Category: Bankruptcy

HAVEN ACT Provides Military Veterans With Increased Income Protections In Bankruptcy

Military veterans often pay a heavy toll for their service from a physical, emotional and even financial standpoint. A new federal law— the Honoring American Veterans in Extreme Need Act of 2019 or the HAVEN Act— aims to address the latter hardship, providing disabled military veterans with greater protections in bankruptcy proceedings.

Prior to the passage of the HAVEN Act, federal Department of Veterans Affairs (VA) and Department of Defense disability payments were included when calculating a debtor’s disposable income when in bankruptcy. In other words, this income is subject to the reach of creditors.

By contrast, Social Security disability benefits are exempt from calculating a debtor’s disposable income. The HAVEN Act places military disability benefits in the same protected category as Social Security disability.

The actual language of the new exception reads as follows:

“(IV) any monthly compensation, pension, pay, annuity, or allowance paid under title 10, 37, or 38 in connection with a disability, combat-related injury or disability, or death of a member of the uniformed services, except that any retired pay excluded under this subclause shall include retired pay paid under chapter 61 of title 10 only to the extent that such retired pay exceeds the amount of retired pay to which the debtor would otherwise be entitled if retired under any provision of title 10 other than chapter 61 of that title.”

The HAVEN Act received strong bipartisan support in both the House and Senate, and was endorsed by both the American Bankruptcy Institute and a host of veterans’ advocacy organizations, including the American Legion and VFW. Reps. Lucy McBath (D-GA) and Greg Steube (R-FL) co-sponsored the legislation in the House, while Sen. Tammy Baldwin (D-WI) and John Cornyn (R-TX) co-sponsored the Senate legislation. President Donald Trump signed the HAVEN Act into law August 23, 2019 and it became effective immediately.

Specific benefits protected under the Haven Act are:

  • Permanent Disability Retired Pay

  • Temporary Disability Retired Pay

  • Retired or Disability Severance Pay for Pre-Existing Conditions

  • Disability Severance Pay

  • Combat Related Special Compensation

  • Survivor Benefit Plan for Chapter 61 Retirees

  • Special Survivor Indemnity Allowance

  • Special Compensation for Assistance with Activities of Daily Living

  • VA Veterans Disability Compensation

  • VA Dependency and Indemnity Compensation, and

  • VA Veterans Pension.

Veterans advocates pushed for the HAVEN Act following five recent Bankruptcy Court Decisions that held that under previous bankruptcy law, disabled veterans were required to include military disability in their disposable income in bankruptcy proceedings.

The new law also provides relief to a segment of the population that needs assistance. According to the 2018 VA Annual Benefits Report, 4.74 million US veterans—or 25 percent of the total veteran population—receive VA disability benefits.

Veterans also make up a disproportionate share of bankruptcy filers. Nearly 15 percent of both Chapter 7 and Chapter 13 bankruptcy filers are veterans, who make up approximately 10 percent of the overall population. Approximately 125,000 veterans filed for bankruptcy in 2017 alone.

Copyright © 2019 Womble Bond Dickinson (US) LLP All Rights Reserved.

For more on veteran’s affairs, see the Government Contracts, Maritime & Military Law page on the National Law Review.

When Your Customer is In Bankruptcy, There Are Two Major No-Nos That You Must Remember.

First, don’t violate the automatic stay, which prevents a creditor from attempting to collect a debt while the debtor is in bankruptcy unless the creditor gets prior court approval.  Second, don’t violate the discharge injunction, which absolves a debtor of liability for those debts covered by the bankruptcy court’s discharge order.  The automatic stay takes effect when the debtor files bankruptcy, while the discharge injunction typically comes at the end of the case.

The United States Supreme Court recently decided a case involving the discharge injunction.  In Taggart v. Lorenzen, the issue was the legal standard for holding a creditor in civil contempt when the creditor violates the bankruptcy discharge order.  In a unanimous decision, the Supreme Court held that a court may hold a creditor in civil contempt for violating a discharge order if there is no fair ground of doubt as to whether the order barred the creditor’s conduct. In other words, civil contempt may be appropriate if there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful.

Bradley Taggart was a part owner of an Oregon company called Sherwood Park Business Center.  He got into a dispute with some of the other owners, and they sued him in state court for breach of Sherwood’s operating agreement.  During the lawsuit, Taggart filed a Chapter 7 bankruptcy. In Chapter 7, a debtor discharges his debts by liquidating assets to pay creditors.   Taggart ultimately obtained a discharge.  After the bankruptcy court entered the discharge order, the parties returned to the state court lawsuit.  The parties who had sued Taggart before he filed bankruptcy obtained an order from the state court requiring him to pay post-bankruptcy attorneys’ fees of $45,000.00.  Taggart contended this debt had been discharged and the parties’ actions violated his bankruptcy discharge.

Multiple appellate courts reached different conclusions as to whether – and why or why not – the parties had violated the discharge order.  One issue the courts struggled with was the standard to apply to the parties’ conduct.  Should the courts apply an objective test based solely on their conduct or should they consider their subjective beliefs and motivations?  Should the courts impose strict liability for discharge violations or should they let creditors off the hook if they didn’t realize their conduct was improper?  The Supreme Court agreed to resolve these questions.

In adopting the “no fair ground of doubt” standard, the Supreme Court noted that civil contempt is a severe remedy and basic fairness requires those enjoined know what conduct is outlawed before being held in contempt.  The standard is generally an objective one.  A party’s subjective belief he was complying with an order ordinarily will not insulate him from civil contempt if that belief was objectively unreasonable.  Bad faith conduct, and repeated or persistent violations can warrant civil contempt.  Good faith can mitigate against contempt and factor into the appropriate remedy.

Although a discharge order often has little detail, the Supreme Court pointed out that, under the Bankruptcy Code, all debts are discharged unless they are a debt listed as exempt from discharge under Section 523.  A domestic support obligation, for instance, is exempt from discharge.  (This recent article discusses how debts involving intentional, fraud-like conduct may be exempted from discharge.)  In other words, ignorance of the bankruptcy law is no excuse.

In adopting the “no fair ground of doubt standard,” the Supreme Court rejected two other standards, one more lenient and one more harsh.  First, the Supreme Court rejected a pure “good faith” test – a creditor’s good faith belief that its actions did not violate the discharge would absolve it of contempt. Second, the Supreme Court rejected a strict liability test – if a creditor violated the discharge, he would be in contempt regardless of his subjective beliefs about the scope of the discharge order or whether there was a reasonable basis for concluding that his conduct did not violate the discharge order.

The discharge injunction is no joke, and creditors violate it at their peril.  A debtor can be compensated for damages resulting from a discharge violation.  In this case, the bankruptcy court initially awarded Taggart over $100,000 for attorneys’ fees, emotional distress, and punitive damages.  Creditors with customers in bankruptcy, or who have filed bankruptcy in the past, should consult counsel who can advise them on what debts they can pursue.  And if a creditor finds itself accused of violating the discharge injunction, it should contact counsel to assess its chances of passing or failing the “no fair ground of doubt” test.

© 2019 Ward and Smith, P.A.. All Rights Reserved.

The Tail of a Dog with Two Hats: Fifth Circuit Upholds “Golden Share” Held by Creditor Affiliate

On May 22, 2018, the United States Court of Appeals for the Fifth Circuit issued its decision in Franchise Services of North America v. United States Trustees (In re Franchise Services of North America), 2018 U.S. App. LEXIS 13332 (5th Cir. May 22, 2018). That decision affirms the lower court’s holding that a “golden share” is valid and necessary to filing when held by a true investor, even if such investor is controlled by a creditor.

The backdrop of mergers and acquisitions leading up to this case need not be retold in detail to understand the holding’s significance, but some context is helpful. Franchise Services of North America, Inc. (“FSNA”), one of North America’s largest car rental companies, filed for chapter 11 bankruptcy without the required consent of its sole holder of preferred stock, Boketo, LLC (“Boketo”). Boketo was a minority shareholder that had invested $15 million in FSNA  making it FSNA’s single largest investor. Boketo is a wholly-owned subsidiary of investment bank Macquarie Capital (U.S.A.) (“Macquarie”), an unsecured creditor of FSNA’s by virtue of an alleged $3 million claim for fees incurred in connection with the aforementioned transactions. When Boketo invested $15 million in FSNA, it required FSNA to re-incorporate in Delaware and add a “golden share” provision to its corporate documents, i.e. Boketo’s affirmative vote of its preferred share was required for certain corporate events, such as filing bankruptcy. Nonetheless, FSNA eventually filed for chapter 11 in the Southern District of Mississippi without seeking Boketo’s consent, fearing that shareholder Boketo—controlled by creditor Macquarie—would not consent to filing.

Macquarie and Boketo filed motions to dismiss the case for a lack of corporate authority under FSNA’s amended corporate charter. In doing so, Macquarie donned two hats—that of a shareholder through Boketo and that of an unsecured creditor with a $3 million claim. FSNA asserted that Macquarie used Boketo as a “wolf in a sheep’s clothing” to equip a creditor with shareholders’ blocking rights under an allegedly unenforceable “blocking provision” or “golden share.” FSNA implied the tail had been wagging the dog—that Macquarie made the $15 million investment through Boketo to avoid the cost and inconvenience of trying to collect some portion of its $3 million claim in FSNA’s bankruptcy. The bankruptcy court denied Macquarie’s motion because case law and public policy forbid a creditor from preventing a debtor’s bankruptcy filing. However, it granted Boketo’s motion, given its status as a voting shareholder. The Fifth Circuit affirmed, and found FSNA’s theory that Macquarie chased $3 million with $15 million “strain[ed] credulity.”

FSNA’s various legal arguments each fell flat. First, FSNA sought a ruling that “blocking provisions” or “golden shares” (similar, but not identical, concepts), in general, are unenforceable under Delaware law. The Fifth Circuit declined to offer such an advisory opinion. Second, FSNA contended that even if Delaware law allowed these types of provisions, federal policy forbids them. This, too, failed to move the court, since the corporate charter did not eliminate FSNA’s ability to file bankruptcy. Instead, it specified which parties’ consent was necessary to authorize a bankruptcy filing, placing the decision with shareholders. Third, because authority to file bankruptcy is a matter of state law, FSNA argued that Boketo could not exercise its blocking right under Delaware law, and that Boketo had owed a fiduciary duty to facilitate the filing. The Fifth Circuit held that Delaware law, flexible by nature, allows a corporate charter to assign rights to shareholders that would ordinarily be assigned to directors/management, but declined to go so far as to determine whether such provision was valid under Delaware law. In addition, the court refuted FSNA’s fiduciary duty argument because only controlling minority shareholders owe fiduciary duties, and here, Boketo was a non-controlling minority shareholder. The court explained that the standard for minority control is a “steep one,” and that courts focus on control of the board—i.e., whether the minority shareholder can exert actual control over the company. While Boketo made a sizeable investment in FSNA, it only had the right to appoint 2 out of 5 directors and therefore could not exert actual control over the board. FSNA pointed to Boketo’s hypothetical ability to prevent bankruptcy as evidence of actual control, but the court distinguished such theoretical control from actual exertion thereof. The court keenly noted that FSNA defeated its own control argument when it filed bankruptcy without Boketo’s consent—if Boketo was a controlling shareholder, then once again the tail must have been wagging the dog.

Franchise Services highlights the potential for a creditor to essentially step into a shareholder’s shoes and assert shareholder rights pursuant to a corporate charter’s blocking provision or “golden share” by virtue of wearing two hats through a parent and subsidiary.

© 2018 Bracewell LLP.

This post was written by Logan Kotler and Jason G. Cohen of Bracewell LLP.

Supreme Court Bars Structured Dismissals of Bankruptcy Cases That Violate the Code’s Priority Distribution Scheme – Could it Affect Your Creditor Position?

supreme court structured dismissalsOn March 22, 2017 the Supreme Court issued its long-awaited ruling regarding the legality of structured dismissals of Chapter 11 bankruptcy cases that would make final distributions of estate assets to creditors in a manner that deviates from the Bankruptcy Code’s statutory priority distribution scheme.1 In Czyzewski v. Jevic Holding Corp., the Court held that such a structured dismissal was forbidden, absent the consent of the negatively affected parties. However, the Court did not bar all distributions of estate assets which violate the priority distribution scheme, suggesting that interim distributions that serve a broader Code objective such as enhancing the chances of a successful reorganization might be allowed, meaning that important bankruptcy tools like critical vendor orders and first-day employee wage orders are still viable.

In Jevic, the debtor was taken over by an investor in a leveraged buy-out (“LBO”), with money borrowed from a bank. The LBO added a significant and ultimately unsustainable level of the debt to the company. Shortly before the bankruptcy, Jevic ceased operations and fired all of its employees. A group of those laid-off employees (the truck drivers) filed a lawsuit against Jevic and the investor for violations of the federal WARN Act.2 The employees prevailed in the WARN Act litigation against Jevic and obtained a $12.4 million judgment, $8.3 million of which was entitled to priority status in Jevic’s bankruptcy case because it was for wages. As the holders of a priority claim, the truck drivers were entitled to be paid before any of the general unsecured creditors in the Jevic bankruptcy. The employees also had a WARN Act claim pending against the investor, the acquirer in the LBO. During the bankruptcy, the unsecured creditors’ committee sued the investor and the bank for fraudulent transfer claims arising from the LBO. While those cases were pending, and during the bankruptcy, several constituencies attempted to negotiate a resolution to the case with a plan of reorganization, but that effort failed. Ultimately everyone but the truck drivers agreed to a settlement regarding the fraudulent transfer claims and distribution of estate property and a structured dismissal of the bankruptcy case.3 The settlement excluded the truck drivers from any recovery, but did provide some recovery to consenting lower-priority unsecured creditors.

The truck drivers and the United States Trustee objected to the structured dismissal since it deviated from the Code’s priority rules. However the Bankruptcy Court approved it, and was affirmed by both the District Court and the Third Circuit Court of Appeals. Those courts reasoned that under the settlement and structured dismissal, there would be at least some recovery to some priority and general unsecured creditors—even if not to the bypassed truck drivers—whereas otherwise no one but the secured creditor would get anything.. The truck drivers could not really complain, those courts concluded, because they would have gotten nothing regardless. Furthermore, those courts did not believe that the absolute priority rule applied to a dismissal.

The Supreme Court, however, reversed the Third Circuit Court of Appeals, and concluded that in a final distribution of estate assets, by whatever mechanism, the Code’s priority rules must be respected, absent the consent of adversely affected parties.

However, the Court narrowly tailored its ruling, stating that strict compliance with the priority rules is only required in a final distribution of estate assets upon the conclusion of the bankruptcy case, whether via liquidation, plan confirmation, sale of assets, or dismissal. The Court noted that during a reorganization case, bankruptcy courts routinely approve interim distributions of estate assets in ways that violate the priority distribution scheme. For example, in almost every chapter 11 case, debtors seek the ability to pay their employees for pre-petition wages that are accrued but unpaid on the petition date. In some cases, debtors also seek critical vendor orders that allow them to pay certain key suppliers the pre-petition amounts due so that those suppliers will continue to ship goods or provide services during the bankruptcy case. The Court distinguished these interim priority-violating distributions from the one at issue in Jevic because the interim distributions served the goal of the bankruptcy system: the rehabilitation of debtors. Priority-violating final distributions made pursuant to structured dismissals do not serve that goal.

Jevic’s ruling will drastically curtail the growing trend of structured dismissals, eliminating some wiggle room bankruptcy stakeholders had in fashioning a resolution to a case outside a plan of reorganization. No longer can recalcitrant groups of creditors be threatened with being squeezed out of any distribution if they won’t cave in and agree to play ball; they can insist on their priority rights. However, the ruling still preserves the flexibility that has developed in chapter 11 cases to allow debtors to attempt to reorganize their business and protect parties that are willing to work with debtors during the bankruptcy.

ARTICLE BY Tamar N. Dolcourt & Gjina Lucaj of Foley & Lardner LLP
© 2017 Foley & Lardner LLP

1 Czyzewski v. Jevic Holding Corp., 580 U.S. ___ (2017); 2017 WL 1066259.

2 The WARN Act is the Worker Adjustment and Retraining Notification Act. Among other things, the WARN Act requires companies to give workers facing a mass layoff at least 60 days’ notice of the layoff, or pay their wages for the 60 day period. 29 U.S.C. 2102.

3 The truck drivers were excluded because they would not agree to drop their WARN Act claims against the investor, who was a party to the settlement.

Payless Expected to File for Bankruptcy in Next Few Weeks

payless bankruptcyAs I mentioned in my article from January, “11 Retailers to Watch for Possible Bankruptcy Filings in 2017,” it looks like Payless is on the verge of a bankruptcy filing.

Bloomberg reports that Kansas-based Payless, Inc. may be filing for bankruptcy protection as early as next week. The retail discount shoe chain has more than 4,000 stores in 30 countries. Speculation is that they will close about 10 to 15% of the stores as it reorganizes.

The company has had difficulties in the increasingly competitive online market. Last year the company attempted to increase revenue with a new master plan for opening more Payless Super Stores with a larger footprint, more in-stock footwear, and heightened shopping experience, according to Footwear News.

The company has about $665 million in debt, according to Reuters. In February, Moody’s downgraded the company debt rating, stating the company shown “weaker than anticipated operating performance.”

With the number stores, a Payless bankruptcy can raise questions for many landlords. If you are a landlord with a Payless it is important to know your rights, now.

ARTICLE BY Thomas S. Onder of Stark & Stark

COPYRIGHT © 2017, STARK & STARK

Bankruptcy News: Gander Mountain Shooting for Chapter 11 Bankruptcy

Gander Mountain Chapter 11 BankruptcyReuters reports Gander Mountain, the St. Paul based hunting and fishing chain, is preparing to file for bankruptcy. The bankruptcy is reportedly due to aggressive expansion that failed to draw new customers. Gander Mountain is known as America’s firearms superstore.

Gander has faced stiff competition from Bass Pro Shops, Cabela’s, and Dick’s Sporting Goods.

Currently, Gander Mountain has about 160 stores, with about 60 new stores opened or announced since 2012. According to Reuters, the company has a $30 million loan and revolving credit lines for $25 million and $500 million.

If Gander Mountain files, it will be the fifth outdoor retailer to file for bankruptcy in the last year. Others include Sports Chalet, Sports Authority, EMS, and Eastern Outfitters.

ARTICLE BY Thomas S. Onder of Stark & Stark

COPYRIGHT © 2017, STARK & STARK

The Road Ahead for 2017 – Restructuring & Insolvency in Australia

insolvency Australia Road to 2017It is anticipated that, by the middle of the year, Australia will see the most significant reform to the corporate and personal insolvency environment in two decades. The reforms, which appear likely to be supported by all sides of government, are designed to promote business preservation and allow greater flexibility in order to ‘turnaround’ distressed companies.

In 2014 the process of reform began with the Australian Productivity Commission’s release of an Issues Paper and subsequent Report on Business Set-Up, Transfer and Closure. In December 2015 the draft Insolvency Law Reform Bill (the Bill) was released.

The perception among the business community is that the existing insolvency landscape stifled entrepreneurship and forced distressed companies into insolvency at the expense of restructuring. While some commentators lament the missed opportunity to go further and adopt more comprehensive reforms, consensus is that the new legislation will resolve some of the market’s biggest concerns and will encourage a turnaround culture. It is also likely to generate increased interest in the domestic distressed debt market.

Key elements of the Insolvency Law Reform Act 2016 include:

  1. Reduction of the bankruptcy period from three to one year
  2. Introduction of a ‘safe harbour’ defence for directors. Directors will avoid personal liability for insolvent trading if they appoint an adviser to assist with business turnaround.
  3. Unenforceability of certain ipso facto clauses. The proposed new laws will prevent a party from terminating a contract based solely on an insolvency event. Certain contracts such as prescribed financial contracts may be excluded from this restriction.

One of the Productivity Commission’s more controversial recommendations (and which did not make it into the draft Bill) is the introduction of a duty of receivers “to not cause unnecessary harm to the interests of creditors as a whole.” This and other more substantive reforms will be subject to further consultation as the Government has committed to another review. The passage of the Bill will meanwhile continue to shine a spotlight on the more substantive reforms proposed.

In addition to the commencement of the Insolvency Law Reform Act 2016, certain class action proceedings in the Federal Court of Australia are likely to intensify in 2017 in the lead up to a hearing on common issues in 2018. Squire Patton Boggs advises the applicants and most group members in seven class action proceedings that have arisen out of the rating of several structured financial products by Standard & Poor’s (S&P) and Fitch Ratings (Fitch). These follow a successful settlement reached in similar proceedings against S&P, following a landmark win in the main proceedings and a further appeal to the Full Federal Court.

The majority of the claims in these proceedings arose following the global financial crisis and the collapse of underlying reference entities including Fanny Mae and/or the swap counterparty Lehman Brothers Australia (in liquidation) (LBA). As a large number of Australian organisations held these products, a number of insolvencies resulted from their collapse in value and/or wipe out and Squire Patton Boggs has acted for creditors of LBA in the insolvency proceedings that ensued to recover money for creditors with these claims.

The products that are the subject of these proceedings include a constant proportion portfolio insurance (CPPI) and synthetic collateralised debt obligations (SCDOs) which were assigned credit ratings by S&P or Fitch. The applicants allege that the ratings agencies were negligent and engaged in misleading and deceptive conduct in assigning high ratings to these products. They contend that had the products not received such high ratings, they would not have invested. S&P and Fitch deny these allegations.

These proceedings have had and will continue to have widespread domestic and international significance due to the number of structured financial products that were sold around the world and were rated by the large ratings agencies using similar methodology. Actions against S&P have been filed in other jurisdictions, including by European institutional investors in Amsterdam, setting a global trend that is likely to continue into 2017. This trend involves ensuring the accountability of credit rating agencies in their assignment of ratings to complex financial products, especially in areas where regulators have as yet failed to achieve similar outcomes. As a result, the continuing progress of these class actions in 2017 is likely to produce lasting implications, in particular further consideration as to the regulation of credit rating agencies.

Continue watching this blog throughout the year to come for updates about these and other topics from our offices across Australia, EU and Europe, UK and US.

ARTICLE BY Amanda Banton of Squire Patton Boggs (US) LLP

© Copyright 2017 Squire Patton Boggs (US) LLP

Jevic Holding Corp.: Is The Supreme Court Now Ready To Strike Down Structured Dismissals?

Supreme Court Bankruptcy Structured DismissalsIn a prior post, we discussed the Third Circuit Court of Appeals’ decision in Jevic Holding Corp., where the court upheld the use of so-called “structured dismissals” in bankruptcy cases, and the Supreme Court’s grant of certiorari. On December 7th, the Supreme Court heard oral argument in Jevic.  The Court’s ultimate ruling will likely have a significant impact upon bankruptcy practice.

Under the Jevic structured dismissal, unsecured creditors received a distribution from a settlement reached between the official committee of unsecured creditors and secured lenders.  Wage priority claimants received nothing from the settlement, notwithstanding their senior position under the Bankruptcy Code.  The bankruptcy court approved the structured dismissal, and by extension the distribution provided for in the settlement, and the district court affirmed on appeal.  The Third Circuit also upheld the structured dismissal, holding that the bankruptcy court has discretion to approve structured dismissals except if there is a showing “that the structured dismissal has been contrived to evade the procedural protections and safeguards of the plan confirmation or conversion process.”

Jevic put front and center two competing concerns in bankruptcy.  On its face, the Jevic structured dismissal appears to conflict with the priority rules set forth in section 507 of the Bankruptcy Code, since junior creditors were paid while certain senior creditors were not.  However, the structured dismissal approved in Jevic also arguably maximized creditor recoveries, albeit in a way that skipped over certain senior creditors. The estate was administratively insolvent and without the structured dismissal, the case would have been converted to Chapter 7 and distributions would have been significantly reduced.

The questions posed yesterday to counsel for Petitioners and counsel for Respondents, as well as to government counsel as amicus curiae, were wide-ranging and pointed.  Justice Breyer questioned the statutory basis for the structured dismissal, noting that while no Code provision forbid it, no specific Code provision permitted it either.  Justice Kennedy looked for guidance on the “for cause” standard under section 349(b), which permits bankruptcy courts to modify the effect of dismissal orders.  Justice Sotomayor expressed concern that there was collusion in Jevic among senior and junior creditors to the detriment of other creditors.  Several Justices expressed concern with Respondents’ position that section 363(b) afforded sufficient discretion to the bankruptcy court to approve a distribution that was at odds with the Code’s priority scheme.  According to Respondents, Jevic presented the extraordinary circumstances required by section 363(b) to deviate from the absolute priority rule since no plan was possible and conversion to Chapter 7 would lead to little, if any, distribution.  Justice Sotomayor questioned Respondents’ position that Jevic was a rare case, and Justice Kennedy took a similar position, noting that it is not rare for there to be no prospect of a confirmable plan, a fact cited by Respondents in support of the Jevic structured dismissal.

Predicting the outcome of cases simply from oral argument is imperfect and notoriously dangerous.  Nonetheless, some commentators have opined that a sufficient number of Justices appear to be sufficiently concerned with the Jevic structured dismissal that the Third Circuit’s opinion is in peril.  If the Court reverses the Third Circuit, the question becomes how sweeping the Court’s opinion will be.

A reversal may well imperil so-called “gift plans”, where a secured creditor makes a payment to junior creditor (the “gift”) in order to obtain support for plan confirmation.  The gift allows the junior creditor to obtain a recovery at odds with the Bankruptcy Code’s priority scheme.  If the Court holds that the priority scheme governs all estate distributions, depending upon the scope of the Supreme Court’s opinion, gift plans may not be permitted.

In addition, if the Court rules that the section 507 priority scheme applies to the entirety of a bankruptcy case, such a holding would conceivably threaten the viability of orders that even Petitioners concede are customary in commercial reorganizations, such as wage payment orders and critical vendor orders.  Those represent instances where estate property is distributed in violation of the Code’s priority scheme, but in reliance on the so-called “Doctrine of Necessity,” where payments serve the overall goal of maximizing the debtor’s going concern value to create the possibility of greater distribution to creditors than does liquidation.

In fact, the Court seemed to struggle with how far its ruling should go, asking the parties what was the scope of the holding they wanted the Court to enter.  Counsel for Petitioners was careful to limit the scope of the holding so as to carve out common Chapter 11 practices, such as wage payment and critical vendor orders.  This was in contrast to counsel for the government who said that it was the government’s view that pre-plan distributions in Chapter 11 that violate the priority scheme “are not permissible under any circumstances unless there is consent of the impaired priority claimholder.”  Depending upon the scope of the Court’s opinion, regular and customary Chapter 11 practices, such as critical vendor motions and pre-petition wage motions, may no longer be permitted.

ARTICLE BY Mark A. Salzberg of Squire Patton Boggs (US) LLP

© Copyright 2016 Squire Patton Boggs (US) LLP

Teenagers And D.C. Circuit Agree: Internet Service Is A Utility – Will Bankruptcy Courts Follow?

Mobile devices, wireless communication technology and internet web concept: business laptop or office notebook, tablet computer PC and modern black glossy touchscreen smartphones with colorful application interfaces isolated on white background

The topic of net neutrality has continued to be at the forefront of public discourse over recent years.  This is the result of the FCC’s repeated attempts to impose regulations designed to protect consumers while at the same time telecom companies seek to control their product and the services they provide without what they contend is burdensome regulation. This summer, in U.S. Telecommunication Association v. FCC, the D.C. Circuit Court of Appeals dealt a blow to the telecom industry when it upheld a FCC declaration that broadband internet is a telecommunication service—essentially a public utility.  Many speculate that this decision will have a broad impact (good and bad) on internet service providers in both the short and long term.  A less considered aspect of the D.C. Circuit’s ruling is how it will be applied in the bankruptcy context.

Section 366 of the Bankruptcy Code establishes safeguards for debtors when it comes to their use of public utilities.  Under Section 366, essential utility providers are prohibited from discontinuing service upon the filing of a bankruptcy petition.  Instead, the debtor is required to provide adequate assurance of payment within short order, and if the debtor complies, the utility provider must continue service.  The Bankruptcy Code does not define what a “utility” is, but the legislative history provides some insight, noting that section 366 “is intended to cover utilities that have some special position with respect to the debtor, such as an electric company, gas supplier, or telephone company that is a monopoly in the area so that the debtor cannot easily obtain comparable service from another utility.”

Bankruptcy courts have not strictly interpreted the monopoly reference in the legislative history and have continued to hold that telephone service is a utility even after the industry has been deregulated.  In the context of cable television, rather than looking to the monopoly requirement, the Fifth Circuit Court of Appeals in Darby v. Time Warner, 470 F.3d 573, 574 (5th Cir. 2006), held that the relevant analysis was whether the provider stands in a “special positon with respect to the [debtor] such that it is a utility within the meaning of the statute.”  There the Fifth Circuit held that cable television providers did not stand in a special position with respect to the debtor and further that cable television service was not a necessity and therefore not a utility under Section 366.

We have no doubt that individual debtors will begin to test whether they can claim internet service is a utility, relying principally on the D.C. Circuit’s ruling.  However, based on the Fifth Circuit’s analysis, it is entirely conceivable that bankruptcy courts will be reluctant to extend utility status to broadband internet service providers in individual bankruptcies, as it is difficult to find that internet service is a necessity.  However, in the corporate chapter 11 context, one can easily envision a scenario where broadband internet service is necessary for a debtor to continue operating its business, for example, in the e-commerce arena or simply to connect its internal computer systems.  In these circumstances, courts have already allowed debtors to consider internet service a utility under Section 366.  The D.C. Circuit’s recent opinion in U.S. Telecommunication Association v. FCC will now provide further support for commercial debtors to claim that internet service is a utility in the event that a provider dissents.

Written by Peter R. Morrison of Squire Patton Boggs Law Firm.

Collections in Connecticut Part 1: Pre and Post-Judgement Collection Specifics

Connecticut flag

Collections in Connecticut – how to get paid if you are owed money? Collecting money owed to you or your company can be frustrating.  You or your company are owed money and have not been paid.  What are your legal options?  The following video is the first in a series of three discussing collection law in Connecticut, pre and post-judgment collection specifics and enforcing foreign judgments.

http://www.murthalaw.com/site/video-player/player.swf

Click here for Part 2 – Prejudgment Remedy – Collections in Connecticut

Click here for Part 3 – Steps in the Connecticut Collection Process

Article By Alena C. Gfeller & Robert E. Kaelin of Murtha Cullina

© Copyright 2016 Murtha Cullina