Archives: Recent Developments in Bankruptcy Law

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In an Alert published on Wednesday, Audrey Noll examines the U.S. Supreme Court’s recent ruling in Husky Int’l Elecs., Inc. v. Ritz:

Last month, the U.S. Supreme Court held that the “actual fraud” bar to discharge debts under Bankruptcy Code section 523(a)(2)(A) includes claims based on intentional fraudulent transfers, regardless of whether the debtor made a false representation to the creditor.

In Husky Int’l Elecs., Inc. v. Ritz, 2016 WL 2842452 (May 16, 2016), the justices reversed a Fifth Circuit ruling and resolved a split among the circuits on the issue of whether “actual fraud” under section 523(a)(2)(A) requires a false representation. (Compare In re Ritz, 787 F.3d 312 (5th Cir. 2015)(“actual fraud” requires false representation) with McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000)(“actual fraud” encompasses actual fraudulent transfer schemes that do not necessarily include false representation).)

The facts in Husky were fairly straightforward. Husky International Electronics, Inc. sold electronic device components to Chrysalis Manufacturing Corp., which failed to pay for about $164,000 worth of the goods. Chrysalis’s principal, Daniel Lee Ritz, drained Chrysalis of assets by transferring them to other entities that he controlled while Chrysalis was insolvent, and for less than reasonably equivalent value. Husky sued Ritz, seeking to hold him personally liable for the $164,000 debt based on fraudulent transfer and alter ego claims. Ritz then filed a Chapter 7 petition. Husky responded by filing a complaint in the bankruptcy court, objecting to the discharge of Ritz’s alleged debt under Bankruptcy Code Section 523(a)(2)(A) (making debt obtained by “false pretenses, a false representation, or actual fraud” nondischargeable).

To read Audrey’s full discussion of the court’s ruling, please visit the Fox Rothschild website.


Audrey Noll is counsel in the firm’s Financial Restructuring & Bankruptcy Department, in its Las Vegas office.

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In an Alert published on Wednesday, Audrey Noll examines the U.S. Bankruptcy Court for the Northern District of Illinois’ recent ruling in In re Lake Mich. Beach Pottawattamie Resort LLC:

Lenders beware: An Illinois bankruptcy court recently ruled that a lender went too far in its efforts to stop a debtor from filing for bankruptcy. The court invalidated the lender’s “blocking director” provision for explicitly excusing the lender from considering any interests other than its own. See In re Lake Mich. Beach Pottawattamie Resort LLC, 2016 WL 1359697 (Bankr. N.D. Ill. April 5, 2016).

The LLC debtor owned and operated a vacation resort. After the debtor defaulted on its secured loan, it entered into a forbearance agreement that required the debtor to amend its operating agreement to establish the lender as an additional “special” member with the right to disapprove of any “material action,” including the filing for bankruptcy relief.

The amended operating agreement also provided that the special member was “entitled to consider only such interests and factors as it desires, including its own interests,” and “to the fullest extent permitted by applicable law, ha[d] no duty or obligation to give any consideration to any interests of or factors affecting the Company or the Members.”

Soon after the forbearance agreement was signed, the debtor defaulted again and the lender filed for foreclosure. The debtor filed a bankruptcy petition on the eve of foreclosure, authorized by the four non-special members. The lender’s special member did not consent.

As of the petition date, the property was worth in excess of $6 million and the secured loan was roughly half of that.

 To read Audrey’s full discussion of the court’s ruling, please visit the Fox Rothschild website.


Audrey Noll is counsel in the firm’s Financial Restructuring & Bankruptcy Department, in its Las Vegas office.

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In an Alert published today, Audrey Noll examines the Seventh Circuit’s recent decision in Official Comm. of Unsecured Creditors v. T.D. Invs. I, LLP (In re Great Lakes Quick Lube LP):

A landlord who terminates a lease before the tenant’s bankruptcy may later be found to have received a preferential or fraudulent transfer and held liable to the bankruptcy estate for the value of the lease, the U.S. Court of Appeals for the Seventh Circuit has ruled.

In light of the March 11 opinion by Judge Richard Posner in Official Comm. of Unsecured Creditors v. T.D. Invs. I, LLP (In re Great Lakes Quick Lube LP), landlords would be wise to think carefully before terminating a lease after their tenant defaults. If the tenant subsequently files for bankruptcy, the landlord might find itself subject to substantial liability as the recipient of an avoidable transfer.

The debtor in the case, Great Lakes Quick Lube LP (Great Lakes), had owned more than 100 oil change and auto maintenance stores throughout the Midwest. It typically bought a store, sold it to investors and then leased it from the new owners under a long-term contract. When its debts were mounting and bankruptcy was looming, Great Lakes agreed with one particularly difficult landlord (T.D.) to terminate two leases – even though the leased stores were profitable. The debtor filed for bankruptcy less than two months later.

 To read Audrey’s full discussion of the Seventh Circuit’s ruling, please visit the Fox Rothschild website.


Audrey Noll is counsel in the firm’s Financial Restructuring & Bankruptcy Department, in its Las Vegas office.

U.S. Court of Appeals for the Ninth Circuit
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In an Alert published today, Audrey Noll examines the Ninth Circuit’s recent decision in U.S. Bank N.A. v. The Village at Lakeridge, LLC (In re The Village at Lakeridge, LLC), 2016 WL 494592 (9th Cir. Feb. 8, 2016):

Earlier this month, the Ninth Circuit ruled that an insider can sell its claim to a friendly third party, whose vote fulfills Bankruptcy Code section 1129(a)(10)’s requirement of an impaired consenting class, unless the third party has a close relationship with the debtor and negotiated the claim purchase at less than arm’s length. See U.S. Bank N.A. v. The Village at Lakeridge, LLC (In re The Village at Lakeridge, LLC), 2016 WL 494592 (9th Cir. Feb. 8, 2016).

When the Village at Lakeridge (the debtor) filed for bankruptcy, it had two primary creditors: the bank with a $10 million secured claim and the debtor’s sole equity holder (MBP) with a $2.76 million unsecured claim. After the debtor filed a plan seeking to cram down the bank, MBP sold its claim to a third party (Rabkin) for $5,000. Rabkin had no prior relationship with the debtor but had a close and personal relationship with one of MBP’s members.

To confirm the plan over the dissent of the bank, the debtor had to satisfy Bankruptcy Code section 1129(a)(10), which requires that at least one class of impaired creditors vote to accept the plan, excluding the votes of any insider. Bankruptcy Code section 101(31) defines “insider” as individuals and entities that fall within certain categories (e.g., officers, directors, affiliates, etc.), referred to as “statutory insiders.” Section 101(31) is not exclusive (“[t]he term ‘insider’ includes”), and courts have developed additional categories of “non-statutory insiders.”

The bank moved to designate Rabkin’s vote. The bankruptcy court held that although Rabkin was not a non-statutory insider and did not acquire the claim in bad faith, his vote should be disregarded because he acquired the claim from a statutory insider and the insider status tainted the claim. On appeal, the Bankruptcy Appellate Panel (BAP) reversed the ruling that Rabkin became a statutory insider by acquiring the claim of an existing statutory insider.

 To read Audrey’s full discussion of the Ninth Circuit’s ruling, please visit the Fox Rothschild website.


Audrey Noll is counsel in the firm’s Financial Restructuring & Bankruptcy Department, in its Las Vegas office.

On February 17, 2016, the Bankruptcy Court published a notification that Judge Christopher S. Sontchi is seeking feedback from the bar on his performance.  As of March 1, 2016, the notice is still available on the website for the Delaware Bankruptcy Court: http://www.deb.uscourts.gov/news/survey-judge-christopher-s-sontchi.

According to the notice, Judge Sontchi wants to assess his level of performance as part of his “on-going commitment to provide the highest level of public service possible.”  He is seeking feedback from all attorneys who have appeared before him for the last 5 years.  The notice states that “The results are exclusively for Judge Sontchi ‘s use in improving his performance; the FJC will not provide the results to anyone other than the judge and the results will not be used in the reappointment process.”

To be frank, I have not heard of a judge actively seeking feedback in such a broad manner from those whom he has provided over.  I can’t imagine a criminal judge requesting feedback from everyone who appeared before him/her in the last 5 years; That would be painful.

In this case, however, Judge Sontchi’s actions are merely another example of the efforts of the Delaware Bankruptcy Court to continue to advance its practice and maintain its position as one of the preeminent bankruptcy circuits in our nation.

Not that I could possibly be biased…

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.

From October 1, 2015 through October 31, 2015, the United States Bankruptcy Court for the District of Delaware will be instituting its annual process to review and consider comments to the Local Rules.  Per the Court’s announcement, all comments received will be discussed by the Local Rules Committee to ascertain if there will be a revision to the Local Rules, and any revisions will be effective as of February 1, 2016.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

This post, written by Dana S. Katz, was originally published in the American Bar Association Young Lawyer Division Bankruptcy Committee Winter 2015 Newsletter. (c) 2015 by the American Bar Association.


The Second Circuit Court of Appeals recently determined that JPMorgan released its security interest on a $1.5 billion term loan by virtue of the mistaken filing of a UCC-3 termination statement.  After concluding that both the borrowers and lenders had reviewed drafts, including review by their counsel, the Second Circuit concluded that erroneous termination statement was filed with actual authority.  Official Committee of Unsecured Creditors v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Co.), Appeal  No. 13-2187 (2d Cir. Jan. 21, 2013)(Second Circuit Decision).  A copy of the decision can be found here.

In October 2011, General Motors (GM) entered into a “synthetic lease financing transaction” (the Synthetic Lease) by which it obtained approximately $300 million of financing from a syndicate of lenders for which JPMorgan was the administrative agent and secured party of record listed on the UCC-1 financing statements.  The Synthetic Lease was secured by liens on real property.   Id. at 3.  Five years later, GM entered into an unrelated term loan facility (the Term Loan) for approximately $1.5 billion in financing from a syndicate of lenders for which JPMorgan was again the administrative agent and secured party of record.  The Term Loan was secured by a large number of GM’s assets, including its equipment and fixtures.  Id. at 3-4.  In connection with the Term Loan, twenty-eight UCC-1 financing statements were filed across the country to perfect the lenders’ security interests, including one filed with the Delaware Secretary of State (the Main Term Loan UCC-1). Id. at 4.

In September 2008, GM contacted Mayer Brown LLP, its counsel for the Synthetic Lease, in order to facilitate repayment of the Synthetic Lease and release of the lenders’ interest in the GM collateral.  Id. at 4.  A paralegal at Mayer Brown performed a search and prepared a list of financing statements for termination that inadvertently included the Main Term Loan UCC-1 despite that it was not related to repayment of the Synthetic Lease and should not be terminated.  Id. at 5.

Copies of the closing checklist and draft UCC-3 termination statements were circulated to GM, Mayer Brown, JPMorgan and JPMorgan’s counsel Simpson Thatcher & Bartlett LLP, but the error went unnoticed.  On October 30, 2008, GM repaid the Synthetic Lease and the erroneous UCC-3 identifying the Main Term Loan UCC-1 was filed with the Delaware Secretary of State.  Id. at 6.  The mistake was not uncovered until GM filed for bankruptcy in 2009 in the U.S. Bankruptcy Court for the Southern District of New York (the Bankruptcy Court).  After GM filed its chapter 11 petition, JPMorgan informed the Unsecured Creditors Committee that a UCC-3 termination statement was inadvertently filed in October 2008, but termination of the security interest was unauthorized and therefore ineffective.  Id.  The Committee then initiated litigation against JPMorgan seeking a determination that the UCC-3 termination was effective, and JPMorgan was therefore an unsecured creditor. Id. at 6-7.

On cross motions for summary judgment, the Bankruptcy Court found the termination statement unauthorized and not effective to terminate JPMorgan’s Term Loan security interest.  Id. at 7. See Official Committee of Unsecured Creditors v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Co.), 486 B.R. 596, 647-48 (Bankr. S.D.N.Y. 2013).  The Committee appealed directly to the Second Circuit, and on appeal, the parties offered competing views of UCC § 9-509(d)(1), under which a termination statement is effective if “the secured party of record authorizes the filing.”  Second Circuit Decision at 7.

The Second Circuit certified a question to the Delaware Supreme Court regarding whether the filing of a termination statement is effective to terminate the security interest regardless of the filer’s intent.  In October 2014, the Delaware Supreme Court provided its answer: “it is enough that the secured party authorizes the filing to be made . . . the Delaware UCC contains no requirement that a secured party that authorizes filing subjectively intends or otherwise understands the effect of the plain terms of its own filing.”  Id. at 9-10 (quoting Official Committee of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank, N.A., __ A.3d __, 2014 WL 5305937, *5 (Del. Oct. 17, 2014) (the Delaware Decision)).  The Delaware Supreme Court reasoned that “[i]f parties could be relieved from the legal consequences of their mistaken filings, they would have little incentive to ensure the accuracy of the information contained in their UCC filings.”  Second Circuit Decision at 10 (quoting Delaware Decision, 2014 WL 5305937 at *3-4).

Having heard from the Delaware Supreme Court, the Second Circuit considered the remaining question, “Did JPMorgan authorize the filing of the UCC-3 termination statement that mistakenly identified for termination the Main Term Loan UCC-1?”  Second Circuit Decision at 11.  Although JPMorgan argued that Mayer Brown must have exceeded the scope of its authority and that JPMorgan “never instructed anyone to file the UCC-3 in question, and the termination statement was therefore unauthorized and ineffective,” the Second Circuit considered the facts at issue – namely that both JPMorgan and Simpson Thatcher received copies of the draft UCC-3 termination statement at issue and neither party expressed any concerns about it or the closing checklist.  Id. at 11-13.  Moreover, JPMorgan’s counsel had approved an Escrow Agreement providing that once GM repaid the Synthetic Lease, the escrow agent would forward the termination statements to GM’s counsel for filing.  Id. at 13-14.

With these facts, the Court cited only the Restatement (third) of Agency to find that actual authority existed here, where “JPMorgan and its counsel knew that, upon the closing of the Synthetic Lease transaction, Mayer Brown was going to file the termination statement that identified the Main Term Loan UCC-1 for termination and that JPMorgan reviewed and assented to the filing of that statement.”  Id. at 14.

Often, when a secured loan is paid off, the lenders rely on the borrower’s counsel to prepare and file UCC termination statements.  The Second Circuit’s decision in this case illustrates the importance of a detailed review of draft termination statements by lenders prior to filing as well as the importance of the Creditors’ Committee’s post-petition review of secured liens which can reveal errors or issues with the liens or their perfection.  In this case, the mistaken filing of the termination statement resulted in JPMorgan and the syndicate of lenders for the $1.5 billion Term Loan releasing their security interests.  Time will tell the full scope of damages to these lenders and whether further litigation will ensue.


Dana S. Katz is an associate in Fox Rothschild’s Philadelphia office. As a member of the firm’s Financial Restructuring and Bankruptcy and Litigation Departments, Dana’s practice focuses on all facets of chapter 11 and chapter 7 bankruptcy matters as well as commercial and business-related litigation, with a particular emphasis on bankruptcy litigation.

The Judicial Conference Advisory Committees on Appellate, Bankruptcy, Civil, and Criminal Rules have proposed amendments to their respective rules and forms, and requested that the proposals be circulated to the bench, bar, and public for comment.

The following proposed amendments were approved for publication by the Judicial Conference Committee on Rules of Practice and Procedure in May 2014.

To view the proposed amendments, click here.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In the recent Third Circuit decision of In re Lower Bucks Hospital, No. 13-1311 (3d Cir. July 3, 2014), the Third Circuit upheld the ruling of the Bankruptcy Court for the Eastern District of Pennsylvania that non-consensual releases were not part of the debtor’s plan of reorganization due to failure to adequately disclose the same to the Court.  In the bankruptcy case, bondholders objected to the release in favor of The Bank of New York Mellon Trust Company, N.A., in its capacity as indenture trustee, on the basis that adequate notification was not provided.

Only a single paragraph in the disclosure statement referenced the third-party release, with no use of distinguishing font, and the debtor’s plan was even less direct.

The third-party release was deemed by the Court to be an injunction that must be described in “specific and conspicuous language” in both the plan and disclosure statement pursuant to Fed. R. Bankr. P. 3016(c).  This would allow a hypothetical investor to be able to make an informed judgment about the plan.  See 11 U.S.C. § 1125(a)(1).  The Third Circuit agreed with the Bankruptcy Court that the pleadings failed on both “presentation and placement.”  Accordingly, a finding of inadequate disclosure and the resulting denial of the third-party release was warranted.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

On July 9, 2012, Judge Peter J. Walsh of the United States Bankruptcy Court for the District of Delaware issued a memorandum opinion (the "Opinion"), in the Blitz U.S.A. bankruptcy proceeding addressing whether an employee bonus plan is a transaction made in the ordinary course of business under 11 U.S.C. 363(c)(1).  The court issued the Opinion after considering Blitz’s motion seeking authorization to make payments associated with an employee bonus plan (the "Motion").  The Official Committee of Unsecured Creditors (the "Committee") objected to the Motion, arguing that the bonus plan was not an ordinary course transaction and did not meet the heightened requirements under 11 U.S.C. 503(c)(3)(prohibiting a debtor from making payments outside the ordinary course of business that are not justified by the "facts and circumstances of the case.")  Opinion at *3; 11 U.S.C. 503(c)(3). 

During an evidentiary hearing, Blitz presented testimony in support of its Motion from Blitz’s President and CEO, along with the testimony of a representative of Blitz’s restructuring firm.  Blitz argued that the employee bonus plan was an ordinary course transaction and therefore falls under the business judgment standard of section 363(c)(1) of the Bankruptcy Code (authorizing a debtor to enter into transactions without notice and a hearing, provided the transaction is in the "ordinary course of business.")  Opinion at *8. 

The court began its analysis by noting that the Third Circuit and other courts apply a two-part test to determine whether a transaction is in the ordinary course of business. Opinion at *9, citing In re Nellson Nutraceutical, Inc., 369 B.R. 787, 797 (Bankr. D. Del. 2007), quoting In re Roth Am., Inc., 975 F.2d 949, 953 (3d Cir. 1992).  Under Roth, the transaction at issue must be examined under both a "vertical" and "horizontal" dimension.  Under the vertical dimension, the court looks at the transaction from the viewpoint of a hypothetical creditor.  The issue is whether the transaction subjects the creditor to an economic risk that differs from what the creditor was subjected to when it decided to extend credit.  Opinion at *9.  Applying the vertical test, the court found that Blitz had "some form of bonus plan since 1992 and … is sufficient to establish a course of pre-petition conduct."  Id.

Under the horizontal test, the issue for the court is "whether from an industry-wide perspective, the transaction is of the sort commonly undertaken by companies in the industry." Opinion at *9, quoting Roth, 975 F.2d at 953.  Here the court found that the evidence presented at the hearing demonstrated that the bonus plan was common to the industry.  The employee bonus plan was overseen by Blitz’s Compensation Committee.  The Compensation Committee relied on a compensation scheme for the plan that was designed by another manufacturer in Blitz’s industry.  Given that the bonus plan satisfied both the horizontal and vertical analysis, the court found that the plan was an ordinary course transaction.  Opinion at *10.  As an ordinary course transaction, the plan was subject to less scrutiny, specifically, whether the bonus plan was taken in good faith with sound business judgment.  Opinion at *11. 

The court considered several factors in deciding whether the bonus plan was made in good faith and with sound business judgment.  Towards the end of the Opinion, the court best explains why it approved the bonus plan:

[t]he bonus plan is intended to provide an incentive for employees, who are informed of the plan’s targets and parameters during their yearly review, and have no control over the rise and fall of defense costs or the effects of the bankruptcy.  Further, where, as here, the employees have known about the plan since October 2011, rewarding them for hard work already done and encouraging them to continue working hard to fill existing orders until operations cease at the end of July does not smack of bad faith or unsound business judgment.  Opinion at *14.

The Blitz Opinion provides a clear framework for considering whether employee bonus plans, as well as other transactions, are "ordinary course" transactions.  Under the "vertical" analysis, courts look at the transaction from the viewpoint of a creditor and ask whether the transaction subjects the creditor to a different kind of economic risk when compared to the risk that was in place when the creditor originally extended credit.  Next, under the "horizontal" analysis, the court considers whether the transaction is common for the debtor’s industry. 

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Jason Cornell is a bankruptcy attorney with the law firm Fox Rothschild LLP. Jason practices before the United States Bankruptcy Court for the District of Delaware.  You can contact Jason at jcornell@foxrothschild.com or at 302 252 5833.  For those not familiar with corporate bankruptcy proceedings, below are prior posts on issues that frequently arise in bankruptcy:

    Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

    Seeking Relief from the Automatic Stay in Delaware.

    A Tale of Two Bankruptcy Auctions.

    What Information is Required in a Chapter 11 Disclosure Statement?