Bitcoins in Bankruptcy: Trouble Ahead for Investors and Bankruptcy Professionals?

It is hard to ignore the media attention surrounding Bitcoin these days. Within the last few months, the virtual currency has surged to new highs, was the focus of a Congressional hearing, and was the subject of comments by former Federal Reserve Chairman Ben Bernanke, who stated that it and other such currencies “may hold long-term promise.” As Bitcoin gains legitimacy, companies offering Bitcoin-related services have sprouted. As with any new industry, however, although there may be spectacular successes, there also will be many failures. A reminder of this is that amid the frenzy, a company named Alydian recently filed the first Bitcoin-related bankruptcy. Accordingly, Bitcoin users and investors in Bitcoin companies should be aware that the qualities of Bitcoin that make it attractive outside of bankruptcy, could present major difficulties in a bankruptcy proceeding. Continue reading

Third Circuit Holds that Debt Collectors Must Generally Comply with the Bankruptcy Code and the Fair Debt Collection Practices Act

In Simon v. FIA Card Services, N.A., the U.S. Court of Appeals for the Third Circuit recently ruled that a debtor in a bankruptcy proceeding is not unconditionally precluded from bringing claims under the Fair Debt Collection Practices Act (the “FDCPA”). The FDCPA, enacted to eliminate abusive debt collection practices by debt collectors, establishes guidelines for debt collecting, clarifies creditor rights when dealing with debt collectors, and establishes penalties for debt collectors that fail to comply with the provisions of the FDCPA. When claims under the FDCPA are asserted by a debtor in a bankruptcy proceeding, they are often challenged by the debt collector on the basis that the Bankruptcy Code governs such matters and precludes application of the FDCPA. Continue reading

Court Approves Extension of the Automatic Stay in Detroit’s Chapter 9 Case to State Officials

On July 24, 2013, Judge Steven W. Rhodes of the Bankruptcy Court for the Eastern District of Michigan approved the City of Detroit’s motion to extend the automatic stay to various non-debtor parties, including certain state officials. The Court’s ruling effectively stays all pending litigation against the City, allows the City to continue to move forward with its chapter 9 case, and paves the way for a dispute over the City’s eligibility to file for chapter 9. Continue reading

City of Detroit Files Chapter 9 Bankruptcy Petition – Challenges Ahead

On the afternoon of July 18, 2013, the City of Detroit filed its highly anticipated petition for relief under Chapter 9 of the Bankruptcy Code in the Bankruptcy Court for the Eastern District of Michigan. This marks the largest municipal bankruptcy filing in United States history. As a result of the Chapter 9 filing, all actions by creditors to collect prepetition claims against the City are enjoined through the imposition of an automatic stay, except for the application of special revenues pledged to indebtedness. Continue reading

Court Finds Investment Advisor’s Payments to Customers Are Not Exempt From Avoidance Under Section 546(e) of the Bankruptcy Code

FCStone, a New York-based commodities brokerage firm, was recently ordered to return a transfer of $15.6 million to the bankruptcy estate of Sentinel Management Group. Approximately $1.1 million of this amount constituted a prepetition transfer of proceeds the debtor obtained from the sale of securities, which proceeds the debtor distributed to a certain segment of its customers, including FCStone. Judge James B. Zagel of the United States District Court for the Northern District of Illinois in Grede v. FCStone LLC, No. 09 C 136, 2013 WL 68662 (N.D. Ill. 2013), determined that this prepetition transfer constituted a preference that was not protected under the safe harbor of section 546(e), which immunizes certain settled financial transactions from avoidance.
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Vitro Update: “Savings Clause” Fails to Save Vitro Subsidiaries From Involuntary Bankruptcy

Shortly after the U.S. Court of Appeals for the Fifth Circuit refused to enforce Vitro SAB’s Mexican plan of reorganization in the United States, Judge Harlin D. Hale of the U.S. Bankruptcy Court for the Northern District of Texas dealt another major blow to the embattled Mexican glassmaker by placing ten of its U.S.-based guarantor subsidiaries into involuntary bankruptcy at Vitro’s noteholders’ request. At a hearing on the involuntary petitions, the Vitro subsidiaries argued that a “savings clause” in the indenture governing the notes created a bona fide dispute as to the amount of the noteholders’ claims, and that creditors with disputed claims are not permitted to file involuntary petitions under Bankruptcy Code section 303. However, Judge Hale held that the savings clause at issue was designed to protect noteholders from attempts to void the subsidiaries’ guarantees as fraudulent transfers and could not be used to manufacture a disputed claim and invalidate an involuntary bankruptcy petition. This decision helps ensure that savings clauses, which appear in many indentures and credit agreements, serve their intended purpose—to protect lenders, rather than serve as a defense to involuntary bankruptcy or other creditor remedies. In re Vitro Asset Corp., et al., No. 11-32600-hdh-11 (Bankr. N.D. Tex. Dec. 4, 2012). Continue reading

SDNY Denies Payment of Administrative Expense Claim by Relying on the Operative Document as a Whole and Rejecting a Statutory Rule of Construction

On December 13, 2012, Judge Vincent L. Briccetti from the United States District Court of the Southern District of New York denied the appellant Notes Trustee’s request to compel payment of an administrative expense claim. Upholding the bankruptcy court’s decision, Judge Briccetti ruled that rules of construction, such as the last antecedent rule, should not be applied because to do so would undermine the intent of the plan, and noted that such rules of construction “are less an ironclad rule than a guide to interpreting the [Plan], as are other interpretation guides and [are] subservient to the clearer meaning of the provision in the context of the entire agreement.” The case is Wilmington Trust Company v. The Great Atlantic & Pacific Tea Company, Inc., Case No. 12-CV-5969 (VB) (S.D.N.Y. Dec. 13, 2012). Continue reading

Gaming Alert – New Jersey Governor Chris Christie Conditionally Supports Online Gambling – Boyd Gaming and Caesars Stocks Rally as a Result

On February 7, 2012, New Jersey Governor Chris Christie issued a conditional veto of a bill that would legalize online gambling in New Jersey, but indicated that he would approve the bill if a few changes were implemented, including an increase in the tax rate from 10% to 15% and the inclusion of a provision that would allow the legislature to reevaluate the bill after 10 years. The legislature is expected to promptly incorporate these revisions and resubmit the bill to Governor Christie in mid-March. This signifies a significant step forward for online gaming in New Jersey and throughout the U.S. Continue reading

In re Hostess Brands, Inc.: Southern District of New York Bankruptcy Court Refuses to Send Cash Collateral Dispute to Arbitration

On January 7, 2013, the Judge Robert D. Drain of the United States Bankruptcy Court for the Southern District of New York held that a dispute concerning the debtors’ use of cash collateral was not subject to arbitration, notwithstanding a broad arbitration clause in the parties’ underlying agreement, because the decision to allow a debtor to use cash collateral constituted a “core” issue and was a fundamental aspect of the bankruptcy process. In re Hostess Brands, Inc., No. 12-22052 (RDD), 2013 WL 82914 (Bankr. S.D.N.Y. Jan. 7, 2013). Continue reading

Stern v. Marshall Update – Ninth Circuit Holds That Bankruptcy Courts Lack Constitutional Authority To Finally Determine Fraudulent Transfer Claims Against Non-Claimants

On December 4, 2012, the United States Court of Appeals for the Ninth Circuit added to the growing body of case law delineating the extent of bankruptcy courts’ jurisdiction in the wake the Supreme Court’s decision in Stern v. Marshall. In In re Bellingham Insurance Agency, Inc., the Ninth Circuit held that (i) non-Article III courts lack the Constitutional authority to enter final judgments in fraudulent transfer actions against non-claimants, (ii) bankruptcy courts may hear and enter findings of fact and conclusions of law in fraudulent transfer actions, and (iii) a defendant may waive its Constitutional right to be heard before an Article III court. Continue reading