Category Archives: Claims

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

SDNY Bankruptcy Court Rules That Borders Gift Card Holders Are Not “Known Creditors” Entitled To Actual Notice Of A Bankruptcy Bar Date

Judge Martin Glenn of the Bankruptcy Court for the Southern District of New York recently ruled that Borders gift card holders did not qualify as “known creditors.” The Court concluded that the gift card holders were entitled only to publication notice rather than actual notice of the bar date for filing bankruptcy claims in Borders’ chapter 11 case. Because potential gift card claims often constitute a significant portion of the unsecured claims in retail bankruptcy cases, the treatment of gift cards and the type of notice to which their holders are entitled can significantly impact the recoveries of other unsecured creditors including bondholders. In re BGI, Inc., f/k/a Borders Group, Inc., No. 11-10614, 2012 Bankr. LEXIS 3724 (Bankr. S.D.N.Y. Aug.14, 2012). Continue reading

Finding that Underlying Development Agreement was Terminated, Delaware Bankruptcy Court Disallows Claim for Rejection Damages

On July 9, 2012, Judge Mary F. Walrath of the Bankruptcy Court for the District of Delaware disallowed a claim for rejection damages related to a real estate development agreement, because the claim had been released upon the termination of an LLC Agreement, and the underlying ground lease never came into existence. In re Magna Entm’t Corp., 2012 Bankr. LEXIS 3089 (Bankr. D. Del. July 9, 2012). Continue reading

KB Toys: Delaware Bankruptcy Court Weighs in on Claims Trading

On May 4, 2012 Judge Kevin J. Carey of the U.S. Bankruptcy Court for the District of Delaware held that a claim against a debtor’s estate, transferred to a third party, is subject to the same infirmities as in the hands of the original holder of the claim. In re KB Toys, Inc., — B.R. —-, 2012 WL 1570755, at *11 (Bankr. D. Del. 2012). Judge Carey’s opinion diverged from, and criticized, the decision of the U.S. District Court for the Southern District of New York in Enron Corp. v. Springfield Assocs., L.L.C., 379 B.R. 425 (S.D.N.Y. 2007). In that case, the court held that whether the disabilities of the original holder are inherited by a subsequent transferee turns on whether the transfer is by way of sale or assignment. Continue reading

Frenville – Gone But Not Forgotten: Third Circuit Prohibits Retroactive Application of Grossman’s

The ability to discharge debts (i.e., liability on a claim) is essential to the fundamental goal of chapter 11 of the Bankruptcy Code – providing debtors with a fresh start by resolving all claims that arose before confirmation of the debtor’s plan of reorganization. In determining the universe of debts eligible for discharge, Third Circuit courts labored for many years under Avellino v. M. Frenville Co. (In re M. Frenville Co.), 744 F.2d 332 (3d Cir. 1984), which held that a claim arises when a right to payment accrues under applicable nonbankruptcy law. Courts in other jurisdictions almost unanimously rejected Frenville’s “accrual” test because it seemed to be at odds with the Bankruptcy Code’s broad definition of “claim”. Continue reading

In re Heritage Highgate, Inc.: Timing Is Everything to Secured Creditors Facing Valuation Issues

On May 14, 2012, the United States Court of Appeals for the Third Circuit upheld a ruling by the Bankruptcy Court for the District of New Jersey that the fair market value of a creditor’s collateral as of the plan’s confirmation date is the proper method of valuing a secured creditor’s claim pursuant to section 506(a) of the Bankruptcy Code. The Third Circuit also adopted a “burden-shifting framework,” finding that a secured creditor will bear the ultimate burden of proving the extent to which its claims are secured pursuant to section 506(a). Continue reading

Extent of Non-Debtor Parent Exposure Under Channeling Injunctions

On April 10, 2012, the U.S. Court of Appeals for the Second Circuit in In re Quigley issued an opinion adopting a narrow interpretation of Section 524(g)(4) of the Bankruptcy Code,
which allows a bankruptcy court to enter an injunction that bars certain actions brought by plaintiffs against non-debtor third parties, such as a non-debtor parent company. Quigley reminds solvent corporate parent companies that there are limits to bankruptcy courts’ injunctive powers to insulate such parent companies from potential claims when their subsidiaries file for bankruptcy to restructure asbestos-related tort liabilities. Continue reading

Benefit of the Bargain: SDNY Bankruptcy Court Affirms Presumption of Contractual Default Rate for Oversecured Creditors’ Postpetition Interest

On April 9, 2012, Judge Stuart M. Bernstein of the U.S. Bankruptcy Court for the Southern District of New York held that an oversecured creditor in a single asset real estate case was entitled to receive prepetition and postpetition interest at the contractual default rate, but declined to allow late payment premiums provided under the loan documents. 785 Partners LLC, Case No. 11-13702 (Bankr. S.D.N.Y. Apr. 9, 2012). The case reaffirms SDNY bankruptcy courts’ deference to the contractual default rate for calculating postpetition interest due to an oversecured creditor when the debtor is solvent and equitable considerations favor imposition of the default rate, a topic which we first discussed in the context of General Growth Properties’ chapter 11 cases. 785 Partners also provides greater clarity in the Southern District of New York regarding the allowance of prepetition interest and late payment charges. Continue reading

Court Holds Plan Does Not Trump Arbitration Clause In Parties’ Agreement

On March 9, 2012, Judge Allan L. Gropper of the U.S. Bankruptcy Court for the Southern District of New York held that a claim for damages resulting from a debtor’s breach of an executory contract must be arbitrated notwithstanding a provision in the debtor’s plan stating that the bankruptcy court retained exclusive jurisdiction to determine all such claims. CIT Group Inc. v. Tyco Int’l Ltd. (In re CIT Group Inc.), Case No. 09-16565 (Bankr. S.D.N.Y. Mar. 9, 2012). The court temporarily stayed arbitration pending the Second Circuit’s decision on whether to grant the claimant’s further stay motion. Continue reading