Author Archives: David E Kronenberg

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

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

Because of Winn-Dixie? SDNY Bankruptcy Court Looks Beyond Literal Compliance with Venue Statute and Transfers Patriot Coal Cases to Eastern District of Missouri

On November 27, 2012, in a ruling that undoubtedly will impact the choice of venue for many large corporate bankruptcies in the future, Judge Shelley C. Chapman of the United States Bankruptcy Court for the Southern District of New York transferred venue of the chapter 11 cases of Patriot Coal Corporation and ninety-eight of its affiliates to the Eastern District of Missouri. Drawing on an array of jurisprudence regarding venue, Judge Chapman found that notwithstanding literal compliance with the applicable statute, the New York domicile of two of the debtors was insufficient to establish venue for all ninety-nine cases in the Southern District of New York when the two debtors were formed on the eve of the commencement of the chapter 11 cases admittedly for the sole purpose of establishing venue. In re Patriot Coal Corp., 12-12900-SCC (Bankr. S.D.N.Y. Nov. 27, 2012) [docket no. 1629]. The Patriot decision is the latest in a line of recent decisions by courts in the Southern District of New York and the District of Delaware granting motions to transfer venue to other districts. The decision is notable in that it strongly discourages the practice of “bootstrapping” a corporate bankruptcy case to the case of a recently formed affiliate in New York when the debtor has no meaningful presence in the jurisdiction, change of venue is requested by economic parties in interest, and moving the case is unlikely to inflict demonstrable economic harm to the estate. Continue reading

Second Circuit Affirms Arbitration Panel’s Finding That A Securities Clearing Firm May Be Liable As The “Initial Transferee” Of A Fraudulent Transfer

On July 3, 2012, the United States Court of Appeals for the Second Circuit refused to vacate an arbitration award against Goldman Sachs Execution & Clearing, P.C. The Court left intact the arbitration panel’s finding that the clearing firm was liable as the “initial transferee” of a fraudulent transfer by a customer engaged in a Ponzi scheme. The Second Circuit’s decision weakens the “mere conduit” defense that has traditionally shielded clearing firms from fraudulent transfer claims, and may increase the risk associated with accepting deposits from dishonest or insolvent customers. Goldman Sachs Execution & Clearing L.P. v. Official Unsecured Creditors’ Comm. of Bayou Group, LLC, No. 10-5049-cv, 2012 U.S. App. LEXIS 13531 (2d Cir. July 3, 2012). Continue reading

Akanthos: Eleventh Circuit Denies Noteholders’ Fraudulent Transfer Claims due to No-Action Clause in Indenture

On April 25, 2012, the U.S. Court of Appeals for the Eleventh Circuit overturned a decision by the U.S. District Court for the Northern District of Georgia permitting noteholders to proceed with a fraudulent transfer suit against the issuer of their notes, despite a clause in the indenture prohibiting such suits. The Eleventh Circuit held that the prohibition in the indenture, otherwise known as a “no-action clause”, should be strictly enforced, and that the noteholders were thus barred from bringing fraudulent transfer claims against the issuer and its officers and directors. Akanthos Capital Mgmt, LLC, et al. v. CompuCredit Holdings Corp., et al., Case No. 11-13227 (11th Cir. Apr. 25, 2012). The Eleventh Circuit’s decision comports with the majority of courts that have interpreted no-action clauses in this context and provides greater certainty in the marketplace regarding the litigation risks associated with bond issuance. Continue reading

VeraSun: Claims Under “Change in Control” Agreements Subject to Cap Governing “Employment Contracts”

In a recent decision in the VeraSun bankruptcy cases, the U.S. Bankruptcy Court for the District of Delaware held that “change in control” agreements between former executives and the debtors are “employment contracts” under section 502(b)(7) of the Bankruptcy Code. Accordingly, the Court determined that the former executives’ claims asserted under the agreements were appropriately capped by the claims-allowance scheme set forth in section 502. In re VeraSun Energy Corp., et al., 2012 Bankr. LEXIS 1262 (Bankr. D. Del. Mar. 26, 2012). Continue reading

Mirant: Fifth Circuit Renders Pro-Creditor Rulings in Fraudulent Transfer Action

On March 20, 2012, in an adversary proceeding stemming from the Mirant bankruptcy, the U.S. Court of Appeals for the Fifth Circuit (i) affirmed the U.S. District Court for the Northern District of Texas’ ruling that Mirant’s recovery trust had standing to pursue a fraudulent transfer action even though Mirant’s unsecured creditors arguably received a full recovery under Mirant’s confirmed plan, and (ii) overturned the District Court’s determination that Georgia’s, rather than New York’s fraudulent transfer law, applied to the action. Because the District Court had dismissed the fraudulent transfer action based on Georgia law, which the Fifth Circuit now deemed inapplicable, the Fifth Circuit remanded the case for adjudication under New York law. MC Asset Recovery LLC v. Commerzbank A.G. et al., 2012 WL 919620 (5th Cir. (Tex.)). The Fifth Circuit’s rulings resurrected Mirant’s seven-year-old fraudulent transfer action, and are important, pro-creditor precedents that could impact numerous pending and future fraudulent transfer actions. Continue reading

Class Dismissed: Fourth Circuit Affirms Denial of Class Proofs of Claim; Leaves Open Possibility for Similar Claims in the Future

On February 2, 2010, the United States Court of Appeals for the Fourth Circuit held that certain class action claimants in the Circuit City bankruptcy cases were authorized to file class proofs of claim. However, the Fourth Circuit further held that in this case, the class action process could not proceed because the bankruptcy claims process provided certain procedural advantages over the class process. Gentry v. Siegel, — F.3d —-, 2012 WL 310870 (4th Cir. 2012). Although the decision theoretically permits class actions in bankruptcy cases within the Fourth Circuit, the decision suggests that Fourth Circuit bankruptcy courts will seldom allow class actions to proceed concurrent with the bankruptcy process. Continue reading

Fourth Circuit Clarifies Position on Non-Debtor Releases

On December 9, 2011, the U.S. Court of Appeals for the Fourth Circuit held that although non-debtor releases are permissible in certain contexts, the District Court for the Eastern District of Virginia erred in affirming a bankruptcy court’s order approving the National Heritage Foundation’s (“NHF”) chapter 11 plan containing non-debtor releases. Behrmann v. Nat’l Heritage Found., Inc., 663 F.3d 704, 712-13 (4th Cir. 2011). The Fourth Circuit found that the bankruptcy court had not stated facts sufficient to justify its decision approving the debtor’s plan. The Fourth Circuit refrained from adopting a particular test that must be satisfied before non-debtor releases may be approved, as other U.S. Circuit Courts of Appeal have done, instead emphasizing that Fourth Circuit bankruptcy courts should make such determinations on a case-by-case basis and explain such determinations with detailed facts. Id. Although Behrmann does not provide a test for determining whether particular non-debtor releases are permissible in the Fourth Circuit, the opinion provides some guidance as to the specificity necessary in bankruptcy court orders approving such provisions, and should be kept in mind by bankruptcy professionals preparing proposed findings of fact in support of chapter 11 plans. Continue reading