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Recent Developments in Bankruptcy Law, October 2020

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Recent Developments in Bankruptcy Law, October 2020 Recent Developments in Bankruptcy Law, October 2020 RICHARD LEVIN Partner +1 (212) 891-1601 [email protected] © 2020 Jenner & Block LLP. Attorney Advertising. Jenner & Block is an Illinois Limited Liability Partnership including professional corporations. This publication is not intended to provide legal advice but to provide information on legal matters and firm news of interest to our clients and colleagues. Readers should seek specific legal advice before taking any action with respect to matters mentioned in this publication. The attorney responsible for this publication is Brent E. Kidwell, Jenner & Block LLP, 353 N. Clark Street, Chicago, IL 60654-3456. Prior results do not guarantee a similar outcome. TABLE OF CONTENTS 1. AUTOMATIC STAY ..................... 1 5.5 Confirmation, Absolute Priority ............................... 3 1.1 Covered Activities ............. 1 6. CLAIMS AND PRIORITIES ......... 5 1.2 Effect of Stay ..................... 1 6.1 Claims ............................... 5 1.3 Remedies .......................... 1 6.2 Priorities ............................ 6 2. AVOIDING POWERS .................. 1 7. CRIMES ....................................... 7 2.1 Fraudulent Transfers ......... 1 8. DISCHARGE ............................... 7 2.2 Preferences ....................... 2 8.1 General ............................. 7 2.3 Postpetition Transfers ....... 2 8.2 Third-Party Releases ........ 7 2.4 Setoff ................................ 2 8.3 Environmental and Mass 2.5 Statutory Liens .................. 2 Tort Liabilities .................... 7 2.6 Strong-arm Power ............. 2 9. EXECUTORY CONTRACTS ....... 7 2.7 Recovery ........................... 2 10. INDIVIDUAL DEBTORS .............. 8 3. BANKRUPTCY RULES .............. 2 10.1 Chapter 13 ........................ 8 4. CASE COMMENCEMENT AND 10.2 Dischargeability ................. 8 ELIGIBILITY ................................ 2 10.3 Exemptions ....................... 8 4.1 Eligibility ............................ 2 10.4 Reaffirmations and 4.2 Involuntary Petitions .......... 2 Redemption ....................... 8 4.3 Dismissal........................... 2 11. JURISDICTION AND POWERS OF THE COURT .......................... 8 5. CHAPTER 11 .............................. 3 11.1 Jurisdiction ........................ 8 5.1 Officers and Administration 3 11.2 Sanctions .......................... 9 5.2 Exclusivity ......................... 3 11.3 Appeals ............................. 9 5.3 Classification ..................... 3 11.4 Sovereign Immunity .......... 9 5.4 Disclosure Statement and Voting ................................ 3 12. PROPERTY OF THE ESTATE .... 9 12.1 Property of the Estate ....... 9 i Recent Developments in Bankruptcy Law, October 2020 12.2 Turnover.......................... 10 13.3 Committees ..................... 11 12.3 Sales ............................... 10 13.4 Other Professionals ........ 11 13. TRUSTEES, COMMITTEES, AND 13.5 United States Trustee ..... 11 PROFESSIONALS .................... 10 14. TAXES ....................................... 11 13.1 Trustees .......................... 10 15. CHAPTER 15—CROSS-BORDER 13.2 Attorneys ......................... 10 INSOLVENCIES ........................ 12 ii Recent Developments in Bankruptcy Law, October 2020 1. AUTOMATIC STAY 1.1 Covered Activities 1.2 Effect of Stay 1.3 Remedies 2. AVOIDING POWERS 2.1 Fraudulent Transfers 2.1.a LBO fraudulent transferee was not a “customer” of a financial institution. As part of a complex series of related transactions, the debtor entered into a note purchase agreement with an investment bank. The agreement specifically disclaimed that the bank was acting as the debtor’s agent or owed the debtor any fiduciary duty. The note proceeds were to be used to pay the debtor’s shareholders to purchase their shares. The investment bank paid the proceeds directly to the shareholders. The trustee sought to avoid the payment as a fraudulent transfer. Section 546(e) prohibits the trustee from avoiding a transfer that is a settlement payment or a transfer in connection with a securities contract “made by or to (or for the benefit of) a … financial institution” except under section 548(a)(1)(A) as an intentional fraudulent transfer. Under Merit Mgmt Group, LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018), section 546(e)’s focus is on the transfer to be avoided, without regard to any component parts of the transfer. Here, the trustee sought to avoid the transfer to the shareholders, without regard to the transfer by the bank as a component part of the transfer. However, a financial institution includes not only a bank but also, when the bank “is acting as agent or custodian for a customer … in connection with a securities contract … such customer.” An agency relationship requires that the principal vest in the agent authority to act on the principal’s behalf, subject to the principal’s control, and the agent consents to act. The relationship requires more than an agreement to effect a transaction as an intermediary. Otherwise, any service provider would qualify as an agent. Here, the note purchase agreement expressly disclaims the bank’s role as an agent. None of the other agreements in the related transactions expressed an agency relationship. The Code defines “custodian” in terms of one acting to enforce claims. Because the Code contains a definition of custodian, the court may not look to other sources to determine whether the bank qualified as the shareholder’s (or debtor’s) custodian. The transactions did not involve debt collection, and none of the prongs of the custodian definition applied. Therefore, the court denies the defendants’ motion for summary judgment on section 546(e) grounds. Buchwald Cap. Advs., LLC v. Papas (In re Greektown Holdings, LLC), ___ B.R. ___, 2020 Bankr. LEXIS 2938 (Bankr. E.D. Mich. Oct. 19, 2020). 2.1.b Holder of joint bank account with fraudulent debtor is not liable as a fraudulent transferee. The debtor opened a joint bank account as an accommodation to a friend, who funded the account. The debtor agreed the account would contain only the friend’s money, and, though they both had signatory authority, the debtor would not use the account. Without telling the friend, the debtor later transferred $1 million into the account and simultaneously wrote a check from the account to a company he owned. After bankruptcy, the trustee sued the friend to avoid and recover the fraudulent transfer into the account. A recipient of funds is not necessarily a “transferee” for purposes of section 550(a). Having dominion and control is necessary but not sufficient to find the recipient to be a transferee, rather than a conduit. Here, none of the requirements were met. Because the debtor simultaneously wrote a check draining the account, the friend was completely unaware of the deposit, and the friend did not authorize or participate in the debtor’s use of the account, the friend did not have effective dominion or control over the deposit. Nor did the debtor intend to transfer the funds to the friend. He intended to transfer only to his other company, with the joint account acting only as a waystation in the scheme. Therefore, the friend was not a transferee and is not liable to the trustee. Jalbert v. Gryaznova (In re Bicom NY, LLC), ___ B.R. ___, 2020 Bankr. LEXIS 2458 (Bankr. S.D.N.Y. Sept. 21, 2020). 1 Recent Developments in Bankruptcy Law, October 2020 2.1.c Court extends section 546(a) two-year statute of limitations under Rule 9006(b). The trustee investigated the debtor’s extensive fraud scheme but encountered resistance from many fraud participants and record keepers. The trustee moved for an extension of the section 546(a) statute of limitations for bankruptcy causes of action. Rule 9006(b) authorizes the court to enlarge the time specified in any rule or order of court (with some exceptions) for taking any action. The Rule applies equally to statutory deadlines. Therefore, the court has authority to extend the statute of limitation and, based on the record in this case, concludes that it should. In re Campbellton- Graceville Hosp. Corp., 616 B.R. 177 (Bankr. N.D. Fla. 2020). 2.2 Preferences 2.2.a New lenders’ direct payment to creditor is not a preference. The debtor owed a law firm money. The debtor’s mother agreed to loan the debtor sufficient sums to pay his debt to the law firm on the condition that the funds be used only for that purpose. The debtor executed a promissory note to his mother, who wrote a check to the law firm and delivered it directly to the law firm. A few days later, the debtor filed his bankruptcy petition. A preference is a transfer of an interest of the debtor in property that enables a creditor to recover more than other similarly situated creditors. The debtor has an interest in property if the debtor has dominion or control over the property or if the transfer of the property would diminish property that would have become property of the estate if it had not been transferred. Under these facts, the debtor did not exercise dominion or control over the loan proceeds: his mother controlled them at all times, and he had no ability to direct their distribution. And the loan proceeds did not diminish the estate, because the mother transferred the funds directly to the law firm, the funds never passed through the debtor’s hands, and the debtor had no interest in the funds. Therefore, the payment was not a transfer of an interest of the debtor in property. Walters v. Stevens, Littman, Biddison, Tharp & Weinberg,
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