 (2d Cir. 2013), the court observed that “the touchstone for application of the ‘settlement payment’ safe harbor is the transfer of cash or securities to complete a securities transaction.”

In addition, the bankruptcy court concluded that it was premature to determine whether the interest payments were protected as transfers made in connection with a securities contract under Section 546(e).  The bankruptcy court stated that “while Madoff applies an expansive scope for a protected ‘securities contract,’ the current record provides no factual basis to support the defendants’ argument.”

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 an 8 page decision dated October 19, 2016, Judge Carey of the Delaware Bankruptcy Court overruled an objection to the reclassification of the claim of a terminated employee.  Judge Carey’s opinion is available here (the “Opinion”).  This employee (“Mangan”) was a fifteen year veteran of the Debtor, and was entitled to 15 weeks of severance pay upon termination.  That is not in dispute.

Also admitted is that Mangan was terminated on August 1, 2014, the Debtors filed for bankruptcy on September 9, 2014, and the Debtors’ employees and representative obtained continued assistance from Mangan in running the business through October 16, 2016.  Finally, $8,693.70 remains unpaid to Mangan.  Opinion at *3.

Judge Carey’s Opinion

Judge Carey started his discussion of applicable law by discussing section 507(a)(4) of the Bankruptcy Code, which provides that priority status would be granted for severance earned by an individual within 180 days of the bankruptcy petition.  Opinion at *4.

This begins the real analysis, which has resulted in a split among bankruptcy courts: when does an employee “earn” a severance payment.  Some courts have held that severance pay, like vacation pay, is earned over the course of employment.  Opinion at *5.  However, Judge Carey has already ruled upon this issue, and in citing his prior In re Garden Ridge Corp. opinion, shows that he has not changed his mind.  In that case, as in this one, he held that an employee’s “right to receive severance payments was earned no earlier than upon termination of employment.”  Opinion at *5.

Judge Carey refers to a number of cases on this issue in a variety of jurisdictions, so even for those of you who are not Delaware practitioners, it is worth a read.  Footnotes 19 and 22 are the footnotes of interest for those who want a quick overview of some other courts’ holdings on this issue.

At the end of the day, I can see how both arguments are persuasive.  Without both having worked a number of years and having been fired, there would be no severance payment.  However, I don’t think we will ever see a decision on this issue on appeal because the amounts involved are just too small; 507(a)(4) caps the priority amount at $12,850.  An appeal to district court would almost certainly cost the estate far more than this limited cap.  And at the end of the day, an estate’s fiduciaries are charged with maximizing the recovery to unsecured creditors, not minimizing priority claims.

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.

A recent decision by the United States Bankruptcy Court for the Western District of Texas in In re Sanjel (USA) Inc., et al., Case No. 16-50778-CAG (Bankr. W.D. Tex. July 29, 2016) explains that in a Chapter 15 case, the U.S. bankruptcy court will not always apply the law of the foreign jurisdiction to U.S. creditors and U.S.-based claims.  Specifically, the case addresses whether it is appropriate for a bankruptcy court to modify or limit a foreign stay through changes to its Chapter 15 recognition order.

Sanjel (USA) Inc. and its related entities (multi-national energy services provider) originally commenced Canadian reorganization proceedings.  The Canadian court granted the debtors a broad stay of any actions against their directors and officers.  The United States bankruptcy court recognized the Canadian proceedings under chapter 15 of the Bankruptcy Code and entered a recognition order extending the reach of the Canadian stay to the United States.

The recognition order among other things gave domestic force to the Canadian stay of legal proceedings against the debtors’ directors and officers.  Claimants at issue included certain of the debtors’ U.S.-based employees who wanted to pursue claims arising under the United States Fair Labor Standards Act, or “FLSA.”  The statute of limitations on FLSA claims may continue to run during the pendency of a chapter 15 case, meaning that the continued imposition of the automatic stay could extinguish the employees’ claims.  Thus, two employees sought to modify the Canadian stay granted in the recognition order.

The Debtors contended that the recognition order was not prejudicial to the employees because they could seek relief before the Canadian court, and that any modification would be prejudicial to the debtors whose limited personnel would be distracted from their restructuring efforts.  Similar arguments made by debtors were successful in In re Nortel Networks Corp., et al., Case No. 09-10164-KG (Bankr. D. Del. Mar. 10, 2010)  in a dispute involving the similar issues before the United States Bankruptcy Court for the District of Delaware, upheld on appealNortel held that, if parties believed they were prejudiced by the stay imposed by the Canadian courts and given effect in the United States by a recognition order, the proper course of action was to seek relief from the Canadian court.

The Sanjel bankruptcy court departed from the Nortel decision under the facts presented.  Under the circumstances, the court concluded that the hardships of the employees carried the greatest weight and, accordingly, modified the recognition order to permit the employees to bring and continue their FLSA claims.  The court emphasized that, under the plain language of section 108(c) of the Bankruptcy Code, the statute of limitations for the FLSA claims would continue to run during the proceeding.  Without relief from the stay, the movants would not be able to argue this tolling point before the appropriate court.  The court also noted that the Debtors’ harm did not counterbalance movants’ risk of losing their statutory claims.

As such, the court departed from Nortel, finding that it would be too burdensome for the movants to appear in Canadian court to “pursue claims in Colorado based wholly on a statutory right created by United States law to protect employees within the United States.”

For U.S. creditors of foreign companies, the Sanjel decision appears to be a win in that they will not have to travel abroad to seek to protect certain of their rights. However, the Sanjel decision creates greater uncertainty for foreign debtors that foreign stays may be disrupted in a Chapter 15 bankruptcy proceedings in the U.S. Stay tuned for further Chapter 15 developments.

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 October 11, 2016, Chief Judge Brendan L. Shannon of the Delaware Bankruptcy Court issued a letter ruling in which he opined on the appropriate valuation of a first lien.  A copy of the Opinion is available here.

While the ruling is short, it is important that lenders are cognizant of it.  Judge Shannon cites to a prior opinion he issued in which he held that “the operative date for valuation of residential property under § 1322(b)” is the petition date.  In re DiMauro, 548 B.R. 685, 689 (Bankr. D. Del. 2016).

The result in this case is that the proof of claim filed by the first lien lender is operative in valuing the property, and the payoff amount sought by the first lien lender is not.  This is the value used to determine whether second (and possibly third) liens should be stripped off.

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.