Restructuring

Contributed by Debra A. Dandeneau.
Forgot to Get a Court Order Approving a Postpetition Loan?  It May Not Matter
Although we do not recommend that anyone rely upon this strategy, Blaire Cahn wrote about a case in which the bankruptcy court afforded priority status to a postpetition loan made without bankruptcy court approval.  In Unauthorized Loan Is Entitled to Priority Status, Blaire discussed the conclusion of the United States Bankruptcy Court for the Western District of New York that, although section 364(b) of the Bankruptcy Code provides “a guaranteed pathway to priority,” it is not the only basis upon which a postpetition loan may be accorded priority status.  In holding that the unauthorized loan would be treated as an administrative expense, the court employed the standard adopted by the Second Circuit in Standard Capital Corporation v. Saper that “a priority claim should only be allowed if the judge ‘is confident that he would have authorized it if a timely application had been made,’ and … if ‘he is reasonably persuaded that the creditors have not been harmed by a continuation of the business made possible by the loan.’” 
A New Approach to Analyzing Extraterritorial Fraudulent Transfers
Brian Wells discussed Bankruptcy Judge Gerber’s departure in the Lyondell cases from other decisions in the SDNY regarding the treatment of allegedly fraudulent transfers by non-U.S. entities in Extraterritorial Transactions – a Viable Way to “Take the Money and Run”?  Judge Gerber held that extraterritorial transfers can be subject to avoidance as fraudulent transfers under section 548 of the Bankruptcy Code.  In so holding, Judge Gerber parted with decisions from two district court judges (Rakoff and Scheindlin) and another bankruptcy judge (Brozman) that had held that, given a lack of clear Congressional intent to the contrary, avoidance and collection provisions of the Bankruptcy Code (in one cases, sections 547 and 550) only applied to domestic transactions.  Of course, if a transaction is not “extraterritorial,” then the Bankruptcy Code provisions apply.  This involves an inquiry into the geographical “center of gravity” of a transaction, including the participants, acts, targets, and effects.  If a transaction is extraterritorial, then courts will presume that a law only applies domestically unless, after inquiring into Congressional intent, they determine that Congress intended the relevant statute to apply extraterritorially.  In Lyondell, the court held that the presumption was overcome  for section 548, and foreign fraudulent transfers could be avoided.
We Know the Automatic Stay Is Universal, but What About Foreign Courts’ Stay Orders?
A debtor’s interest in property becomes “property of the estate” under section 541 of the Bankruptcy Code “wherever” the property is located, and the automatic stay imposed by section 362(a) of the Bankruptcy Code applies to all property of the estate.  Does the same breadth apply to a foreign court’s stay order?  That was the question Yvanna Custodio answered in How Wide Is a Worldwide Stay? Bankruptcy Court Analyzes Scope of Foreign Court’s Stay Order.  Yvanna discussed the decision in Daebo International Shipping’s chapter 15 case, in which Judge Wiles enforced a stay order issued by a Korean insolvency court and vacated maritime attachments made against Daebo’s shipping vessel docked in the United States.  Similar to the automatic stay, Judge Wiles interpreted the Korean statute and stay order to apply to all creditors of the foreign debtor, to all actions such creditors might take, and to all “rehabilitation creditors,” regardless of location.
Being Interested Is Not the Same Thing as Being a Party in Interest
It is hard to think of a better process than the bankruptcy process for permitting  parties access to the courts, providing transparency to transactions, and affording a wide range of creditors and interest holders the ability to come in and be heard on issues.  Abigail Lerner, though, reminded us that, to some extent, the process is still by invitation only in Bankruptcy Court Rules Parties Lack Standing, Reminds Litigants of the Parameters of §1109(b). When Alpha Natural Resources sought bankruptcy court approval of its settlement with the West Virginia Department of Environmental Protection regarding Alpha’s ability to “self-bond” to satisfy regulatory requirements (including relating to its environmental reclamation obligations), certain environmental groups objected, arguing that the settlement violated the laws of the United States and West Virginia. The court bankruptcy court concluded that “party in interest” includes all persons whose pecuniary interests are directly affected by the bankruptcy proceedings.  Here, the court noted that the environmental parties had failed to plead any concrete and particularized injury in fact that would result from approval of the West Virginia settlement.  Moreover, even if the environmental parties had some pecuniary interest, standing only would attach under section 1109(b) of the Bankruptcy Code if the pecuniary interest would be “directly affected” by the bankruptcy proceeding.  Because the objecting groups did not satisfy these requirements, they did not have standing to object to the settlement motion.
At What Point Does a Bank’s Suspicions About a Transfer Preclude It From Being a Good Faith Transferee or Subject Its Claim to Equitable Subordination?
In her two-part series on the Seventh Circuit’s Decision in the Sentinel Management bankruptcy case, Debora Hoehne addressed the circuit court’s ruling that (1) a bank employee’s suspicions about the source of the bank’s collateral should have put the bank on inquiry notice, thus precluding the bank from asserting that it was a “good faith” transferee under section 548(c) of the Bankruptcy Code, but (2) those suspicions of wrongdoing did not meet the high standard for equitable subordination of the bank’s claim.  Although Sentinel represented to its clients that it would hold their funds in segregated accounts, as required under the Commodity Exchange Act, at some point Sentinel began using customer account assets to secure its overnight bank loans by transferring assets out of the customer accounts and into other accounts subject to the bank’s lien.  At a certain point, a managing director at the bank became suspicious and wrote an email questioning whether the assets pledged as collateral for the overnight loans “[were] for someone else’s benefit” and whether the bank had rights on all the collateral, but the bank did not conduct a further inquiry.
Seventh Circuit Discusses Inquiry Notice focused on whether the bank could be a transferree that took “in good faith” under 548(c) of the Bankruptcy Code.  In a decision authored by Judge Richard Posner, the Seventh Circuit held that the bank did not accept the liens on Sentinel’s assets in good faith and, therefore, could not retain those liens, because the bank possessed information that should have placed it on inquiry notice that Sentinel was improperly using customer assets to secure the bank’s loans to Sentinel.  Stressing that the court should apply an objective standard in determining whether the bank was put on inquiry notice, Judge Posner clarified that “inquiry notice is not knowledge of fraud or other wrongdoing but merely knowledge that would lead a reasonable, law-abiding person to inquire further — would make him in other words suspicious enough to conduct a diligent search for possible dirt.”
As Debora explained in Seventh Circuit Discusses Equitable Subordination of Non-Insider, though, that inquiry notice was not sufficient cause to equitably subordinate the bank’s claim under section 510(c) of the Bankruptcy Code.  Judge Posner observed that the statute does not indicate what conduct is necessary to impose equitable subordination.  In the Seventh Circuit’s view, “the defendant’s conduct must be not only ‘inequitable’ but seriously so (‘egregious,’ ‘tantamount to fraud,’ and ‘willful’ are the most common terms employed) and must harm other creditors” in order to impose the “Draconian remedy” of equitable subordination.  Although Sentinel’s customers had been harmed by the bank’s acceptance of the customer accounts as security, and the bank’s executive had suspicions about the collateral that he should have led to further investigation, the trustee had not shown that the bank knew that Sentinel was securing the bank’s loans with customers’ money without the customer’s consent.  Because negligence is not a basis for equitable subordination, the bank’s claims could not be equitably subordinated.
Freeze on Funds OK – Assuming It’s the Government Doing the Temporary Freezing
Private parties might not be so lucky, but the SEC can continue to pursue a freeze on assets even when the assets constitutes property of the estate, as Andriana Georgallas reported in Second Circuit Wyly’ing Out? Asset Freeze Order Doesn’t Violate the Automatic Stay.  Holding that a temporary freeze on a debtor’s assets is permitted by section 362(b)(4)’s police and regulatory power exception to the automatic stay, the Second Circuit distinguished its prior ruling in SEC v. Brennan, in which the Second Circuit held that the automatic stay prevented the government from requiring a debtor-defendant to repatriate to the U.S. funds held in offshore trusts and deposit them in a court registry.  The order in Brennan constituted “a step ‘preparatory to money collection’” and, thus, fit within the exception to the police and regulatory power exception.  In SEC v. Miller, however, the Second Circuit found that the order was “merely an asset freeze” and, among other things, neither transferred ownership nor vested control of the assets in the courts. The court explained that, although the asset freeze order temporarily burdens the use of assets — and seeks to preserve the status quo — it does not rise to the level of impermissible enforcement of a money judgment.
If You Want a Third Party Release, the Plan Must Be Clear and Unambiguous
Third party releases are controversial enough, but the Fifth Circuit recognized in Republic Supply Co. v. Shoaf that a third party release, particularly if not challenged at confirmation, may be enforceable.  As Matthew Goren discussed in Let Me Be Clear: Fifth Circuit Holds Generic Plan Release Language Lacks Specificity to Discharge Creditor’s Claims Against Officer of the Debtor, the Fifth Circuit requires that the release provisions in the plan be “clear and unambiguous” and “expressly release” the third party claims.  Applying the so-called “specificity test” to the language set forth in the plan, the court of appeals held that the release language in the plan did not identify the officer to be released by name, even though the plan generally purported to release officers.   Moreover, the Fifth Circuit stated that the plan did not mention the claims to be released.  Lacking clear language relating these claims, the plan as not specific enough to release plaintiff’s claim against the debtor’s officer, and the debtor could not rely upon Shoaf’s  res judiciary principles to protect the officer.