Contributed by Debra A. Dandeneau.
Our end of summer bankruptcy cram course continues today with Part 3 of our Lookback Period.
Where Should the Court Draw the Line on Legal Advice?
In Blurred Lines: Seventh Circuit Keeps Alive Claims Based Upon Law Firm’s Alleged Failure to Advise on Degrees of Business Risk, Matthew Goren discussed the potential effect on restructuring advisors of a decision refusing to dismiss a malpractice action against a law firm. In that case, a chapter 7 trustee commenced a malpractice action against a law firm that had advised now-insolvent hedge funds that had invested in what turned out to be a Ponzi scheme, arguing that the firm had failed to recognize certain “serious red flags” that should have led the firm to advise the hedge funds to seek additional protections in their negotiations with the fraudulent investment scheme. In keeping the action alive, the Seventh Circuit noted that “within the scope of the engagement a lawyer must tell the client which different legal forms are available to carry out the client’s business, and how (if at all) the risks of that business differ with the different legal forms.”
SDNY Bankruptcy Court Recognizes the OAS Foreign Main Proceedings in Brazil
Over the objections of a group of bondholders, Bankruptcy Judge Drain from the Southern District of New York recognized as “foreign main proceedings” the proceedings filed by OAS S.A. and its affiliates in Brazil. In his three-part series, Maurice Horwitz broke down the elements of the court’s decision. In SDNY Sides with Fifth Circuit and the UNCITRAL Model Law when Granting Recognition to OAS S.A. et al., Moe discussed the bankruptcy court’s conclusion that the foreign representative designated by OAS met the definition of “foreign representative” even though he was authorized by OAS’s board, and not the Brazilian court, to act as the representative. The bankruptcy court concluded that the definition of “foreign representative” under section 101(24) of the Bankruptcy Code does not require that a foreign representative by judicially appointed. It also held that, because the OAS debtors retained full control of their assets, subject to the oversight of the judicial administrator, they effectively functioned as debtors in possession with the authority to appoint a foreign representative.
In his second entry, SDNY Holds That Austrian Financing Subsidiary Has Its Center of Main Interests in Brazil, Moe discussed the bankruptcy court’s conclusion that Brazil was the center of main interests (“COMI”) of OAS’s Austrian subsidiary, which happened to be the issuer of the notes held by the creditors challenging recognition. Notwithstanding the presumption that a debtor’s COMI is located where the debtor’s registered office is located, the bankruptcy court found that the Austrian subsidiary was a special purpose financing entity that did not conduct business, own assets, have a physical location, or employ anyone in Austria. Moreover, the Austrian subsidiary’s only business was to issue the notes. Accordingly, the bankruptcy court found that Brazil was the “nerve center” of the OAS entities, including the Austrian financing subsidiary.
Finally, in SDNY Takes Narrow View of Chapter 15’s Public Policy Exception, Moe focused on the bankruptcy court’s rejection of the noteholders’ argument that the bankruptcy court should deny recognition of OAS’s Brazilian bankruptcy proceedings because certain aspects of Brazilian bankruptcy law, or the Brazilian proceedings themselves, are “manifestly contrary” to U.S. public policy. This argument arises under section 1506 of the Bankruptcy Code, which permits the bankruptcy court to refuse to take an action under chapter 15 if such “action would be manifestly contrary to the public policy of the United States.” The bankruptcy court, however, noted the U.S. courts have interpreted section 1506 narrowly and found that, notwithstanding the noteholders’ expressed concerns about a lack of due process in the Brazilian proceedings, given the U.S. courts’ narrow interpretation of section 1506, the ability of the noteholders to seek further judicial review of certain ex parte orders of the Brazilian court, and that some concerns were simply speculation about what might happen in the Brazilian proceeding, the proposed actions were not manifestly contrary to U.S. public policy.
A Default Is a Default, and Reinstatement Doesn’t Change That
Alana Heumann examined the effect of reinstatement of a debt under section 1123 of the Bankruptcy Code on a lender’s ability to claim default interest in The Cure: Eleventh Circuit Entitles Lender to Default Rate Interest. In In re Sagamore Partners, the Eleventh Circuit rejected the debtor’s argument that it need not pay accrued default interest as a condition to reinstatement of a loan under the debtor’s plan. In so holding, the Eleventh Circuit relied upon the language of section 1123(d) of the Bankruptcy Code, which requires the debtor to cure defaults in accordance with the terms of the underlying documents and applicable non-bankruptcy law. The Eleventh Circuit also upheld the lender’s right to assert alternative remedies—here, late fees – and held that the lender did not waive its claim to interest by asserting a (later withdrawn) claim for late fees.
Lien Stripping vs. Lien Rides Through – What’s a Debtor to Do?
During this lookback period, we have seen a number of decisions dealing with the effect of bankruptcy cases on secured claims. In Why Won’t the Courts Apply the Plain Language of Section 1141(c)? Second Circuit Misses the Chance to Get It Right in Northern New England Telephone Operations, I discussed the Second Circuit’s decision to express support for the “lien rides through” Dewsnup principles. Even though the secured creditor actively participated in the case before it, the court felt compelled to rule that a secured creditor’s “participation” in a chapter 11 case is one of the requirements that must be satisfied before a plan can revest property of the debtor’s estate in the reorganized debtor free and clear of that creditor’s interest.
Katherine Doorley discussed two decisions on “lien stripping” – avoiding a lien to the extent the value of the collateral is less than the lienholder’s interest – in Two New Decisions Appear to Support Lien Stripping (Under Certain Conditions). In Boukatch v. Midfirst (In re Boukatch), the Ninth Circuit BAP held that a lien can be stripped following a chapter 13 debtor’s payment of all amounts payable under his or her plan even if the individual debtor is not eligible for a discharge. In In re John Paul Smith, Kate discussed a decision of the U.S. Bankruptcy Court for the Eastern District of North Carolina that somehow conditioned confirmation of an individual chapter 11 debtor’s plan upon making all payments required by the plan (a condition not satisfied by Mr. Smith). The decision, however, might be read to suggest that, if Mr. Smith had made all his payments, he could have stripped an underwater secured creditor’s lien.
The Burden of the Bundle in Section 365
A number of ostensibly conflicting principles guide assumption or rejection of executory contracts under section 365 of the Bankruptcy Code – a debtor may not cherry pick provisions in a contract (i.e., it must assume or reject a contract in toto), but a single contract that is really multiple contracts might be severable. What happens when the parties expressly state that multiple contracts should be treated as one? That was the issue addressed in Delaware, and discussed by Jessica Diab, in It’s All or Nothing: Delaware District Court Says Debtor Cannot Pick and Choose From Bundle of Related Agreements! After determining that a software license agreement was assumable notwithstanding section 365(c)(1) of the Bankruptcy Code because the agreement allowed for the assignment, the Delaware District Court nevertheless held that, if the debtor wanted to assume a software license, it also was required to assume a number of related agreements because all of the agreements were intended to be part of an integrated bundle. In so ruling, the district court held that agreements need not even be executed simultaneously to form part of an integrated contract. Among other things, the reference among the agreements to other agreements and incorporation of each other’s terms led the court to conclude that the parties intended for the related agreements to be treated as one integrated agreement.
Believe It or Not, But Manville Continues to Generate Decisions
Johns-Manville emerged from its historic chapter 11 case in 1988, but its legacy continues – not just in the use of 524(g) injunctions patterned after those of Manville and other early asbestos debtor pioneers, but also in disputes that have continued to work their way through the judicial system. Abigail Lerner addressed the latest such decision in SDNY Bankruptcy Court Says Claims Against Insurer Need Not Be “Inextricably Intertwined” with Insurer’s Relationship with Debtor to Fall Within Scope of Channeling Injunction. In a ruling that likely has relevance to the interpretation of channeling injunctions under section 524(g) of the Bankruptcy Code, the Bankruptcy Court for the Southern District of New York ruled that so-called “independent” claims asserted against Manville’s insurance broker were barred by the channeling injunction in the Manville plan and confirmation order because they were “related to” the services provided by the broker to Manville. The bankruptcy court rejected the claimant’s argument that the broker was required to show that the claims were “inextricably intertwined” with the broker’s relationship with Manville to be protected under the channeling injunction.