Blog Posts
International
International Trade: Service of Process and Default Judgments Can Reach You in Unexpected Ways
A recent Second Circuit decision offers a valuable lesson for foreign companies dealing with U.S. counterparties: a plaintiff may effect service of process through a collection agent, even if that agent was not expressly authorized to accept service of process on the company’s behalf. Ryniker v. Sumec Textile Co. Ltd., 177 F.4th 365 (2d Cir. 2026). The Second Circuit reinstated a default judgment against a Chinese creditor, Sumec Textile Company Limited, following a convoluted procedural path from bankruptcy court to district court, then bankruptcy court again and a rare direct appeal to the Second Circuit. As they say, the devil is in the details. A closer look at the background helps explain why the court reached that result. Décor Holdings, Inc. and its affiliates were sellers of decorative fabric that filed voluntary Chapter 11 petitions on February 12, 2019. They listed Sumec Textile Company Limited, a Nanjing, China-based textile manufacturer, as their second-largest unsecured creditor. Sumec Textile Company Limited held an export credit insurance policy with China Export & Credit Insurance Corporation, known as Sinosure, and submitted an insurance claim to Sinosure for the unpaid balance owed by the debtors. Before Sinosure paid on the insurance claim, Sumec Textile Company Limited executed a Collection Trust Deed authorizing Sinosure to collect, “on our behalf,” the “full amount” of the debt owed by the debtors, $3,029,719.52, and granted Sinosure “full power” to exercise collection rights and remedies in Sumec Textile Company Limited’s name or Sinosure’s own name. Sinosure then hired Brown & Joseph, LLC, a U.S. collection agency, to collect the debt. Sinosure’s instructions to Brown & Joseph granted it “full power” to exercise collection rights and remedies for “amicable debt collection.” The Collection Trust Deed, however, did not authorize Sinosure to accept service of a summons or complaint on Sumec's behalf or act in any way for Sumec. To assist in debt collection, Sinosure hired the Detroit-based collection agency Brown & Joseph LLC (“B&J”). The scope of B&J's authority and services was set forth and limited by a Trust Deed and Letter of Instruction dated March 4, 2019. There is no language in the Trust Deed and Letter of Instruction that authorizes B&J to accept service of process on behalf of Sumec. B&J filed a proof of claim in Décor Holdings, Inc.’s bankruptcy on behalf of Sumec. The dispute arose when a litigation administrator later commenced an adversary proceeding seeking to recover payments made to Sumec and to disallow Sumec’s claim. The summons and complaint were mailed to Sumec “in care of Brown & Joseph” at the address listed on the proof of claim. Brown & Joseph engaged with the plaintiff after service, stating it was reviewing the matter with “our client and the creditor,” referencing an ordinary course defense, and noting that Sumec believed the payments “were made in the ordinary course of business.” Despite these communications, Sumec never appeared, and a default judgment was entered. The central issue on appeal was whether Brown & Joseph qualified as an “agent authorized by appointment or by law to receive service” under Bankruptcy Rule 7004, even though the governing documents did not expressly authorize it to accept service of process. The Second Circuit answered yes, holding that Brown & Joseph had implied actual authority to accept service on Sumec’s behalf. The Court emphasized that actual authority is not limited to what is expressly stated. It includes authority “to perform acts necessary or incidental to achieving the principal’s objectives, as reasonably understood from the principal’s manifestations.” Here, Sumec had authorized Sinosure to collect the “full amount” of the debt, and Sinosure had in turn authorized Brown & Joseph to do the same. By filing a proof of claim in Sumec’s name and designating itself as the recipient for notices, Brown & Joseph positioned itself as the functional representative of the creditor in the bankruptcy case. Critically, the adversary proceeding did not exist in isolation. It sought not only to recover alleged preferences but also to disallow the very claim Brown & Joseph had been authorized to pursue. In that context, they rejected the argument that express authorization to accept service was required. Instead, it reasoned that authority to recover the “full amount” necessarily included authority to receive notice of litigation that could reduce that recovery. As the Court put it, actual authority may be implied from the principal’s objectives, and here those objectives made service on Brown & Joseph appropriate. The Court therefore reinstated the default judgment. For foreign creditors, the implications are significant. This decision underscores that delegating collection authority and allowing a default to be entered may carry material negative consequences that extend beyond simple debt recovery. Even where agency documents state that the agent does not have authority to accept service, a court may find otherwise based on the scope of the assignment and the surrounding circumstances. Interestingly, in this case, the creditor had posted a bond to stay enforcement during the appeal process and the reinstatement of the default judgment clears the path to satisfying the judgment quickly. The takeaway is straightforward but important: foreign companies should carefully define and, where appropriate, limit the authority granted to insurers, factors, and collection agents. Absent clear boundaries and active oversight, service of process on a U.S. agent may be sufficient to bind a foreign creditor even where the creditor has not expressly authorized the agent to accept service and the agent has affirmatively informed the plaintiff that it lacks such authority.
June 29, 2026
Commercial Litigation
Prejudgment Asset Freezes: Where the Line Is Drawn
In these turbulent times, more and more creditors are pushing for prejudgment asset freezes and restraints. Recent decisions in New York and Florida illustrate when that is possible. A district court in New York was reversed when it granted a preliminary injunction against the assets of guarantors who did not give the creditors any security interest. Interestingly, a bankruptcy court in Florida gave a plan trustee an injunction in a fraudulent conveyance action. The U.S. Supreme Court’s decision in Grupo Mexicano is the common theme. Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308 (1999). Grupo Mexicano is considered a departure from practice in the U.K. courts, which issue the so-called Mareva injunctions prohibiting defendants from transferring assets before judgment. See Mareva Compania Naviera S. A. v. International Bulkcarriers S. A., 1 All E.R. 213 (1980). Grupo Mexicano stands for the proposition that an unsecured creditor has no rights, at law or in equity, in the property of his debtor before judgment. New York (Leadenhall v. Advantage Capital – 2d Cir.) The Second Circuit Court of Appeals confirmed that where a creditor has no rights in a debtor’s assets, neither law nor equity shall operate to grant such rights prejudgment, and reversed, as an abuse of discretion, the District Court’s grant of a preliminary injunction against the assets of guarantors. The lenders extended a secured loan to borrower entities and obtained comprehensive collateral from the borrowers, but only unsecured guarantees from affiliated guarantors who pledged no assets. After discovering alleged fraud and default and accelerating roughly $600 million in debt, the lenders sued for breach of contract, fraud, and RICO, and sought to freeze both borrower and guarantor assets prejudgment, based on fears of dissipation. The district court granted the injunction, but the Second Circuit reversed because, as to the guarantors, the lenders asserted only legal claims for money damages, identified no specific property, and held no lien or equitable interest in guarantor assets. Those facts placed the case squarely within Grupo Mexicano. An unsecured creditor with a legal damages claim cannot restrain a defendant’s general assets before judgment, even where dissipation is likely. The absence of any pledged collateral, traceable res, or equitable remedy (such as restitution of specific property) was dispositive. Florida (Vital Pharmaceuticals – Bankr. S.D. Fla.) In a recent decision, Judge Russin held that Grupo Mexicano was inapplicable in a case arising from the bankruptcy of Vital Pharmaceuticals, which was forced into bankruptcy after losing a false advertising lawsuit brought by its competitor, Monster Energy. The debtor’s CEO, while the company faced massive and mounting litigation exposure, caused the company to transfer nearly $10 million of corporate funds to purchase and maintain a specific luxury property titled in a shell entity he controlled, with no consideration flowing back to the company. The transfers occurred as the company was allegedly insolvent or rendered insolvent, and while facing hundreds of millions of dollars in contingent liabilities. After confirmation of a liquidating plan, the trustee brought fraudulent transfer claims seeking to recover that specific real property (or its value), and moved to enjoin further encumbrance or transfer. Critically, the trustee traced estate funds directly into an identifiable res (the property) and pursued equitable relief, avoidance, and recovery of the property itself, not merely money damages. The court granted the preliminary injunction, holding that Grupo Mexicano did not apply because the action fit within the traditional equitable exception. It was an equitable fraudulent-conveyance claim targeting specific property, where the injunction served to preserve the res pending adjudication. The strong factual showing of insider transfers, lack of value, insolvency, and pending litigation exposure further supported both the likelihood of success and the need to prevent dissipation. The recent decisions underscore that Grupo Mexicano remains a firm constraint on prejudgment asset freezes in the United States: unsecured creditors pursuing legal claims for money damages cannot restrain a defendant’s general assets absent a recognized equitable interest. At the same time, courts will grant such relief where the plaintiff can anchor its claim in equity by tracing funds to a specific, identifiable res and seeking recovery of that property. Ultimately, the outcome determinative factors are not urgency or risk of dissipation, but whether the creditors can tie their claim to an identifiable asset or equitable remedy.
May 28, 2026
Bankruptcy
From Purdue to Pat McGrath: Are Opt-Out Third-Party Releases Truly Consensual?
Judge Laurel Isicoff’s April 21, 2026, decision confirming the Chapter 11 plan of Pat McGrath Cosmetics LLC answers in the affirmative the question left open by Harrington v. Purdue Pharma: whether third‑party releases imposed through an opt‑out mechanism can be truly consensual. Once valued at more than $1 billion following a 2018 private‑equity investment, the company struggled with chronic inventory shortages and mounting debt, ultimately filing for Chapter 11 in January 2026 to restructure its capital stack and preserve the brand’s core value. Emphasizing that Purdue addressed only nonconsensual third‑party releases and expressly left open the legality of consensual releases, the court held that an opt‑out mechanism may constitute consent where creditors receive clear, conspicuous notice, understand the consequences of inaction, and are afforded a meaningful opportunity to decline the release. Drawing analogies to class actions and core bankruptcy voting rules, the court emphasized that the Bankruptcy Code routinely binds parties based on inaction after adequate notice, and that Purdue deliberately declined to define the contours of “consent.” Creditors who voted to reject the plan, or were deemed to reject, could not be bound absent affirmative consent—underscoring that opt‑out is not a one‑size‑fits‑all solution. The question of whether opt-out releases are consensual is soon going to be reviewed at the Circuit level. In the Second Circuit, Chief Bankruptcy Judge Carl L. Bucki of the Western District of New York found that opt‑out releases are not consensual and therefore prohibited by Purdue. In re Diocese of Buffalo, N.Y., 2026 WL 585099 (Bankr. W.D.N.Y. Feb. 27, 2026). Recognizing the absence of a controlling authority and the issue’s “public importance,” Judge Bucki certified a direct appeal to the Second Circuit under 28 U.S.C. § 158(d)(2), explicitly citing the growing inter‑ and intra‑circuit split. At the end of 2025, District Judge Denise Cote of the Southern District of New York reversed confirmation of an opt‑out plan, holding that the ability to opt out does not itself establish consent to release claims against non-debtors in In re GOL Linhas Aéreas Inteligentes S.A.,675 B.R. 125 (S.D.N.Y. Dec. 1, 2025). The GOL debtor has appealed, with briefing now headed to the Second Circuit. Meanwhile, the Fifth Circuit is confronting the same question from the opposite direction. In Container Store, District Judge Lee Rosenthal upheld confirmation of an opt‑out plan, concluding that the opportunity to opt out rendered the releases consensual and therefore permissible after Purdue. 676 B.R. 356 (S.D. Tex. Feb. 12, 2026). The U.S. Trustee appealed on April 10, teeing up appellate review. The Path McGrath decision adds momentum to a growing body of post‑Purdue case law confirming that consensual third‑party releases remain viable and that opt‑out mechanisms, when properly structured, can satisfy both due process and the Bankruptcy Code. Whether opt-out releases will remain viable is a question now destined for the Second Circuit and Fifth Circuit, and possibly back to the Supreme Court itself.
April 28, 2026
Bankruptcy
Deal Structures Under Stress: Courts Reexamine Prebankruptcy Transactions
According to data from Epiq Bankruptcy, February 2026 marked a significant increase in commercial bankruptcy activity. Commercial Chapter 11 filings rose by 67% year over year, while Subchapter V elections by small businesses increased by an even more striking 91%. For restructuring professionals and deal participants, this surge is not merely a statistical datapoint. It is a harbinger of avoidance actions yet to come. As more cases move past the filing stage, trustees and debtors‑in‑possession will inevitably turn their attention to transactions that preceded bankruptcy, particularly those involving affiliates, directors and officers, sponsors, or asset purchasers. These challenges most often surface as fraudulent conveyance actions, and a mix of recent and historical cases serves as a pointed reminder of the practical exposure risks facing transaction participants. Courts are looking past labels, deal structures, and market conventions to examine the economic reality of transactions that leave debtors overleveraged and creditors exposed. Although these cases arise in very different factual settings, they converge on the same core principle: economic reality controls. Transactions that extract value while saddling a company with unmanageable obligations will receive heightened scrutiny if in financial distress and ultimately in a bankruptcy proceeding. The cases discussed below, spanning leveraged buyouts, subsequent transferee liability, merchant cash advances, and insider transactions, underscore a unified principle: courts are increasingly indifferent to form where creditor harm is real. Market-standard LBO is not insulated from a fraudulent conveyance claim. In Worth Collection, the Delaware bankruptcy court denied motions to dismiss a Chapter 7 trustee’s amended complaint challenging a 2016 leveraged buyout that allegedly gutted the debtor while enriching insiders. Worth Collection Ltd. was placed in bankruptcy, involuntary by its inventory suppliers and service providers. After an earlier dismissal, the trustee returned with a much more detailed pleading that carefully laid out the transaction’s financial consequences. According to the amended complaint, the LBO increased the debtor’s debt from approximately $2.4 million to more than $25 million. Interest expense increased by over 5,000%, operating losses quickly followed, and the company’s cash reserves fell from roughly $12 million in 2014 to less than $500,000 by 2016. At the same time, former equity holders allegedly received over $39 million in closing distributions, leaving unsecured creditors to absorb the downside. The trustee asserted a broad range of claims, including substantive consolidation, veil-piercing, the collapsing of the LBO transactions, and avoidance of transfers as both actually and constructively fraudulent under the Bankruptcy Code and Delaware law. Judge Shannon held that the amended complaint plausibly alleged each of these claims. Of particular importance, the court found that the traditional badges of fraud, like insider transfers, lack of reasonably equivalent value, and insolvency, were pleaded with sufficient detail to survive dismissal. The court also emphasized that fraudulent intent need not be shown directly and may be inferred circumstantially, especially in LBO cases where leverage spikes and liquidity collapses shortly after closing. The significance of Worth Collection lies in its confirmation that leveraged buyouts are not insulated from challenge simply because they resemble market‑standard deals. Where the economic effect of the transaction is to burden the operating company while delivering value to insiders, courts will allow fraudulent conveyance claims to proceed, often into costly and protracted discovery. “Purchase of Future Receipts” Called by Its Real Name: A High‑Interest Loan The Bankruptcy Court for the Northern District of Texas, In re Denali Construction Services, LLC v. Cloudfund et al., dismantled the merchant cash advance model marketed as purchases of future receivables. Denali experienced significant financial distress since its CFO embezzled funds by failing to fund union and tax obligations. The company’s condition worsened with the onset of the COVID‑19 pandemic in 2020. From 2019 through 2022, Denali unsuccessfully sought traditional bank financing. By late 2022, Denali could not continue operating without outside funding. Beginning in October 2022, Denali entered into at least 10 merchant cash advance agreements with eight different providers. Over time, Denali used later MCAs to repay earlier MCAs due to insufficient operating cashflow. Denali was never able to stabilize its cash flow, and it filed a Chapter 11 petition on October 3, 2024. On October 7, 2024, Denali filed an adversary proceeding against multiple MCA providers. After trial, the Texas bankruptcy court concluded that the MCAs were loans in substance rather than true receivables purchases. Repayment was effectively fixed and absolute, enforced through daily ACH debits that operated regardless of actual revenue. Default provisions accelerated repayment obligations and expanded remedies to sweep assets, hallmarks of traditional lending rather than asset sales. When the court examined the pricing mechanics, the embedded “interest” produced effective annual rates ranging from approximately 348% to 427%, far exceeding Texas’s 28% cap for commercial loans. As a result, the agreements were declared usurious and void, the lender was hit with treble damages exceeding $2.6 million, and the liens securing the obligations were avoided as constructively fraudulent transfers under section 548. Where risk is illusory, repayment is guaranteed in practice, and labels such as “revenue purchase” disguise functionally predatory lending terms, courts are increasingly willing to intervene. The same lesson echoes earlier cases such as Teligent and Coco Foods, where courts placed greater weight on how transactions actually operated than on formal documentation. The Coco Transactions: Structure, Control, and Fraudulent Transfer Exposure Coco Foods, Inc. and Coco Partners, Inc. (the “Debtors”) filed voluntary petitions for relief under Chapter 7 on October 9, 2017. A little over a year before that, these two companies acquired the assets of Nelson and Son Formals and Rychards Formals. The Chapter 7 trustee brought fraudulent conveyance actions against the sellers, an affiliated entity, and the principal, Richard Nelson. Coco Foods and Coco Partners were corporations wholly owned by Steven Fielitz. Richard Nelson was the principal and 100% owner of Nelson & Sons Formals Ltd., Rychards Formals Ltd., Nelson & Sons Rentals Inc. Nelson & Sons Formals and Rychards Formals operated tuxedo rentals and sales businesses on Long Island. Nelson & Sons Rentals Inc. functioned as the assignee of promissory notes arising from the debtors’ purchases and was dissolved in September 2017. During 2015–2016 Nelson and his business broker Transworld negotiated with Steven Fielitz for the sale of the businesses. Fielitz was given access to QuickBooks data and summarized financial records, and point‑of‑sale sales figures for the calendar year 2015. The financial materials initially provided reported positive net income for both businesses and significantly higher sales figures. On May 18, 2016, two transactions closed simultaneously: Coco Foods purchased the assets of Rychards Formals for $380,000 Coco Partners purchased the assets of Nelson & Sons Formals for $570,000 The combined purchase price was $950,000, approximately two times the represented net profit of each business. Each purchase consisted of a down payment, a promissory note, a cash payment at closing, and broker commissions. Although the sellers were Nelson Formals and Rychards Formals, none of the sale proceeds were received by those entities. All net proceeds were deposited into a Charles Schwab account held by Nelson & Sons Rentals, Inc. Both promissory notes were assigned to Nelson & Sons Rentals, and all payments under the notes were made to that entity. Richard Nelson controlled the flow of all purchase consideration through Nelson & Sons Rentals. Shortly after closing, Fielitz discovered discrepancies between the pre‑sale information and the actual operations of the businesses. Payroll data understated the number of employees. Additional employees were paid in cash and not reflected in the records. Actual payroll expenses were substantially higher than disclosed. Sales figures for 2015 were overstated by approximately $113,000 across both stores. Actual sales for 2016 and 2017 were consistent with the lower corrected figures. Within months of closing, Coco Foods and Coco Partners required outside financing to continue operations. Coco Foods obtained lines of credit and incurred credit card debt, all personally guaranteed by Fielitz. Fielitz invested personal funds to keep the businesses operating. Despite these efforts, the businesses were unable to stabilize financially. In February 2017, Fielitz attempted to sell both companies but received no viable offers. Nelson & Sons Rentals received $383,954 from the Coco Partners transaction, and $255,968 from the Coco Foods transaction. In September 2017, Nelson & Sons Rentals was dissolved. At dissolution, the Schwab account held approximately $340,000, all accessible to Richard Nelson as sole owner. The court held that structure and formalities do not shield transactions from attack. Funneling proceeds through controlled entities did not protect recipients from liability. Disclaimers of reliance and boilerplate acknowledgments proved ineffective, as the court valued the transaction holistically rather than mechanically. In some cases, complex structures may actually increase exposure, where value flow and control are misaligned. As Judge Grossman noted: The Defendants’ argument fails to recognize that the statutes authorizing the recovery of constructively fraudulent transfers are drafted neither to reward the debtor, nor to punish the defendant for intentional wrongdoing. Rather, the basic intent of constructive fraudulent conveyance statutes is to protect creditors of a debtor from transactions where assets of a debtor’s estate were transferred for less than fair value. Richard Nelson, who was the principal for each of the corporate defendants and orchestrated the structure of the transactions, may believe that he cleverly outwitted the principal of the debtors, but his maneuvers do little as a matter of law to protect the recipients of the fraudulent transfers from liability in these actions. To the extent they as transferees have statutory or other legitimate defenses to such actions, they must assert them in the adversary proceeding itself. Having failed to assert any defenses, the recipients are liable for the fraudulent conveyances. The Court notes that Richard Nelson directed the flow of all consideration paid by the debtors to an entity he controlled. Neither that entity nor Richard Nelson transferred anything of value to either Coco Foods or Coco Partners. Like the LBO and MCA cases, Coco demonstrates that layered entities and transactional complexity will not obscure where value actually went. Informal Contemporaneous Statements Can Override Transaction Documents In Teligent, the court notably credited the debtor’s CEO’s contemporaneous newspaper interview over the negotiated separation agreement, concluding that loan forgiveness was a voidable transfer The case illustrates how informal explanations like emails, interviews, and casual descriptions can outweigh carefully drafted agreements. Teligent is also a reminder that any transaction that eliminates a claim, obligation, or enforcement right should be evaluated as though cash changed hands. Teligent, Inc. was a telecommunications company that filed for Chapter 11 bankruptcy. Alex Mandl was Teligent’s former Chairman and Chief Executive Officer. Prior to joining Teligent, Mandl served as President and Chief Operating Officer of AT&T. On September 1, 1996, Mandl entered into an employment agreement with Teligent’s predecessor to serve as Chairman and CEO. As part of the same transaction, Mandl borrowed $15 million from Teligent’s original shareholders, evidenced by two promissory notes. In 1998, the notes were assigned to Teligent. The employment agreement included several provisions under which the loan would be automatically forgiven; the loan would be automatically forgiven if Mandl was terminated “other than for Cause” or if he resigned for “Good Reason,” subject to notice requirements. Good Reason included Teligent's failure to comply with any material provision of the employment agreement, including a breach of the provision committing Teligent to employ Mandl as its Chairman and CEO, with the customary duties and responsibilities. If Mandl was terminated for Good Reason, his Notice of Termination had to detail the facts and circumstances claimed as the basis for the termination. Upon termination of his employment, Mandl was required to resign from the board. On the first anniversary of employment, one‑fifth of the principal and all accrued interest were forgiven automatically, leaving a remaining balance of $12 million. On April 17, 2001, IDT Corp. acquired a controlling interest (approximately 41.1%) in Teligent’s Class A common stock. As part of this transaction, new directors affiliated with IDT were installed on Teligent’s board. The board composition changed substantially following IDT’s acquisition. Mandl’s employment was terminated after IDT assumed control. A Separation Agreement and Release, dated April 27, 2001, provided that Mandl’s employment was terminated “other than for cause,” Mandl resigned as Chairman, CEO, and from all board positions, and mutual releases were exchanged between Mandl and Teligent. The agreement restructured forgiveness of the $12 million loan into 20 annual installments, effectively canceling Mandl’s repayment obligation. Mandl signed the separation agreement on May 8, 2001, and Teligent’s general counsel signed on May 17, 2001. The newspaper interview that the court found more credible was made within months of his departure. The court concluded that the statements in the interview indicated that Mandl was not forced to resign but voluntarily separated. He stated that he was disappointed that the board rejected his $700 million recapitalization plan and he had already discussed the possibility of resigning with the board. Conclusion The sharp increase in commercial bankruptcies in early 2026 signals an equally sharp rise in avoidance litigation. Recent decisions make clear that courts are increasingly focused on substance over form and creditor impact over transactional labels. Transactions that load debt, shift risk, or extract value during periods of distress or transition are especially vulnerable. As filings continue to climb, sponsors, lenders, directors, officers, and asset buyers should assume that past transactions will be reexamined with fresh skepticism and prepare accordingly.
March 30, 2026
Bankruptcy
“Void” Doesn’t Mean “Whenever You Get Around to It”
The Supreme Court has opened the new year with a decision that should convince every company that ignoring a payment demand is a mistake. In Coney Island Auto Parts Unlimited, Inc. v. Burton, the Court resolved a long‑standing circuit split and held that motions to set aside a judgment as void under Rule 60(b)(4) must still be filed within a “reasonable time” under Rule 60(c)(1). Vista-Pro Automotive, LLC entered bankruptcy in 2014. As part of its bankruptcy, Vista-Pro initiated adversary proceedings against Coney Island Auto Parts Unlimited, Inc., to collect $50,000 in allegedly unpaid invoices. Vista-Pro attempted to serve process on Coney Island by mail, but in doing so, it did not allegedly comply with the mail-service requirements in Federal Rule of Bankruptcy Procedure 7004(b)(3). Coney Island never answered the complaint, and the Bankruptcy Court entered a default judgment against Coney Island in 2015. The Vista-Pro bankruptcy trustee attempted to enforce the judgment over the next six years. The trustee sent a demand to Coney Island’s CEO in April 2016, which the Court treated as sufficient notice of the judgment and the trustee’s enforcement efforts. In 2021, a marshal seized funds from Coney Island’s bank account in satisfaction of the judgment. Only then did Coney Island file a motion to vacate the judgment as void for improper service. The Bankruptcy Court and the Sixth Circuit denied the motion. The Supreme Court has now affirmed. Federal Rule of Civil Procedure 60 permits a court to “relieve a party . . . from a final judgment, order, or proceeding,” and subdivision (b)(4) specifically authorizes a court to Federal Rule of Civil Procedure 60 permits a court to “relieve a party . . . from a final judgment, order, or proceeding,” and subdivision (b)(4) specifically authorizes a court to have granted relief from void judgments long after their entry, especially when the issuing court lacked jurisdiction over the defendant. See, e.g., Harris v. Hardeman, 14 How. 334, 338, 344–346 (1853) (affirming a lower court order that set aside a judgment 11 years after its issuance where the plaintiff did not make proper service and the defendant did not appear). The Court’s core reasoning is straightforward. A Rule 60(b)(4) motion is a Rule 60(b) motion. Rule 60(c)(1) says all Rule 60(b) motions must be filed “within a reasonable time.” The Court rejected the position endorsed in several circuits for decades — that a “void” judgment is a “legal nullity” and can be attacked at any time. The Court emphasized that many legal errors cannot be cured by time, yet procedural rules still impose deadlines to prevent perpetual uncertainty. And importantly, the Court noted that a flexible “reasonable time” standard already protects defendants who truly had no notice, because what is “reasonable” depends on when the party first learned of the judgment. Why This Matters Litigation, especially bankruptcy litigation, is full of default judgments, service disputes, and defendants who surface years later claiming they never knew about the case. This decision will put defendants on the clock the moment they have actual or constructive notice, thus reducing strategic silence. Practical Takeaways for Defendants Treat every demand letter as a priority item. Ignoring it may cost you your only avenue to relief. Act immediately when you learn of a judgment — any judgment. Preserve records showing when you first learned of the judgment. That date determines whether your motion is timely. Litigants must treat demand letters not as administrative annoyances but as legal events that define rights, deadlines, and consequences. Procedural precision matters, and courts increasingly expect it from everyone. Default judgments remain serious, but defendants still have a path to relief if they move promptly.
January 29, 2026
Bankruptcy
2025 WRAPPED
2025 is nearly in the books, but before we turn the page, we’re taking a step back to reflect on some overlooked lessons from the bankruptcy courts. We’ve combed through the year’s rulings and selected three cases that merit a closer look, along with practical takeaways you can apply going forward. Bankruptcy Remote Structures, In re 301 W N. Ave., LLC, 666 B.R. 583 (Bankr. N.D. Ill. 2025) 301 W North Avenue, LLC is a Delaware limited liability company. Its primary asset is a mixed-use real estate development known as the North Park Pointe Apartments, located at 301 West North Avenue in Chicago, Illinois (“301 West North Property”). The debtor borrowed $26 million secured by the 301 West North Property. The lender required the debtor to be a bankruptcy-remote entity and to have an independent director. The independent director was sourced through CT Corporation Staffing, Inc. (“CTCS”). As part of the financing, the debtor entered into a limited liability company agreement (the “LLC Agreement”) and appointed the independent manager identified by CTCS. The LLC Agreement governed the duties of the managers and the actions requiring the manager’s consent, including the filing of a bankruptcy petition. 301 W. North Avenue LLC ultimately defaulted on the loan and filed for bankruptcy without the consent of an independent manager. The debtor asserted that the consent was not necessary because lender-mandated terms imposed constituted provisions eliminating its right to file bankruptcy, and as such, violated public policy and unenforceable. In its analysis of whether the filing was properly authorized, the Court ruled that the LLC Agreement and appointment of the independent director were enforceable. In 301 W North Avenue, the debtor’s LLC agreement required unanimous consent of the managers, including the independent manager, to file for bankruptcy. The independent manager was neither consulted nor consented. The court dismissed the case: no authority, no case. At the same time, the court distinguished disfavored “golden share” vetoes held by creditors, considered void as against public policy, from fiduciary-based consent structures, which are enforceable when drafted to protect the entity and its stakeholders — not just the lender. Takeaway: If a lender has the right to appoint an independent director for a limited liability company, and the operating agreement creates a structure in which a director’s fiduciary duties are respected and that complies with applicable statutes, the agreement is enforceable. Treatment of SAFEs In Bankruptcy Proceedings, In re Rhodium Encore, 2025 WL 2501132 (Bkrtcy.S.D.Tex.) SAFEs (Simple Agreement for Future Equity) are financial instruments commonly used in startup financing as an alternative to convertible notes. In a first reported decision, the Bankruptcy Court for the Southern District of Texas found that SAFE notes in that case gave their holders not a mere equity interest but a contingent claim, and they could recover ahead of common stockholders. The Court emphasized that the contractual language mandated this outcome and followed Delaware’s objective theory of contracts, i.e., a contract's construction should be that which an objective, reasonable third party would understand. The SAFEs were not shares of stock but contracts that required the company to return the purchase price received from SAFE holders upon certain triggering events. This right to payment contingent on future events fits the Bankruptcy Code definition of a “claim” under 11 U.S.C. § 101(5)(A). The notes also explicitly created a liquidation priority for cash-out amounts. The relevant provision stated that the cash-out amount was junior to creditor claims but senior to common stock. Takeaway: If your SAFE has cash out on dissolution/liquidity, you likely hold a contingent claim that ranks ahead of common but behind creditors. When drafting a SAFE note, if the economic deal is equity-only risk, remove cash-out rights, or subordinate expressly to common; if investor protection is essential, state the cash-out priority unambiguously and ensure charter and cap table modeling reflect it. SPAC Redemptions, In re Indus. Hum. Cap., Inc., No. 23-11014-LMI, 2025 WL 3534176, at *1 (Bankr. S.D. Fla. Dec. 9, 2025) The court addressed whether funds held in a SPAC trust account were property of the bankruptcy estate. Industrial Human Capital (“IHC”), a SPAC[1], raised $116.7 million in its IPO and deposited the proceeds into a trust account managed by Continental Stock Transfer & Trust Company (“CSTTC”) under a Trust Agreement. The Trust Agreement provided for CSTTC to manage, supervise, and administer the Trust Account. Although the parties to the Trust Agreement are IHC andCSTTC, the named beneficiaries of the Trust Agreement are IHC and the purchasers of the shares issued through the IPO, identified as the “Public Stockholders.” IHC did not find suitable acquisition targets, and investors asked for redemption, which the company made. Against the advice of counsel that payment to creditors should be made first, IHC CEO authorized CSTTC to release the funds to investors. Then, creditors put the company in an involuntary Chapter 7 proceeding, and a trustee was appointed. The trustee filed lawsuits to claw back the payments. Although the agreement named the public stockholders as beneficiaries, the court emphasized that the funds originated from the sale of IHC’s stock and were therefore property of IHC and, upon bankruptcy, property of the estate. The investors’ argument that the funds were held in trust for their benefit was rejected because the trust did not alter the fundamental nature of the funds as proceeds of stock sales belonging to the debtor. Takeaway: SPAC trust funds remain property of the debtor’s estate in bankruptcy, even if held in a trust account for redemption purposes. The existence of a trust agreement and redemption rights does not override the fact that IPO proceeds are corporate assets. Investors should understand that redemption rights do not insulate funds from clawback or estate claims in insolvency proceedings. [1] As the Court explained, a SPAC, also known as a blank check company, is a company that is formed for the sole purpose of acquiring, usually through merger, another company. In addition to funds contributed to fund the cost of forming the SPAC, the SPAC then raises funds from investors, which are placed in trust until the target is identified. Generally, there is a time limit to find the target; after the expiration of that time, the funds are subject to return by the original investors.
December 30, 2025
Bankruptcy
From the Bench: A Roadmap for Navigating Preference Defenses
Port Elizabeth Terminal & Warehouse Corp., a major marine terminal and warehousing operator serving the Port of New York and New Jersey, filed for Chapter 11 on November 14, 2025, in the Bankruptcy Court for the District of New Jersey against the backdrop of a continued freight recession. Whether this downturn reflects a sector-specific correction or signals a broader economic slowdown amid weakened consumer demand, suppliers of goods and services should take this moment to revisit their exposure to preference claims — particularly when customers show signs of financial distress. A recent decision by Judge Walrath underscores the importance of this review. Miller v. Industrial Finishes & Systems Inc. (In re Calplant I LLC), 23-50690 (Bankr. D. Del. Oct. 27, 2025). The court held that a $72,978.53 payment made just four days before CalPlant’s Chapter 11 filing was an avoidable preference under 11 U.S.C. § 547(b). The vendor argued that the payment qualified either as (1) a contemporaneous exchange for new value, or (2) a payment made in the ordinary course of business. The court rejected both defenses. Case Background CalPlant I, LLC operated a facility converting rice farming byproducts into medium-density fiberboard. The defendant, Industrial Finishes & Systems (“IFS”), supplied materials under a 2019 consignment agreement. Under this arrangement, IFS shipped supplies to CalPlant, which used them as needed. Title transferred only upon use, after which CalPlant reported usage and IFS issued invoices payable within 30 days. On September 30, 2021, IFS invoiced CalPlant for $72,978.53; payment was received on October 1, 2025 just days before the bankruptcy filing. IFS contended it was not a creditor as of September 30, 2021 because its right to payment arose only after invoicing, and there was no antecedent debt. The court disagreed, emphasizing that creditor status does not hinge on invoice issuance or proof of claim filing. The Bankruptcy Code (the “Code”) defines a creditor as an “entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor.” Under the Code, a “claim” includes any right to payment — contingent or otherwise — and a “debt” is a liability on such a claim. While the Code does not define “antecedent,” the court found its meaning is well-established: “earlier; preexisting; previous.” Thus, the court concluded that a transfer is made on account of an antecedent debt if the creditor had a right to payment of that debt before the debtor made the transfer. Thus, the right to payment arose when CalPlant used the supplies, even if invoicing occurred later. This interpretation significantly broadens exposure for vendors operating under delayed billing. The usage in September preceded the transfer date regardless of whether the transfer occurred on September 30 when the debtor initiated the electronic transfer, on October 1 when IFS received the funds. With respect to the new value defense, the decision underscores that the vendor must show actual new value given at or after the transfer — not just business convenience. As to ordinary course defense, the court demands specific industry data, not general statements about internal practices. This decision reinforces the need for vendors dealing with distressed customers to proactively manage preference risk. It is important to monitor payment timing closely and avoid deviations from historical patterns, particularly when payments are made earlier than usual. Consistency in timing can help demonstrate that transactions occurred in the ordinary course of business. Additionally, vendors should document industry standards and maintain supporting data, as this information is critical for establishing an ordinary course defense if challenged.
November 21, 2025
Bankruptcy
Global Capital, Local Law: Navigating the Risks of U.S. Bankruptcy
When raising capital in the U.S., owners and directors of foreign companies have to be cognizant of how restructuring can be used by creditors to displace management and shareholders. A recent decision by the U.S. District Court for the Southern District of New York, which upheld a bankruptcy court’s order imposing sanctions on former owners and directors of Eletson Holdings Inc. (“Eletson”), underscores the importance for company leadership, particularly those facing financial distress, to fully understand the scope of obligations under U.S. bankruptcy law. Eletson was the parent of a Greek-based international gas shipping enterprise operating a fleet of 18 medium- and long-range oil and gas tanker vessels carrying a wide range of refined petroleum products and crude oil. The business was operated through companies that were closely held by several related Greek family groups, each holding equity through offshore trusts. The three majority shareholders of Eletson, each holding a 30.7% interest, included the family of Laskarina Karastamati, controlled Lassia Investment Company (“Lassia”), the family of Vassilis Kertsikoff, controlled Family Unity Trust Company (“Family Unity”), and the family of Vassilis Hadjieleftheriadis, controlled Glafkos Trust Company (“Glafkos”). Each was organized under the laws of Liberia. The minority shareholders of Eletson were Elafonissos Shipping Corp. and Keros Shipping Corp. During the Chapter 11 proceedings, the board of directors of Eletson consisted of 1) Vassilis Hadjieleftheriadis, 2) Konstantinos Hadjieleftheriadis, 3) Ioannis Zilakos, 4) Emmanuel Andreoulakis, 5) Vassilis Kertsikoff, 6) Eleni Giannakopoulou, 7) Panagiotis Konstantaras, and 8) Laskarina Karastamati. Eletson was forced into bankruptcy in March 2023 when three creditors (the “Petitioning Creditors”) commenced involuntary Chapter 7 proceedings against the company and two affiliates (Eletson Finance (US) LLC and Agathononissos Finance LLC) (the “Debtors”). In re Eletson Holdings Inc. et al. (“Bankruptcy Proceeding”), No. 23-10322 (Bankr. S.D.N.Y.) In September 2023, the case was converted to a voluntary Chapter 11 proceeding. The Petitioning Creditors and the Debtors submitted competing reorganization plans. Under the plan proposed by the Debtors, the Greek families who held a majority interest in Eletson prior to bankruptcy, committed to provide funds to the entity in exchange for their continued control. The creditors, by contrast, promised to contribute $53.5 million in cash to Eletson through an offering of equity rights to holders of unsecured claims, which would be backed up by a commitment amount by one of the Petitioning Creditors of the same value. After contentious fights and lengthy hearings, the bankruptcy court found that the plan proposed by the Debtors was unconfirmable and not feasible and approved the creditors’ recapitalization plan. The Debtor’s plan was unconfirmable because it did not contribute new value: (1) the supposed new value contribution was not new because it came from inside the Debtors’ capital structure, (2) the contribution was contingent upon a final award in pending arbitration proceedings, and (3) there was no adequate proof that the funds committed by the majority shareholders would be available over such a long-time horizon. The $37 million in new shareholder value proposed, even if available, did not provide sufficient funding to make all required payments on the effective date of the plan. The Bankruptcy Court ruled in favor of the creditors’ plan of reorganization (the “Plan”) because it provided sufficient funding to meet all effective date obligations, and because the creditors had escrowed $43.5 million in cash to fund the plan. On October 25, 2024, the Bankruptcy Court confirmed the Plan proposed by Petitioning Creditors (the “Confirmation Order”). The Confirmation Order vested control of Eletson in the Petitioning Creditors rather than the three Greek families that had previously controlled the company. On the date the Plan was to become effective, “all property in each estate” vested “in Reorganized Holdings, free and clear of all liens, claims, charges or other encumbrances.” Plan § 5.2(c). Section 5.4 of the Plan provided that all notes and stock and other documents evidencing or giving rise to claims against an interest in debtors were canceled and the obligations of the debtors thereunder or in any way related thereto were released, terminated, extinguished, and discharged. Plan § 5.4. The members of the board of directors of each Debtor, prior to the date the Plan went into effect, were “deemed to have resigned or otherwise ceased to be a director or manager of the applicable Debtor.” Plan § 5.10(c). Eletson Holdings was deemed to be Reorganized Holdings, and the equity of the old Eletson Holdings was vested in its new owners. Reorganized Holdings was to be managed by a new board consisting of three directors: (i) one director selected by the Plan Proponents, (ii) one selected by the Plan Proponents but subject to the consent of the Unsecured Creditors’ Committee, and (iii) an independent director selected by the Unsecured Creditors Committee. The Confirmation Order provided: “The Debtors and the Petitioning Creditors and each of their respective Related Parties were directed to cooperate in good faith to implement and consummate the Plan.” Confirmation Order ¶ 5(i). Furthermore, the Confirmation Order mandated: “Upon entry of this Confirmation Order, all Holders of Claims or Interests and other parties in interest, along with their respective present or former employees, agents, officers, directors, principals, and affiliates, shall be enjoined from taking any actions to interfere with the implementation or consummation of the Plan or interfering with any distributions and payments contemplated by the Plan.” The Plan became effective on November 19, 2024 (the “Effective Date”), 14 days after it was entered. Thus, on the Effective Date, the board members of the former Debtors were deemed to have resigned, the new board of directors was deemed appointed, the equity interest in the former holders was extinguished, and the equity interest was vested in the new holders. Following the Bankruptcy Court’s confirmation of the Plan, but before the Plan was effective, Elafonissos Shipping Corporation and Keros Shipping Company, the former minority shareholders of Eletson, sought relief from a court in Greece to appoint a temporary board to manage the company while the Confirmation Order was being appealed and with the specific mandate to obtain judicial protection, to support an appeal already filed against another order of the United States Bankruptcy Court for the Southern District of New York, and to seek other remedies and means provided by law, before the Greek Courts, in order to challenge the Confirmation Order. On November 12, 2024, the Greek Court issued an ex parte interim order replacing certain resigning directors of Eletson Holdings and appointing “Provisional Appointees” in their stead to join the remaining directors to form a provisional board of Eletson Holdings. On November 25, 2024, reorganized Eletson Holdings filed an emergency motion seeking an order imposing sanctions on Eletson’s former shareholders, officers, directors, and counsel because their actions outside of the United States frustrated the ability of the new owners of Reorganized Holdings to conduct business as contemplated by the confirmed plan. See In re Eletson Holdings Inc., Case No. 23-10322, Dkt. 1268. The Bankruptcy Court held a trial on the sanctions motion on January 6, 2025, which resulted in an oral decision granting the sanctions motion, followed by an accompanying order on January 29, 2025. Dkt. 11396, 1402. Notwithstanding that order, Eletson’s former management continued to fail to comply with their obligations under the Plan. The Bankruptcy Court had to issue orders enforcing the Plan and directing Eletson’s former shareholders and management to cooperate. In March 2025, the Bankruptcy Court found the legacy Eletson board of directors in contempt and ordered a $5,000 per day fine until they obeyed the Plan’s requirements. Id., Dkt. 1536, 1537. On July 2, 2025, the reorganized Eletson debtors obtained a court order granting a motion for attorneys’ fees and costs after asserting that Eletson’s former majority and minority shareholders, among others, treated the Bankruptcy Court’s authority and the confirmed Plan with contempt and “inflicted direct and measurable harm” by, among other things, forcing the reorganized company to seek enforcement of the confirmation order in Liberia and Greece. Dkt. 1712. The Bankruptcy Court increased the sanctions with respect to certain persons to $10,000 per day. Dkt. 1716. The former majority and minority shareholders appealed the orders imposing sanctions. In its September 26 decision, the U.S. District Court affirmed the Bankruptcy Court’s order. The Eletson Holdings illustrates how U.S. bankruptcy law empowers creditors with robust tools to restructure distressed entities, even to the point of displacing entrenched management and shareholders. The court’s willingness to enforce its orders across borders, impose sanctions, and penalize noncompliance underscores the importance of understanding the full scope of creditor rights and judicial authority in U.S. insolvency proceedings. For international businesses, especially those with complex ownership structures, the lesson is clear: cross-border capital raising demands not only financial sophistication but also a deep appreciation of the legal landscape and the risks of losing control.
October 29, 2025
Bankruptcy
When the Subsidiary Fails: Litigation Risks for Officers and Directors of Parent Companies
A recent decision in an adversary proceeding in Delaware, arising from the Chapter 7 liquidation of Rosetta Genomics, Inc., serves as a cautionary tale for corporate officers and directors — especially those of parent companies operating across borders. In Beskrone v. Berlin (In re Rosetta Genomics Inc.), 18-11316 (Bankr. D. Del. July 14, 2025), the complaint, which survived a motion to dismiss, underscores how fiduciary and fraud-related claims can reach beyond the immediate debtor to implicate leadership at the parent level, even when that parent is based outside the United States. Rosetta Genomics, Inc., a Delaware corporation, was a wholly owned subsidiary of Rosetta Genomics, Ltd., an Israeli biotechnology company. The U.S. entity was created to commercialize diagnostic tests in the American market. The parent company developed new diagnostic tests based on various genomics markets, including DNA, microRNA, and protein biomarkers, using various technologies, including qPCR, microarrays, Next Generation Sequencing (NGS), and Fluorescent In Situ Hybridization. The complaint alleges that the Delaware subsidiary’s most significant assets were its subsidiaries Minuet Diagnostics, Inc. and GynoGen, Inc., as well as the diagnostic test RosettaGX Reveal (“Reveal”). The latter accounted for the vast majority of the debtor’s revenue (up to 85%). The Israeli parent company owned another diagnostic test RosettaGX Cancer Origin Test. In 2012 Medicare established a reimbursement rate for Cancer Origin and published a formalized coverage decision through a Local Coverage Determination. This meant that the debtor and/or parent received approved automatic payments for claims submitted to Medicare and private insurers for Cancer Origin. The Reveal test was rarely reimbursed, but it was often billed under the coding for Cancer Origin. Central to the claims is the alleged miscoding of RosettaGX Reveal, which led to inflated revenues. Despite learning of Medicare scrutiny in mid-2017, the executives allegedly failed to disclose the issue to investors and continued to raise capital, ultimately contributing to the collapse of both entities. According to the complaint, Sabby Healthcare and Sabby Volatility Warrant Master Funds (collectively “Sabby”) and a potential merger partner incorporated financial statements that allegedly misrepresented the true source of revenue, omitting the coding irregularities. After the merger partner walked away, the Delaware subsidiary was placed in a Chapter 7 proceeding in 2018. Years after the subsidiary was put in a Chapter 7 proceeding, the trustee, Don Beskrone, initiated litigation not only against the officers of the debtor but also against the executives of the Israeli parent. Interestingly, a lawsuit was first commenced in the Southern District of New York in 2021, and the case was dismissed without prejudice for lack of personal jurisdiction. What facilitated the litigation was an assignment of claims from the Israeli parent’s liquidator and Sabby, which had invested nearly $8 million in the parent company under securities purchase agreements signed. The lawsuit asserts a number of causes of action, including breach of fiduciary duty, gross negligence, fraud, and negligent misrepresentation on behalf of the bankruptcy estate, against Kenneth Berlin (CEO of the parent and sole director of the debtor), Ron Kalfus (CFO of both entities), and Brian Markison (chairman of the parent’s board). All are U.S. citizens, yet their roles in the foreign parent did not shield them from liability in the U.S. bankruptcy court. The defendants in their motion to dismiss emphasize that Rosetta, Ltd. operated in the intensely competitive and rapidly changing biotechnology marketplace, and it had a consistently disclosed history of losses, as well as extensive disclosures in its public filings detailing the many risks inherent in investment (including, but not limited to, the risks inherent in Medicare billing determinations). Its failure was a risk that was clearly disclosed both early and often. Sabby, on the other hand, was a sophisticated investor that well understood the risks associated with investment in biotechnology and healthcare startups. The defendants challenged the complaint on numerous procedural grounds, including lack of subject matter jurisdiction, statute of limitations, forum non-conveniens, and failure to state claims. Nonetheless, the court allowed the case to proceed, signaling that directors and officers, even of foreign parents, can face serious litigation exposure when a U.S. subsidiary fails. This case is particularly instructive because it highlights how liability can extend across borders and corporate structures, exposing parent company officers to U.S. litigation and broadening the scope of claims through investor and liquidator assignments.
September 26, 2025
Bankruptcy
One Way or Another: Non-U.S. Crypto Customers Will Have to Face Celsius Preference Lawsuits
Why You Should Read Terms Before You Click or Check the Box with “I Agree” As Blondie sings: One way, or another, I'm gonna find ya I'm gonna get ya, get ya, get ya, get ya One way, or another, I'm gonna win ya I'm gonna get ya, get ya, get ya, get ya Earlier this summer, the Bankruptcy Court for the Southern District of New York rejected a challenge to the Litigation Administrator, Moshin Y. Meghji, lawsuits against Celsius Network LLC customers. The challenge was based on, among other grounds, lack of personal jurisdiction over defendants who resided outside of the United States and undertook transactions with Celsius online. The litigation administrator asked the Bankruptcy Court to hold that the foreign defendants were subject to personal jurisdiction, and that the preferential transfers they received were domestic transfers for the purposes of the preference avoidance provisions of the Bankruptcy Code, or, in the alternative, that these provisions of the Code applied extraterritorially. The foreign defendants argued that jurisdiction cannot be decided without a factual record, given questions about which entity owned the crypto, inconsistent Terms of Use provisions, potential fraudulent inducement, and the heavy burden on foreign defendants to litigate in the U.S. In his July 29 decision, Judge Glenn held that a bankruptcy court may exercise jurisdiction over a foreign defendant if the defendant has minimum contacts with the United States as a whole. The court further found that, as to all customers, the transfers were domestic and involved a domestic application of the Bankruptcy Code. Because the transfers are domestic in nature, the court did not reach the issue of extraterritoriality[1]. The court held that the transfers were domestic in nature because they were made from a Delaware company via LLC-designated frictional wallets and workspaces. The court’s analysis meticulously followed the textbook test for exercising specific personal jurisdiction over a non-resident defendant. Judge Glenn reviewed the three requirements that must be satisfied: “(i) a defendant must have purposefully availed itself of the privilege of conducting activities within the forum State or have purposefully directed its conduct into the forum State, or the United States when the issue arises in adversary proceedings in bankruptcy courts; (ii) the plaintiff’s claim arises out of or relates to the defendant’s forum conduct; and (iii) the exercise of jurisdiction must be “reasonable under the circumstances.” U.S. Bank Nat’l Ass’n v. Bank of Am. N.A., 916 F.3d 143, 150 (2d Cir. 2019).” Why the Court Found There was Personal Jurisdiction All non-US customers were bound by the Terms of Use, which contained a New York choice of law provision and a forum selection clause requiring litigation in New York courts, and that had shifted Celsius’ primary business operations, relationships, and obligations away from a U.K. entity to a U.S. company. Accordingly, the Bankruptcy Court found that the foreign defendants’ decision to contract with the U.S. company manifests an intent to purposefully direct their activities at the forum. Defendants have contracted to open accounts in a U.S.-based entity and signed a contract subject to the laws of the State of New York. The transfers were made by a U.S. entity to the foreign defendants accounts. “[A] contract with a New York choice of law provision is “a significant factor in a personal jurisdiction analysis because the parties . . . invoke the benefits and protections of New York law.” In re Celsius Customer Preference Actions, No. 24-04024 (MG), 2025 WL 2125270 (Bankr. S.D.N.Y. July 29, 2025) citing Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec., LLC, 460 B.R. 106, 117 (Bankr. S.D.N.Y. 2011), aff'd, 474 B.R. 76 (S.D.N.Y. 2012). These principles, Judge Glenn, emphasized also apply to clickwrap agreements. Id. at 12 citing Zaltz v. JDATE, 952 F. Supp. 2d 439, 451–55 (E.D.N.Y. 2013) (finding plaintiff assented to defendant’s terms of service when she clicked a box agreeing to the defendant's terms of service). Additional analysis of the forum selection clauses also supported the finding of personal jurisdiction over the foreign defendants. The Terms of Service included the following language: [t]he relationship between you and Celsius is governed exclusively by the laws of the state of New York. . . . Any dispute arising out of, or related to, your Celsius Account or relationship with Celsius must be brought exclusively in the competent courts located in New York, NY and the U.S. District Court located in the Borough of Manhattan. . . . Judge Glenn held that the Terms of Use were reasonably communicated to the defendants, the forum selection clause was mandatory, and the claims and parties involved in the litigation were subject to the forum selection clause. Lastly, the court held that the foreign defendants have not demonstrated a strong showing to rebut the presumption of enforceability. The court was not persuaded by the argument that an individualized determination with respect to each defendant was necessary, and the court could not rule on the defendants “en masse,” because the defendants did not dispute that the Terms of Use that were active during the preference period contained a forum selection clause. While allegations of fraudulent inducement and other defenses may be addressed in future proceedings, the court concluded that the litigation administrator had made a prima facie showing of personal jurisdiction over all defendants. In summary, Judge Glenn’s decision reinforces a clear message: engaging with U.S.-based platforms — even digitally —comes with legal obligations. The ruling not only affirms the reach of U.S. bankruptcy jurisdiction but also sets a precedent for how courts may treat cross-border crypto transactions going forward. The fine print matters! [1] As Judge Glenn pointed out the presumption against extraterritoriality is a “basic premise of our legal system.” It provides that “[a]bsent clearly expressed congressional intent to the contrary, federal laws will be construed to have only domestic application.” RJR Nabisco v. Eur. Cmty., 579 U.S. 325, 335 (2016) (citing Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247, 255 (2010)). The two-step inquiry, when analyzing extraterritoriality issues, requires to ascertain if a statute gives a clear indication of an extraterritorial application and if there is no such clear indication of an extraterritorial reach then a court has to examine the statute’s ‘focus’ to determine whether the case involves a domestic application of the statute.
August 27, 2025
Bankruptcy
The “One Big Beautiful” Bill and the State of AI Regulation
After several weeks of back and forth on a potential 10-year moratorium on state or local AI legislation and regulation enforcement, the final version of the so-called One Big Beautiful Bill Act, signed into law on July 4, 2025 (Pub. L. No. 119-21), abandoned the proposed provision. Accordingly, companies must be alert to and comply with a variety of evolving state and local laws governing the use and deployment of AI tools. In addition, companies that supply AI systems or produce outputs intended for use in the EU are subject to the EU AI Act. Here we will provide a high-level overview of the state laws that are AI-specific (as opposed to regulating use cases or general conduct that might involve AI). Colorado AI Act The Colorado AI Act is scheduled to go into effect on February 1, 2026. It is considered a consumer protection law and imposes obligations on developers and deployers of so-called "high-risk" AI systems "to use reasonable care to avoid algorithmic discrimination in the high-risk system." The law creates a rebuttable presumption that a developer or deployer used reasonable care if they complied with specified provisions in the law. Texas Responsible Artificial Intelligence Governance Act The Texas governor recently signed the Texas Responsible Artificial Intelligence Governance Act, which will become effective on January 1, 2026. It creates a regulatory system for AI development and use, AI disclosure requirements for government agencies, a program that allows AI development with relaxed legal constraints, and an advisory council to analyze AI use and provide recommendations to state agencies. Although it primarily regulates governmental agencies and health care providers, the new law is of relevance to private sector organizations, more generally the new law clarifies that: It is unlawful for any person to use an AI system to intentionally discriminate against individuals based on a protected characteristic, with limited exceptions for certain insurance companies and financial institutions. Showing a disparate impact on a given group is insufficient to demonstrate intentional discrimination. Maine Chatbot Disclosure Law On June 12, 2025, Maine enacted H.P. 1154, a law requiring disclosure of the use of AI chatbots. Under the law, a person may not use an AI chatbot of any other computer technology to engage in trade and commerce with a consumer in a manner that may mislead or deceive a reasonable consumer to believing that the consumer is engaging with a human being, unless the consumer is notified in a clear and conspicuous manner that the consumer is not engaging with a human being. Violation of the law is a violation of the Maine Unfair Trade Practices Act. New York RAISE Act New York state lawmakers passed the groundbreaking Responsible AI Safety and Education Act (RAISE Act) on June 12, 2025. New York will become the first state to impose enforceable AI safety standards on powerful “frontier models” to prevent catastrophic harm by advanced models, if the governor signs off. The law would take effect 90 days after the governor signs the bill. The law applies to AI models with $100M+ compute cost (or $5M+ for certain “distilled” versions) and covers any frontier models developed, deployed, or operated in New York The law imposes on developers, of extremely large-scale AI systems, sweeping transparency and safety obligations. They must develop a safety and security protocol and publish the safety protocols (with limited redactions for trade secrets or security purposes). Any serious incident indicating heightened risk must be reported to state regulators within 72 hours. Businesses must participate in ongoing reassessment of protocols as models evolve. Utah Artificial Intelligence Consumer Protection Amendments On March 27, 2025, Utah Governor Spencer Cox signed S.B. 226, a law governing the use of GenAI in consumer transactions and regulated services. The law: States it is not a defense to violation of any law administered by the State Division of Consumer Protection that AI:made the violative statement, undertook the violative act, or was used in the furtherance of the violation. Requires disclosure for the use of GenAI when:in connection with a consumer transaction, and providing services in a regulated occupation. Establishes a safe harbor for clear and conspicuous disclosure GenAI is used, subject to additional rulemaking specifying forms and methods of disclosure. Allows the Division of Consumer Protection to impose administrative fines of up to $2,500 per violation. Gives courts the power to:declare an act or practice violates the law, issue an injunction for violation, order disgorgement of money received in violation, impose fines of up to $2,500 per violation, plus costs and fees. The law is effective May 7, 2025. EU AI Act The EU AI Act, known as Regulation (EU) 2024/1689, is a comprehensive regulatory framework designed to govern AI systems and the organizations that supply and use them within the EU. It categorizes AI systems based on their risk levels and imposes obligations on providers, importers, distributors, and deployers of AI systems. Compliance deadlines vary, with most provisions applying from August 2, 2026, but some have earlier compliance dates, including: Prohibited AI practices are banned outright from February 2, 2025[1], AI literacy[2] obligations apply from February 2, 2025, GPAI model rules become effective on August 2, 2025, and Penalties, which apply from August 2, 2025, except penalties applicable to GPAI model providers, which apply from August 2, 2026. Rules on high-risk AI systems forming the safety components of products covered by existing EU product safety legislation apply from August 2, 2027. The EU AI Act defines AI systems as machine-based systems designed to operate with varying levels of autonomy and adaptiveness, generating outputs such as predictions, content, recommendations, or decisions that can influence environments. It excludes certain AI systems used for military, defense, national security, and other specific purposes. Organizations must determine their role in the AI supply chain, whether as providers, deployers, distributors, or importers, and comply with the corresponding obligations. Providers must create technical documentation, conduct conformity assessments, and appoint authorized representatives, among other requirements. Deployers must ensure human oversight, monitor AI system performance, and complete fundamental rights impact assessments, if applicable. Distributors must verify compliance with CE marking and conformity declarations and take corrective actions if necessary. Organizations must assess whether their AI systems are high-risk and meet technical requirements, including risk management systems and data governance practices In connection with the upcoming effective date for the general-purpose AI, the European Commission issued guidelines for providers to assess whether their model is a general-purpose AI model. Article 3(63) AI Act defines a ‘general-purpose AI model’ as ‘an AI model, including where such an AI model is trained with a large amount of data using self-supervision at scale, that displays significant generality and is capable of competently performing a wide range of distinct tasks regardless of the way the model is placed on the market and that can be integrated into a variety of downstream systems or applications, except AI models that are used for research, development or prototyping activities before they are placed on the market’. This definition lists, in a general manner, factors that determine whether a model is a general-purpose AI model. Nevertheless, it does not set out specific criteria that potential providers can use to assess whether a model is a general purpose AI model. The specific criteria the commission chose is based on computational power. An indicative criterion for a model to be considered a general-purpose AI model is that its training compute is greater than 1023 FLOP and it can generate language (whether in the form of text2 or audio3), text-to-image or text-to-video. If a general-purpose AI model meets the latter criteria, but does not display significant generality or is not capable of competently performing a wide range of distinct tasks, it is not a general-purpose AI model. Similarly, if a general-purpose AI model does not meet that criterion but, exceptionally, displays significant generality and is capable of competently performing a wide range of distinct tasks, it is a general-purpose AI model. In Conclusion Companies must create a risk-management framework to navigate a complex, evolving patchwork of rules. With compliance deadlines stretching across 2025–2027, organizations must now proactively monitor and adapt to both U.S. mosaic regulation and EU mandates depending on their markets and use cases. Ultimately, treating AI regulation as a dynamic and strategic compliance horizon will be essential to manage legal risk, maintain trust, and sustain innovation in this rapidly evolving landscape. [1] Prohibited AI practices include: Subliminal techniques which can materially distort a person's behavior by impairing their ability to make an informed decision in a way that causes or is reasonably likely to cause them significant harm. Exploiting the vulnerabilities of a person or specific groups of people (for example, due to their age, a disability or economic situation) which can materially distort their behavior in a way that causes or is reasonably likely to cause them significant harm. Social scoring systems based on known, inferred or predicted personality characteristics which causes detrimental or unfavorable treatment that is disproportionate or used in a context unrelated to the context in which the data was originally collected. Risk assessment systems which assess the risk of a person to commit a crime or re-offend (except in support of a human assessment based on verifiable facts). Indiscriminate web-scraping for the purposes of creating or enhancing facial recognition databases. Emotion recognition systems in the workplace or educational institutions (except for medical or safety reasons). Biometric categorization systems used to infer characteristics, such as race, political opinions or religion. Real-time, remote biometric identification systems in publicly accessible spaces for the purpose of law enforcement except (subject to safeguards and within narrow exclusions) searching for victims of abduction, preservation of life and finding suspects of certain criminal activities (as listed in Annex II: criminal offences permitting use of real-time biometric systems). Real time means live or near-live material, to avoid short recording delays circumventing the prohibition. [2] AI literacy is defined as the skills, knowledge and understanding of a deployer or a provider (and other affected persons) to make informed use of AI systems and to be aware of both the opportunities of AI systems and the risks of potential harm. The obligation to take measures to ensure a sufficient level of AI literacy is set out in Article 4.
July 31, 2025
Bankruptcy
Acquisition Strategies: Navigating Section 363 Sales and the Impact of Undersecured Liens
Overview and Advantages Section 363 of the Bankruptcy Code allows a Chapter 11 debtor to sell assets "free and clear" of existing claims, liens, encumbrances, and other liabilities. This provision facilitates expedited sales that might otherwise be hindered outside of bankruptcy proceedings. With a growing number of cases where courts allow a traditional asset buyer purchasing assets out-of-court to become liable for the seller’s liabilities, a court-approved sale of all or part of the seller’s assets brings distinct advantages. Among these advantages is the ability to take over favorable contracts and leases, even if they contain anti-assignment clauses. As a result, strategic buyers have the unique opportunity to purchase distressed assets inside of bankruptcy in a way that eliminates or reduces future liability because the bankruptcy court order approving the sale often expressly forecloses “successor liability” claims against a good-faith purchaser. Recent Notable Sales The versatility and legal protections offered by Section 363 sales make them an attractive option for strategic buyers and distressed companies, regardless of their industry or size. From pharmaceuticals and biotechnology, clean energy to retail, one can find multiple examples of successfully closed sales. Merz Pharmaceuticals' Acquisition of Acorda Therapeutics' Assets Merz Pharmaceuticals, LLC subsidiary of Merz Therapeutics, completed the acquisition of key assets, including two FDA-approved medications for neurological diseases like Parkinson’s and MS, from Acorda Therapeutics, Inc. on July 10, 2024, through a court-approved Section 363 sale in the Bankruptcy Court for the Southern District of New York. The transaction was valued at $185 million in cash. Teknor Apex Company's Acquisition of Danimer Scientific's Assets Teknor Apex Company completed the acquisition of substantially all assets of Danimer Scientific, Inc. under Section 363 as part of its Chapter 11 proceedings in the U.S. Bankruptcy Court for the District of Delaware. The winning bidder agreed to a total cash purchase price of $19 million and assumption of certain liabilities. Lucid Group's Acquisition of Nikola Corporation's Facilities Lucid Group, Inc. acquired selected facilities and assets from the bankruptcy estate of Nikola Corporation, a manufacturer of electric and hydrogen-powered trucks, including Nikola's manufacturing facility in Coolidge, Arizona, and its Phoenix headquarters, totaling over 884,000 square feet of real estate, to expand its electric vehicle (EV) manufacturing and testing operations. Gonher Music Center's Acquisition of Sam Ash's Assets Mexican-based retailer Gonher Music Center acquired substantially all of Sam Ash's assets for $15.2 million in a 363 sale in 2024, following a competitive auction process. Gonher outbid E-Distributors Inc. after initially submitting a bid of $10.3 million for the e-commerce and wholesale assets, which subsequently increased to $15.2 million to secure the combined package. The assets included Sam Ash’s e-commerce operations, intellectual property, trademarks, customer data, and the wholesale Samson business. The sale excluded assets related to the store closing sales. Mondee Holdings' Asset Sale to Mondee Purchaser LLC Mondee Holdings, Inc., a travel technology company specializing in the leisure travel sector, both in the United States and internationally, sold substantially all of its assets to a newly formed entity, Mondee Purchaser LLC, backed by affiliates of its lenders TCW Asset Management Company LLC and Wingspire Capital LLC with the majority stake held by its former CEO. New York Case Spotlight: In re Urban Commons 2 West LLC What makes these asset sales possible is Section 363(f) of the Bankruptcy Code. Section 363(f) of the U.S. Bankruptcy Code allows a company in bankruptcy to sell estate property "free and clear" of liens and other interests, provided that one of five specific conditions is met: (1) applicable nonbankruptcy law permits the sale of such property free and clear of such interest; (2) such entity consents; (3) such interest is a lien, and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; (4) such interest is in bona fide dispute; or (5) such an entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest. 11 U.S.C. § 363(f). Subsection 5 is particularly significant when dealing with "underwater" assets—those whose sale price is less than the total of the liens against them. A recent decision by Judge Bentley brings a little more peace of mind to asset buyers in New York bankruptcy proceedings. In re Urban Commons 2 West LLC, 22-11509 (Bankr. S.D.N.Y. March 4, 2025). The Urban Commons case involves the sale of the lease interests in Manhattan’s Battery Park City Hotel. The hotel was part of a mixed-use condominium building and subject to a ground lease with the Battery Park City Authority (BPCA). The hotel initially operated under the Ritz-Carlton brand, but in March 2018, it changed its brand to The Leading Hotels of the World and its name to The Wagner at Battery Park. The Debtors purchased the Hotel Lease Interests in September 2018 for approximately $147 million, of which $96 million was financed by a first mortgage issued by BPC Lender, LLC (the “Lender”). The loan matured in 2020, and the Debtors were unable to obtain refinancing. Later that year, following the onset of the Covid-19 pandemic, the hotel ceased operations and remained closed. By the time of the bankruptcy filing, the amount owed under the mortgage loan had grown to approximately $114 million plus fees and costs. The Debtors negotiated a global resolution with the main creditors, proposing a sale to the holder of the first lien on a $78 million credit bid and cash payments aggregating $20 million in cash to cure defaults on leases and contracts. The only objection to the sale and confirmation of the plan came from the holder of a $189,000 mechanic’s lien that was deeply underwater. The objector relied on an unpopular district court opinion, Dishi & Sons v. Bay Condos LLC, 510 B.R. 696, 710 (S.D.N.Y. 2014). In Dishi & Sons v. Bay Condos LLC, the Court held that subsection (5) applies only if the debtor, as the property owner, could compel the lienholder to accept monetary satisfaction. Judge Bentley rejected the Dishi court interpretation of Section 365(f)(5) because he held the construction was so narrow as to virtually nullify Section 363(f)(5). The Court adopted a “realistic possibility” standard, meaning that section 363(f)(5) encompassed not any conceivable hypothetical proceeding that might compel interest holders to accept a money satisfaction, but only proceedings that might realistically be brought in the case before the court if the automatic stay were lifted or did not apply. In most cases, this would include either foreclosure proceedings or UCC sales. The mere hypothetical possibility of an eminent domain taking would not satisfy section 363(f)(5). In conclusion, Section 363 sales offer a compelling avenue for strategic buyers to acquire distressed assets efficiently and with reduced risk. However, the nuances of Section 363(f), particularly subsection (5), underscore the importance of understanding jurisdictional interpretations. Stakeholders considering participation in a Section 363 sale must conduct thorough due diligence and engage experienced legal counsel to navigate the complexities of bankruptcy proceedings.
May 30, 2025
Bankruptcy
Director & Officer Duties: What Every Leader Should Know
Earlier this year, the FDIC, acting as receiver for Silicon Valley Bank (“SVB”), filed a breach of fiduciary duty lawsuit against six officers and eleven directors of the bank. The FDIC alleged that these individuals ignored internal risk warnings, prudent banking standards, and SVB’s own risk management policies in pursuit of short-term profits and a boost to the stock price of SVB Financial Group (SVBFG). According to the complaint, SVB’s downfall stemmed from critical errors, including an overreliance on long-term, unhedged, interest-rate-sensitive securities. This exposed the bank to significant risk amid a rising interest rate environment. Compounding the issue, executives allegedly manipulated internal risk models to conceal problems rather than address them. Between 2021 and mid-2022, SVB removed key interest rate hedges in an effort to inflate short-term earnings and SVBFG’s stock price, increasing its exposure to rate volatility. In late 2022, despite signs of financial distress, SVB paid a $294 million dividend to its parent company, further depleting its capital reserves. This filing serves as a timely reminder of the critical responsibilities that directors and officers (D&Os) hold—especially during periods of financial instability. The current environment of uncertainty, market volatility, and fear of recession heightens the risk of bankruptcies and the accompanying scrutiny of the actions of officers and directors. What should directors and officers consider when a company transitions from solvency to insolvency? D&O Duties Two fundamental fiduciary duties exist under Delaware law1: the duty of care and the duty of loyalty. Fulfilling the Duty of Care To satisfy the duty of care, directors and officers must make decisions based on a reasonably informed process. This means they must actively gather and consider all material information relevant to a decision. The standard for breaching this duty is gross negligence. Delaware law—specifically §102(b)(7) of the Delaware General Corporation Law—permits corporations to include charter provisions that exculpate directors from monetary liability for breaches of the duty of care. While this makes awarding money damages rare, breaches may still give rise to equitable remedies or support claims for aiding and abetting. Fulfilling the Duty of Loyalty The duty of loyalty requires directors and officers to act in good faith and in the best interest of the company, not in pursuit of personal benefit. This duty focuses on avoiding conflicts of interest. To fulfill the duty of loyalty, directors and officers must be disinterested, meaning having no personal financial stake in the matter, and independent, or in other words not being under the control or influence of someone with a personal financial interest. Who Are the Duties Owed To? Directors and officers must remember that fiduciary duties are owed to the corporation itself, with the goal of maximizing the value of the enterprise. When the company is solvent, fiduciary duties are effectively owed to shareholders, as they are the residual beneficiaries of the corporation’s success. Ordinarily, the board of directors owes fiduciary duties to both preferred and common stockholders. However, in the event of a conflict between their interests, the board is obligated to prioritize the interests of common stockholders over those of preferred stockholders When the company becomes insolvent, the focus shifts. Insolvency gives creditors standing to bring derivative claims for breaches of fiduciary duties since the value of the enterprise is now effectively for their benefit. A corporation is considered insolvent under two main tests: 1) balance sheet test – when liabilities exceed the fair market value of assets; and 2) cash flow test – when the corporation is unable to pay its debts as they come due. This evolving fiduciary landscape underscores the importance of responsible governance, especially when a company is under financial stress. Directors and officers must remain vigilant, informed, and unbiased to fulfill their legal and ethical obligations—and avoid the kind of fallout we saw with SVB. T A couple of other examples of director and officers’ actions that led to successful breach of fiduciary duty claims come from the case of TransCare Corporation and AMC. TransCare – Insider Transaction In TransCare, a Chapter 7 trustee brought claims against the sole director of TransCare. TransCare Corporation was a Delaware corporation headquartered in Brooklyn, New York. TransCare Corporation, by and through its subsidiaries, provided ambulance services to hospitals and municipalities for emergency and non-emergency patients and paratransit services to the New York Metropolitan Transit Authority (“MTA”) for individuals with disabilities. At all relevant times, Lynn Tilton served as the sole director of TransCare. The officers of TransCare did not have the authority to (a) approve an annual operating plan budget or any interim operating plan or budget; (b) negotiate the sale or disposition of any assets; (c) recapitalize or make other changes in the capital structure; (d) disclose any financial information to any third party; (e) enter into any contract or license agreement not contemplated by the approved Annual Plan (of which there was none); (f) enter into any financing or loan agreement; (g) dispose of any unusable asset or write off any receivable, or make a charitable contribution; (h) change auditors; (i) engage legal counsel; (j) settle or compromise any claim; (k) engage any consultant; or (l) conduct any reduction in force. Accordingly, Tilton made all decisions for TransCare and managed TransCare through her employees at related entities. TransCare encountered financial difficulties and Tilton decided to split it into OldCo and NewCo. First, OldCo would be wound down in one of two ways: (i) outside of bankruptcy over ninety days followed by Chapter 7 or (ii) through a Chapter 11. Second, Patriarch Partners Agency Services, LLC, an entity indirectly owned and controlled by Tilton and acting as an administrative agent for a term loan extended to TransCare, would foreclose on collateral and sell it to NewCo which would continue to operate as a going concern. The foreclosure and sale to NewCo became the problem. Lynn Tilton’s fundamental error was turning what should have been an arm’s-length sale into a one-sided, self-dealing foreclosure and sale to herself without any of the procedural safeguards that Delaware law requires for “entire fairness.” In particular, she: Controlled every step of the deal — conceived, negotiated, approved, and executed the strict foreclosure and subsequent sale through her own affiliates, with no independent board or special committee involvement. Fixed the price unilaterally — she set the $10 million “foreclosure credit” herself (and even miscalculated it, including receivables she never bought), rather than having a neutral advisor or market process test the value. Failed to explore alternatives — she never retained a financial advisor to solicit third-party offers, didn’t consider a Section 363 sale in bankruptcy, didn’t seek debtor-in-possession financing or reach out to known interested buyers, and simply decided that only she would lend to or buy the assets. By standing on both sides of the transaction and excluding any bargaining, oversight, or competitive bidding, she tainted both the process (“fair dealing”) and the price (“fair price”), breaching her fiduciary duties of loyalty and good faith. AMC – Interfering with Shareholder Vote In the case of AMC, its board was accused of using its power to issue new securities and structuring those securities’ voting rights to sideline ordinary shareholders, force through dilutive capital aising proposals, and secure a management-friendly outcome—even when the bona fide majority of investors opposed it. AMC’s board ran afoul of basic shareholder‐protection principles in several i ways. Despite retail investors rejecting two proposals (in Jan. and June 2021) to increase the number of authorized common shares, the board kept coming back, effectively trying to dilute holders who’d already rejected the proposal.” In July 2022, instead of going back to common holders, the board created a new class of units (APEs) that enjoyed special voting rules—unvoted APEs would be “tacked on” proportionally to the votes cast, magnifying the weight of any single APE vote. This design guaranteed that APE holders could override the common stockholders en masse, even if most common shares sat out the vote. After the unsuccessful public sale of APEs , AMC quietly sold $75 million worth of them to Antara Capital and swapped additional units for debt relief—on the explicit condition that Antara vote them in lockstep with management’s agenda. Leveraging those “committed” votes, the board pushed through both (a) an increase in authorized common shares (to enable APE conversion) and (b) a 1-for-10 reverse split—despite a clear lack of support (or even participation) from the ordinary shareholders. Because most common holders either voted “no” or didn’t vote, the Antara backed APE votes tipped the scales. The plain effect was to disenfranchise the broad base of retail investors—many of whom had amassed shares precisely to have a voice in corporate governance. By structuring the APE vote the way they did, the board effectively “hijacked” the voting process, turning what should have been a straightforward shareholder decision into an engineered outcome. Retail investors brought lawsuits alleging that the board had breached its duty of loyalty (by putting its own fundraising goals ahead of shareholders’ interests) and duty of care (by adopting convoluted voting schemes without proper disclosure or shareholder debate). The court’s preliminary block on converting APEs into common shares underscores that the directors have to exercise extreme caution when they use corporate power to intrude on shareholder rights. Key Takeaways for Leadership Stay Informed: Implement robust risk monitoring and reporting systems. Act Swiftly: Confront bad news Guard Capital: Resist dividend payments or share buybacks when liquidity or solvency is in question. Document Decisions: Keep minutes and expert analyses to demonstrate an informed process. Prevent Conflicts: Establish clear recusal policies and independence protocols. By anchoring decision making in these fiduciary principles—especially during times of financial stress—directors and officers can both protect the enterprise and shield themselves from liability. On March 25, 2025, Delaware adopted amendments to Section 144 of the DGCL that became effective immediately and among other things, establish statutory safe harbors in defense of breach of fiduciary duty actions related to controlling stockholder transactions and interested director and officer transactions.
April 30, 2025
Bankruptcy
AI Tidbits Watch; Regulatory Tracking
Currently, there is no comprehensive federal legislation or regulations in the US that govern the development of AI or restrict its use. There are state and local laws that will be highlighted here going forward. On May 17, 2024 Colorado Governor Polis signed into law Senate Bill 24-205 "Concerning Consumer Protections in Interactions with Artificial Intelligence Systems" (Colorado AI Act). This is the first comprehensive law targeting AI in the US. The Colorado AI Act is focused on high-risk AI systems, defined as AI that makes consequential decisions. Consequential decision in turn is defined as any decision that has a material or similar effect across a wide range of domains, including education and employment opportunities, financial and lending services, essential government services, health care services, housing, insurance and legal services. Developers and deployers of high-risk AI systems will have until February 1, 2026 to develop processes to comply with the law's requirements. both developers and deployers have a duty to use reasonable care to protect consumers from any known or reasonably foreseeable risks of algorithmic discrimination stemming from the intended uses of the AI system. While this duty is key to the law, it's also important to note that developers and deployers are entitled to a presumption that they used reasonable care if they satisfy some key obligations.
March 26, 2025
Bankruptcy
Not All (Protection) is Lost After Purdue: Non-Debtor Owner Shielded by Bankruptcy Stay for Duration of Reorganization of His Company
Third-party releases may no longer provide a shield to owners and directors of a reorganized company. Still, a New York bankruptcy court recently paved the way for another constructive solution for the individual owner of a bankrupt company. Judge Mastando III confirmed the reorganization plan of the company and allowed the individual owner and president to stay under the company’s automatic stay umbrella for the life of the 5-year reorganization plan, drawing on precedents that allow bankruptcy courts to issue temporary injunctions staying actions against non-debtors. In re Hal Luftig Co., Inc., No. 22-11617 (JPM), 2025 WL 586757, (Bankr. S.D.N.Y. Feb. 24, 2025). Judge Mastando III noted that “[n]otwithstanding the wealth of precedents extending the automatic stay to non-debtors pursuant to Bankruptcy Code §§ 105 & 362(a), it appears to be an issue of first impression as to whether a non-debtor stay extension should remain in place for the life of a plan.” Id. at *15 (Bankr. S.D.N.Y. Feb. 24, 2025). With respect to debtors, Bankruptcy Code § 362(c)(2) provides that the automatic stay under Code § 362(a) “continues until the earliest of — (A) the time the case is closed; (B) the time the case is dismissed; or (C) if a case is under … chapter 11 … of this title, the time a discharge is granted or denied[.]” 11 U.S.C. § 362(c)(2). When bankruptcy courts extend the automatic stay to non-debtor parties as preliminary injunctive relief, the durational limits of such stays are often not clear.” Id. at *16. The court held that extending the automatic stay to the non-debtor for five years supported the reorganization purposes, as most of the debtor’s business depended on the owner’s efforts, and his ability to manage the debtor’s business was critical to generating revenue. The court agreed that the extension was essential to prevent Mr. Luftig from being distracted by litigation and to allow the debtor to focus on reorganization. The court rejected objections that the extension was unfair or inequitable, as it did not discharge a creditor's claim against Mr. Luftig but temporarily suspended enforcement of the judgment for the duration of the debtor’s reorganization plan. Hal Luftig Company Inc. (HLC) was a notable Broadway production company. An arbitration award against the company and its owner forced it to seek bankruptcy protection in December 2022[1]. The arbitration had awarded investor Warren Trepp’s company FCP $2.6 million, in addition to $2.7 million previously received. In response, HLC filed for bankruptcy protection. The reorganization plan anticipated that Trepp would receive approximately $720,000 over five years, about 25% of the arbitration award. Additionally, the plan included a non-consensual release, effectively shielding Hal Luftig personally from further liability related to Trepp's claims. Judge John P. Mastando III had previously approved in 2023 Hal Luftig Company, Inc.'s Chapter 11 reorganization plan, which included a non-consensual release of claims against non-debtor and owner Hal Luftig in exchange for a one-time cash contribution of $500,000 (the “Initial Confirmation Opinion”). This release effectively shielded Luftig from the arbitration award. The Initial Confirmation Opinion included proposed findings of fact and conclusions of law, subject to approval by the District Court. FCP and the U.S. Trustee objected, and in a decision dated March 19, 2024, the District Court sustained the objections and rejected the findings of fact and conclusion of law in the Initial Confirmation Opinion. Then, in June 2024, the United States Supreme Court issued its ruling in Harrington v. Purdue Pharma L.P., 603 U.S. 204 (2024). HLC was forced to revise its plan. In November 2024, HAP filed its Third Amended Plan that proposed a stay extension, which would terminate upon the earliest of this Chapter 11 case’s closure, dismissal, or the grant or denial of discharge and clarified that the scope of the only applied to FCP. In confirming the new plan, the court relied on the Second Circuit’s Queenie, Ltd. decision and a recent decision out of the Delaware bankruptcy court. Queenie, Ltd. v. Nygard Int'l., 321 F.3d 282 (2d Cir. 2003); In re Parlement Techs., Inc., 661 B.R. 722, 724 (Bankr. D. Del. 2024) (“cases have long recognized that bankruptcy courts may enter a preliminary injunction that operates to stay actions against non-debtors.”). The Second Circuit extends the automatic stay to non-debtors when a claim against them would have a direct negative financial impact on the debtor's estate, particularly in cases where the debtor and non-debtor are so closely connected that the debtor is essentially the real party being sued. Other courts have also acknowledged this exception, recognizing that bankruptcy courts can issue preliminary injunctions to stay actions against non-debtors. Queenie, Ltd., 321 F.3d at 287–88 (quoting A.H. Robins Co. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986). The courts that have ruled on non-debtor stay extensions post-Purdue Pharma have reviewed such stay extensions as temporary injunctive relief to facilitate negotiations among the parties. Parlement Techs., Inc., 661 B.R. at 724–25 (debtor sought to extend the automatic stay to its former officers as co-defendants in certain state court litigations while the bankruptcy case proceeded); see also Purdue Pharma L.P. v. Massachusetts, 2024 Bankr. LEXIS 2916, at *6–11 (granting a three-week non-debtor stay extension to allow the debtor and the interested parties to continue negotiations towards a global settlement). In conclusion, the recent decision in In re Hal Luftig Co., Inc. highlights a constructive approach to balance the interests of creditors, the debtor, and non-debtor parties, helping to maintain the stability and success of reorganization efforts in complex bankruptcy cases. By allowing the individual owner to remain under the company’s protective umbrella for the full duration of the plan, the court recognized the critical role that the owner played in the business’s recovery. This decision aligns with precedents permitting bankruptcy courts to grant temporary injunctive relief for non-debtors, ensuring that litigation does not derail the reorganization process. While third-party releases may no longer serve as a shield for owners and directors of reorganized companies, the court's approval of a stay extension for Hal Luftig emphasizes the importance of safeguarding the debtor's reorganization efforts. Ultimately, this ruling offers guidance for future cases where non-debtors are integral to the debtor’s ability to emerge from bankruptcy, establishing that the automatic stay can, in certain circumstances, be extended beyond traditional limits to support the reorganization process. [1] On the date the company sought bankruptcy protection, it also commenced an adversary proceeding (the “Adversary Proceeding”) seeking to extend the automatic stay to non-debtor Mr. Luftig and seeking a preliminary injunction enjoining FCP from executing on the Judgment against Mr. Luftig. See Hal Luftig Company, Inc. v. FCP Entertainment Partners, LLC, Case No. 22–01176. In support of its request for relief, the Debtor argued that there were unusual circumstances warranting an extension of the automatic stay to Mr. Luftig. Specifically, the Debtor argued that it derives profits from the shows produced by Mr. Luftig and that if Mr. Luftig was not protected by the stay, “he [would] be forced on a daily basis to deal with [FCP’s enforcement collection efforts,]” which will “irreparably harm the Debtor’s chance of a successful reorganization…”. Mem. L. Supporting the Luftig Stay at 18, AP Docket No. 3. Moreover, the Debtor argued that the requisite elements for a preliminary injunction against FCP’s efforts to enforce the Judgment were satisfied. Id. at *6. on January 23, 2023, the Court entered an order extending the automatic stay to Mr. Luftig (such stay, the “Luftig Stay”) pursuant to Bankruptcy Code §§ 105 & 362, over FCP’s objection (such order, the “Luftig Stay Order”). FCP did not appeal the Court’s Luftig Stay Order.
March 26, 2025
Bankruptcy
2024: Year in Review: Third-Party Releases After Purdue Pharma
"Lately I’ve been, I’ve been losing sleep Dreaming about the things that we could be" - Counting Starts, One Republic The most notable decision in the bankruptcy world in 2024 was the Supreme Court’s decision in Purdue Pharma. Harrington v. Purdue Pharma, L.P., 144 S. Ct. 2071 (2024). At the heart of the fight in Purdue Pharma were nonconsensual third-party releases where Purdue’s chapter 11 plan released all opioid crisis-related claims against the Sackler family[1]. Why are third-party releases important? A third-party release is a provision in a chapter 11 plan that can eliminate future liability for pre-bankruptcy conduct of non debtors like affiliates and officers and directors of the company that sought bankruptcy protection. For many years, debtors have used third-party releases as an important restructuring tool in chapter 11 cases. Bankruptcy lawyers and judges have been losing sleep over strategies to preserve this tool Circuit courts were divided on whether bankruptcy courts had the authority to grant nonconsensual third-party releases. The Second and Seventh Circuits permitted nonconsensual third-party releases when the particular release is essential and integral to the reorganization itself. Third Circuit permitted nonconsensual third-party releases in limited circumstances when the releases were fair and necessary to the reorganization. The Fourth, Sixth, and Eleventh Circuits approved third-party releases and applied a multifactor test[2] to decide the merits of third-party releases. The Fifth, Ninth and Tenth Circuits, however, held that nonconsensual third-party releases were not permitted by the Bankruptcy Code. The Bankruptcy Code does not include any explicit language that would permit third-party releases in most cases, but courts would approve them under §1123(b)(6) of the Bankruptcy Code, which allows bankruptcy courts to approve any “appropriate” provision in a chapter 11 plan that is “not inconsistent with the applicable provisions of this title.” Some courts also relied on §105(a) of the Bankruptcy Code which allows the bankruptcy court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. The Supreme Court’s Purdue Pharma decision eliminated nonconsensual third-party releases. However, Purdue Pharma did not dispose of consensual third-party release and left open the question what would be considered consensual releases and what is going to be the fate of efforts to stay litigation against non debtor parties. In Purdue Pharma, the majority of the creditors voted for the final iteration of the plan which provided for a release of all opioid-related claims against the Sacklers in exchange for a several billion-dollar contribution to the bankruptcy estate. Under the terms of the plan, Purdue would reorganize as a benefit corporation with the purpose of ameliorating the opioid crisis. The United States Trustee objected to the third-party releases arguing that the Bankruptcy Code does not permit the nonconsensual release of claims against non debtors and raising concerns about the victims’ due process rights. In a five-to-four majority opinion written by Justice Neil Gorsuch, the court held that the Code did not permit nonconsensual third-party releases. The Court reasoning was premised on the text of Sections 1123(b) and 524 of the Bankruptcy Code. Section 1123(b)(6) specifically states that a debtor may include in its plan “any other appropriate provision not inconsistent with the applicable provisions of this title.” The Court reasoned that because “[p]aragraph (6) is a catchall phrase at the end of a long and detailed list of specific directions,” it must be interpreted within the context of the rest of the subsection. Thus, because paragraph (6) follows a list of provisions relating to the rights, relationships, and responsibilities of the debtor to its creditors, the majority interpreted § 1123(b)(6) to only permit the bankruptcy court to grant orders concerning the relationships between the debtor and its creditors, and not any relationships between non debtors and the creditors. In addition, the Supreme Court reasoned that the discharge provisions under § 524 limited discharge to the debtor and did not permit the discharge of third parties. The Court noted that § 524(g) already provides an exception to the discharge provisions by authorizing nonconsensual releases of third-party claims under limited circumstances in asbestos-related cases. Accordingly, if Congress intended to broadly authorize nonconsensual third-party releases, it could have included language to that effect. The full impact of Purdue remains to be seen but several bankruptcy courts grappled with what constitutes a consensual release. In the first opinion on the topic since the Supreme Court’s Purdue decision in late June, Bankruptcy Judge Christopher M. Lopez of Houston confirmed an opt-out chapter 11 plan with non debtor, third-party releases. The U.S. Trustee objected to the opt-out plan and argued that the releases were coercive and that the releases should be given only by creditors who opt in. Any creditor who voted in favor of the plan could not opt out, and creditors who did not vote would be bound by the releases. In addition, creditors who opted out could not sue unless the bankruptcy court were to determine that the claims were colorable. Judge Lopez started his analysis by emphasizing that Purdue explicitly dealt with non-consensual third – party releases only and did not change the law in Fifth Circuit. What constituted consent, including opt-out features and deemed consent for not opting out, had long been settled in this District and hundreds of chapter 11 cases have been confirmed with consensual third-party releases with an opt-out. The debtor gave extensive notice about the opt-out provisions in the plan. About 100 creditors opted out, Judge Lopez said in his opinion. Judge Lopez overruled the U.S. Trustee’s objection and confirmed the plan because “the third-party releases are consensual and narrowly tailored.” A New York judge in the Bankruptcy Court for the Western District of New York, Chief Bankruptcy Judge Carl L. Bucki of Buffalo, N.Y. denied confirmation of an opt out plan in a case where the corporate debtor offered $300,000 for distribution among creditors with more than $282 million in unsecured claims. The proposed plan called for releasing not only the debtor but also the debtor’s officers, directors, shareholders and agents. Non debtor releases were also earmarked for the debtor’s and the committee’s professionals, among others. Unless a creditor affirmatively opted out, they would be deemed releasing claims. In re Tonawanda Coke Corp., ___ B.R. ___,. No. BK 18-12156 CLB, 2024 WL 4024385, at *2 (Bankr. W.D.N.Y. Aug. 27, 2024.) Unlike Purdue, the released non debtors were not making financial contributions toward the payment of creditors’ claims. Applying section 5-1103 of the New York General Obligations Law, Judge Bogucki held that an opt out plan does not satisfy the requirements for consent under New York law because an agreement to “discharge” an “obligation” had to be in writing and signed by the party against whom it would be enforced. Judge Craig T. Goldblatt of Delaware held that an opt-out provision is permissible only if the creditor was on notice that it would be subject to a third-party release and the creditor took an affirmative act, such as voting on the plan, but failed to exercise the opt-out right. A review of cases even pre-dating Purdue on what constitutes a consensual release shows that there is a case to support every view. Some cases apply state law contract principles (usually to deny approval of opt-out releases), and others apply federal bankruptcy principles (usually to approve them). “[C]ourts are markedly split on the issue, with some categorically finding that a release cannot be consensual absent an affirmative act to opt in, and others finding that opt-out mechanisms that (as is the case here) provide adequate notice and a simple opt-out process can result in a consensual release. In re: LAVIE CARE CENTERS, LLC, et al., Debtors., No. 24-55507- PMB, 2024 WL 4988600, at *12 (Bankr. N.D. Ga. Dec. 5, 2024). The consensual third-party releases will continue to be the main focus next year and the issue will continue to percolate in the bankruptcy and higher courts. [1] The Sackler family owned and controlled Purdue Pharma, the maker of oxycontin, which contributed to the opioid crisis. Empire of Pain, written by investigative journalist Patrick Keefe recounts the story of Purdue and the investigations and legal proceedings into the marketing practices of oxycontin. There are numerous criminal and civil proceedings initiated by the federal and state governments, foreign authorities and individual victims. Hulu’s Dopesick and Netflic’s Painkiller illustrate the impact of oxy in a more easily digestible format. [2] The Courts in these circuits take into consideration the following factors: (1) There is an identity of interests between the debtor and the third party, usually an indemnity relationship, such that a suit against the non debtor is, in essence, a suit against the debtor or will deplete the assets of the estate; (2) the non debtor has contributed substantial assets to the reorganization; (3) the injunction is essential to reorganization, namely, the reorganization hinges on the debtor being free from indirect suits against parties who would have indemnity or contribution claims against the debtor; (4) the impacted class, or classes, has overwhelmingly voted to accept the plan; (5)the plan provides a mechanism to pay for all, or substantially all, of the class or classes affected by the injunction; (6)the plan provides an opportunity for those claimants who choose not to settle to recover in full ;and (7) the bankruptcy court made a record of specific factual findings that support its conclusions.
December 18, 2024
Bankruptcy
Gating Issues for Foreign Trustees Looking to Obtain Chapter 15 Recognition
There has been an uptick in chapter 15 cases, and they have raised various intriguing issues. Among them is the threshold question of who can actually file a Chapter 15. By design chapter 15 applies where assistance is sought in the United States by a foreign court or a foreign representative in connection with a foreign proceeding of a foreign debtor. The Bankruptcy Code itself proclaims that the purpose of this chapter is to incorporate the Model Law on Cross-Border Insolvency so as to provide effective mechanisms for dealing with cases of cross-border insolvency. A decision rendered by the Eleventh Circuit (including Florida, Georgia and Alabama) in the spring of 2024 created a circuit split on a threshold eligibility question, namely whether the foreign debtor must have domicile, business or property in the U.S. to obtain recognition. Section 109(a) of the Bankruptcy Code limits the scope of who may be a debtor, stating that “only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor” in a domestic bankruptcy proceeding. The Eleventh Circuit held that a duly qualified representative of a foreign debtor that is properly subject to a foreign proceeding is entitled to seek and obtain Chapter 15 recognition even if such foreign debtor has no property in the United States or otherwise does not qualify to be a debtor under section109(a) of the Bankruptcy Code. In re Al Zawawi, No. 22-11024, 2024 WL 1423871 (11th Cir. Apr. 3, 2024). This is directly contrary to the precedent established in the Second Circuit more than ten years ago, which requires courts in New York, Connecticut and Vermont to factor in Section 109(a) of the Code. In re Barnet, 737 F.3d 238 (2d Cir. 2013). It remains to be seen which approach will prevail and if the Eleventh Circuit courts will become the primary forum for foreign representatives when they want to investigate potential claims or conduct discovery in the United States, but the foreign debtor has no assets here.
November 6, 2024
Bankruptcy
How Can Rights to Future Payments Survive Bankruptcy? Lessons Learned from Pharma Bankruptcy Cases
In a decision published earlier this year, the Third Circuit gave creditors in the pharma space clear pointers on how to manage risk in advance and structure a transaction in a way that rights to future payments could survive a bankruptcy filing. In re Mallinckrodt PLC, 99 F.4th 617. Mallinckrodt and its affiliates operated a global specialty biopharmaceutical company that produces and sells both generic and branded pharmaceutical products including specialty products for the treatment of rare diseases and controlled substances. Prior to the Mallinckrodt’s bankruptcy filing Sanofi and Mallinckrodt entered into an Asset Purchase Agreement ("APA ") which transferred ownership of a drug called Acthar which treats chronic inflammation and auto immune disease, and related intellectual property to Mallinckrodt. It was an outright sale in which Mallinckrodt paid Sanofi $100,000 upfront and promised a perpetual royalty of 1% of all net sales over $10 million per year. Sanofi took a security interest in the up-front payment but not the royalty. By 2019, sales hit almost one billion dollars. With the confirmation of Mallinckrodt’s reorganization plan, the Sanofi’s claim for royalties was discharged and Mallinckrodt kept the drug and IP without the obligation to share revenue upon emergence from bankruptcy. Sanofi could have structured the deal differently. It could have licensed the rights to the drug, kept a security interest in the intellectual property, or set up a joint venture to keep part ownership. Instead Sanofi transferred its rights to Alchar Gel in an outright sale.
November 6, 2024
Bankruptcy
Demystifying the Bankruptcy Process - Part Six
Originally posted on 12/27/2020, content updated on 10/27/2023 The COVID-19 pandemic created a lot of turmoil in every industry and every company. Hundreds of companies in the energy, transportation, entertainment, health & personal care, retail, travel, lodging, and leisure industries cited COVID-19 as a factor in their decision to commence a bankruptcy proceeding. According to 2020 data compiled by Bloomberg, the pandemic battered New York City businesses, with almost 6,000 closures by late October 2020, a jump of about 40% in bankruptcy filings across the region, and shuttered storefronts in the business districts of all five boroughs. The final summary in the series is intended to help small business owners better understand how valuable a tool Chapter 11 can be during a time of crisis. The Small Business Reorganization Act (or Subchapter V of Chapter 11 of the Bankruptcy Code), which went into effect in February 2020, offers a timely and cost-efficient solution for businesses with undisputed non-contingent liability of up to $7.5 million. Among the key benefits of the traditional restructuring regime under Chapter 11 of the Bankruptcy Code are: the management stays in control of the company and an outside trustee/administrator is not brought in unless there are extraordinary circumstances. the company can cherry-pick beneficial contracts and reject burdensome ones. the company can sell its business, selected business lines, or individual assets free and clear of any encumbrances or interests. Subchapter V brings even more benefits to the equity owners of the company and, by all indications, seems to be working as intended. The Small Business Reorganization Act (SBRA), incorporated in the Bankruptcy Code under Subchapter V of Chapter 11, went into effect on February 19, 2020. It provides a faster, cheaper, and simpler mechanism for reorganization of small businesses. Who is eligible to file under subchapter V - Businesses and individuals engaged in commercial activities with no more than $2,725,625 of liquidated and non-contingent obligations? However, businesses for which primary activity is the owning of single-asset real estate are not eligible. The CARES Act had increased the debt ceiling to $7,500,000 through March 27, 2021. The increased debt limit applied only to cases filed after the effective date of the CARES Act. There are a number of modifications of the traditional restructuring process that make a subchapter V proceeding a more straightforward and cheaper path to reorganization: It allows the owner of the business to preserve his or her equity even when the business is not in a position to pay in full its secured and unsecured creditors (i.e., abrogates the so-called “absolute priority rule”). The creditors' ability to block confirmation is significantly weakened because Subchapter V eliminates the traditional requirement that at least one impaired class of creditors accepts the reorganization plan. A reorganization plan will be deemed fair and equitable to objecting unsecured creditors if the debtor pays projected disposable income to be received over at least three years. A subchapter V plan may provide for later payment of administrative expenses (i.e., payment through the plan) as opposed to payment on the effective date of the plan. Only the debtor company can file a plan (i.e., eliminates the ability of creditors to propose their own restructuring plan). It eliminates U.S. Trustee quarterly fees and other procedural and reporting burdens. The SBRA cases work on a tight schedule. Within 60 days of the filing, the bankruptcy court has to hold a status conference “to further the expeditious and economical resolution” of the case. Fourteen days prior to the conference, the debtor must file a report detailing the efforts to attain a consensual plan of reorganization. The Debtor must file a plan 90 days after the order for relief. The SBRA debtor need not solicit plan acceptances with a separate disclosure statement. The plan must include a brief history of the business operations of the debtor, a liquidation analysis, and projections with respect to the debtors’ proposed payments under the proposed plan. Confirmation of a small business debtor plan of reorganization is pursuant to the usual criteria of section 1129(a) of the Bankruptcy Code, with the critical exception that the debtor does not need to obtain the acceptance of even one impaired class of creditors. Allowing only the debtor to file a reorganization plan and to preserve equity in the process while giving them the option to force a plan against the creditors’ vote provides a unique opportunity for reviving a business in these challenging times. If you have a question on this topic, please contact Albena Petrakov at apetrakov@offitkurman.com or 212.380.4106
October 27, 2023
Bankruptcy
Demystifying the Bankruptcy Process - Part Five
Originally posted on 10/13/2020, content updated on 10/12/2023 The COVID-19 pandemic created a lot of turmoil in every industry and every company. Stay-at-home mandates forced most retailers, restaurants, and event venues to close their doors without realistic prospects of a return to pre-COVID operations. The risk of dealing with a company in financial distress was at an all-time high. Understanding the bankruptcy tools available to a company that is on the path to or already in a court-supervised reorganization can help you in managing and reducing this risk. Chapter 11 of the Bankruptcy Code governs the restructuring of businesses and individuals’ assets and liabilities. The proceedings under chapter 11 bring all stakeholders to one forum and facilitates global resolution of claims and liabilities. It may have a different impact on the different stakeholders – secured and unsecured lenders, trade creditors, employees, and landlords. What If You Are A Landlord? If you find yourself a landlord of a company that filed for a Chapter 11 protection, you can enjoy some unique rights that put you in a better position than any other typical unsecured creditor. However, vigilance is essential because highly accelerated sales procedures and first-day motions may negatively impact the landlord’s protections. The financial risk to a landlord is somewhat different in two discrete time periods: 1) before the debtor’s decision to assume or reject the lease and 2) after the debtor decides to reject the lease. In the first time period, the debtor tenant is typically still in possession and the landlord cannot re-let or market the space. Pre-Assumption/Rejection: Thanks to the special protections for commercial real estate landlords under Section 365(d) of the Bankruptcy Code, between the date on which the petition is filed and the date on which there is a judicial order approving a rejection or assumption of the lease, a debtor tenant is required to timely perform all of its obligations under the terms of the lease. Post-Assumption/Rejection: After the determination is made whether to assume or reject, landlords are subject to a risk of significant monetary loss if the debtor rejects the lease. The landlord's unsecured claim for termination damages is capped by Section 502(b)(6)(A) of the Bankruptcy Code, which limits a landlord's claim to the rent reserved for the greater of one year or 15 percent of the remaining term not to exceed three years. Even though most courts hold that a rejection can only occur with a formal court order, some courts have approved an effective date of the rejection can be earlier than the date of the order, making the rejection retroactive. This impacts a landlord’s ability to collect rent and enforce the lease prior to a debtor's decision to "assume" or "reject" the lease, described above. Some other risks to keep in mind: 1) Pre-bankruptcy lease termination is difficult and may be set aside by the bankruptcy court. A lease termination fee may be viewed as a preference or fraudulent conveyance, and 2) the debtor is entitled to assume despite defaulting on the lease and despite any contractual clauses contrary to that. The Bankruptcy Court in effect provides a federal cure right and the debtor can assign the lease despite anti-assignment clauses. In case you missed it, read part one, two, three, and four here. If you have a question on this topic, please contact Albena Petrakov at apetrakov@offitkurman.com or 212.380.4106
October 12, 2023
Bankruptcy
Demystifying the Bankruptcy Process – Part Four
Originally posted on 09/29/2020, content updated on 09/29/2023 As previously highlighted, the COVID-19 pandemic created a lot of turmoil in every industry and every company and hundreds of in the energy, transportation, entertainment, health & personal care, retail, travel, lodging, and leisure industries have sought bankruptcy protection. In 2020, the Art Dealers Association of America (ADAA) released a report on how art galleries across the U.S. have been affected by the pandemic. The report demonstrated that galleries had faced devastating revenue losses, reduction in business activity, and closures of their physical spaces, not only financially impacting their employees and vendors but artists and creative professionals around the world. Therefore, it is important to be familiar with your rights as an artist. WHAT IF YOU ARE AN ARTIST DEALING WITH A GALLERY’S BANKRUPTCY State law dictates the scope and nature of the legal rights and interest that a debtor-gallery has in artwork in its possession, even when the gallery is a bankruptcy proceeding in federal court. Applicable state law in New York expressly provides that artwork delivered by an artist to a gallery for sale is trust property and that any proceeds from the sale of such work are trust funds in the hands of the gallery for the benefit of the artist. Such artwork and sale proceeds may not be subject to any claims, liens or security interest. When a bankruptcy proceeding is commenced, property in the possession of the debtor-gallery becomes property of the estate and subject to distribution to all or certain creditors to the extent of the debtor-gallery’s property interest. Such interest is determined by state law. Since under Section 12.01(1)(a)(ii) of the NYACAL, artwork is trust property in the hands of the debtor-gallery for the benefit of the artist, artwork protected by the statute never becomes part of the debtor-gallery estate and should be beyond the reach of the gallery’s creditors. By its terms, the New York statute applies “[n]otwithstanding any custom, practice or usage of the trade, any provision of the uniform commercial code or any other law, statute, requirement or rule, or any agreement, note, memorandum or writing to the contrary.” Section 12.01 unequivocally provides that no liens or security interest may attach to artwork delivered by an artist to a gallery for sale. Moreover, the statute also expressly provides that an artist cannot waive this provision of the statute, making it impossible for a lien or security interest to attach. To be protected by the statute, the artwork should fall under the definitions of the statute. Section 11.01 of the NYACAL sets forth the applicable definitions: An “artist” is defined as “the creator of a work of fine art or, in the case of multiples, the person who conceived or created the image which is contained in or which constitutes the master from which the individual print was made.” “Fine art” is defined as “a painting, sculpture, drawing, or work of graphic art, and print, but not multiples.” Section 12.01(1)(b) expressly prohibits the waiver of the “no lien” provision contained in Section 12.01(1)(a)(v), and no artist whose works are subject to Section 12.01 is able to consent to the granting of a lien or security interest, even if they were inclined to do so. Section 12.01(1)(b) contains one exception to its prohibition on waivers. Subject to certain conditions, Section 12.01(1)(a)(iii), which provides that any proceeds from the sale of work that is trust property are trust funds in the hands of the gallery for the benefit of the artist, may be waived if “such waiver is clear, conspicuous, in writing and subscribed by the consignor. Therefore, when dealing with a gallery, an artist has to carefully review any language proposed by the gallery that may suggest relinquishing statutory rights. In case you missed it, read part one, two, three, and five here. If you have a question on this topic, please contact Albena Petrakov at apetrakov@offitkurman.com or 212.380.4106
September 29, 2023
Bankruptcy
Demystifying the Bankruptcy Process – Part Three
Originally posted on 09/15/2020, content updated on 08/31/2023 The COVID-19 pandemic created a lot of turmoil in every industry and every company. From March to September 2020, more than 200 companies in the energy, transportation, entertainment, health & personal care, retail, travel, lodging, and leisure industries cited COVID-19 as a factor in their decision to file for bankruptcy. The risk of dealing with a company in financial distress was at an all-time high. Understanding the bankruptcy tools available to a company that is on the path to or already in a court-supervised reorganization (known as a Chapter 11 proceeding) can help you manage and reduce this risk. Chapter 11 filers choose to opt for bankruptcy relief for various reasons: to stop debt collection action, to revise the unworkable capital structure, to address overwhelming litigation, to facilitate the sale of major assets to a prospective buyer, and to reject burdensome contracts, to name a few. Chapter 11 brings all stakeholders to one forum and facilitates the global resolution of claims and liabilities. It may have a different impact on the different stakeholders and this mini-series will cover the impact of a bankruptcy proceeding on trade creditors, distressed asset buyers, landlords, and the art world. The final summary is intended to help small business owners better understand how valuable a tool Chapter 11 can be during a time of crisis by availing themselves of the new restructuring mechanism for businesses (and individuals with business debt) with undisputed liabilities that do not exceed $7.5 million. What If You Are Interested in Buying Assets From A Company In Bankruptcy/Financial Distress The 2020 market conditions presented opportunities to acquire businesses at relatively good prices. Section 363 of the Bankruptcy Code provides a Chapter 11 debtor the opportunity to sell its assets free and clear of claims, liens, encumbrances, competing ownership interests, and other liabilities that may prevent a sale outside of Chapter 11. As a result, buyers are incentivized by the unique opportunity to purchase distressed assets inside of bankruptcy, especially because the bankruptcy court order approving the sale often expressly forecloses “successor liability” claims against the purchaser. With a growing number of cases where courts allow a traditional asset buyer (purchasing assets out-of-court) to become liable for the seller’s liabilities, a court-approved sale of all or part of the seller’s assets brings distinct advantages. Another benefit is the ability to cherry-pick favorable contracts and leases, including the ability to take over contracts even if they contain anti-assignment clauses. The bankruptcy court approval of a 363 Sale takes place in two stages. The first stage entails obtaining court approval of the bidding protection procedures. These procedures are described in a motion filed with the court. The second stage is the hearing on the sale of the assets itself when the bankruptcy court hears and rules on any objections to the 363 Sale. Standards for Approving 363 Sale The standard that the bankruptcy courts generally apply is whether a sound business reason supports the sale. The factors considered in this process include 1) the proportionate value of the assets to the estate as a whole, 2) whether the sale price is fair and reasonable under the circumstances, 3) the amount of time elapsed since the filing, 4) the effect of the proposed distribution on future plans of reorganization, 5) the proceeds to be obtained from the disposition compared to appraisals of the assets, 6) whether the asset is increasing or decreasing in value. When navigating that process, a company exploring options for buying assets from a bankruptcy estate should consult with bankruptcy counsel to evaluate available tools and establish a strategy. In case you missed it, read part one, two, four, and five here. If you have a question on this topic, please contact Albena Petrakov at apetrakov@offitkurman.com or 212.380.4106
August 31, 2023
Bankruptcy
Demystifying the Bankruptcy Process – Part Two
The COVID-19 pandemic created a lot of turmoil in every industry and every company. From March to September 2020, more than 200 companies in the energy, transportation, entertainment, health & personal care, retail, travel, lodging, and leisure industries cited COVID-19 as a factor in their decision to file for bankruptcy. The risk of dealing with a company in financial distress was at an all-time high. Understanding the bankruptcy tools available to a company that is on the path to or already in a court-supervised reorganization (known as a Chapter 11 proceeding) can help you to manage and reduce this risk. Chapter 11 filers choose to opt for bankruptcy relief for various reasons: to stop debt collection action, to revise unworkable capital structure, to address overwhelming litigation, to facilitate the sale of major assets to a prospective buyer, and to reject burdensome contracts, to name a few. Chapter 11 brings all stakeholders to one forum and facilitates global resolution of claims and liabilities. It may have different impacts on the different stakeholders, and these mini-series will cover the impact of a bankruptcy proceeding on trade creditors, distressed asset buyers, landlords, and the art world. The final summary is intended to help small business owners better understand how valuable a tool Chapter 11 can be during a time of crisis by availing themselves of the new restructuring mechanism for businesses (and individuals with business debt) with undisputed liabilities that do not exceed $7.5 million. Post-petition services and goods – What if you are a supplier of goods and services faced with the decision to continue working with a company in a Chapter 11 proceeding? A business may find itself in a difficult position if prebankruptcy payment default remains outstanding and the debtor still seeks performance post-petition. In general, a Chapter 11 debtor may assume, assign, or reject an unexpired contract or lease at any time prior to confirmation of a plan. The confirmation of the plan may occur six months and (typically) more after the commencement of the case, which creates a lot of uncertainty for the non-debtor party to the contract. In such a case, a trade creditor remains obligated to perform under the nonterminated contract so long as the debtor complies with its terms. Although the Bankruptcy Code mitigates further exposure by giving the administrative expense priority over even secured claims, payment is not guaranteed. What is an administrative expense priority? When a company is operating during the restructuring process, post-petition business transactions undertaken at the debtor’s discretion – such as the supply of goods and services necessary for the debtor’s operations — can receive administrative priority if transacted in the ordinary course of business. Section 507(a)(2) of the Bankruptcy Code provides that each of these kinds of administrative claims is entitled to priority of payment over, among other things, the general unsecured pre-petition claims of creditors. Under the appropriate set of facts, a contract counterparty may move the bankruptcy court to shorten the long waiting period the debtor company has for assumption and rejection of contracts. Bankruptcy courts have developed a multi-factor balancing test that weighs the harm to the party seeking such relief against the harm to the bankruptcy estate. Courts look at the interests of the creditors collectively and the bankruptcy estate as a whole against the position of one creditor out of many. Counterparties face significant hurdles in prevailing on such motions, but it is not impossible. Trade creditors in this situation should closely monitor the debtor’s post-bankruptcy performance and seek relief from the bankruptcy court if necessary. In case you missed it, read part one, three, four, and five here. If you have a question on this topic, please contact Albena Petrakov at apetrakov@offitkurman.com or 212.380.4106
August 28, 2023
Bankruptcy
Doing Business Amid Increasing Russian Sanctions
Originally posted on 03/19/2019, content updated on 08/22/2023 With Russia in the headlines almost every other day over the last several years, the U.S. government has introduced and progressively increased economic sanctions targeting certain Russian individuals and companies. Big banks and insurance companies have always been sensitive to trade sanctions regimes and have well-developed compliance systems in place. However, the time has come for small and mid-size businesses to put aside the optimism bias and actively manage the risks associated with doing business involving Russian companies under U.S. law. Unlike an embargo – which is a comprehensive ban blocking all transactions within a country – the Russian sanctions regime involves asset-blocking and restrictions on specific transactions. The sanctions started in March 2014 as a response to the Ukraine and Crimean crisis and have progressively developed. The relevant rules are embodied in U.S. Executive Orders 13660, 13661, 13662, 13665, 13685, 13694 and 13757, the Ukraine Freedom Support Act (“UFSA”), the Support for the Sovereignty, Integrity, Democracy and Economic Stability of Ukraine Act of 2014 (“SSIDEA”), Countering America’s Adversaries Through Sanctions Act (“CAATSA”). CAATSA codified existing sanctions issued through Obama-era executive orders, strengthened and expanded sectoral sanctions and threatened imposition of secondary sanctions for various activities that lack any nexus with the U.S. Is there a particular reason CAATSA needs a description but the others don’t – it’s the most comprehensive one. The Treasury Department’s Office of Foreign Asset Control (OFAC) promulgates and implements the regulations in connection with the sanctions regime and maintains a comprehensive list of Specially Designated Nationals and Blocked person (the “SDN list”). OFAC adds individuals and companies to the SDN list frequently, and it is essential to monitor and follow current law before entering into a transaction involving Russian individuals and entities. Which activities are prohibited? 1) Blocking sanctions prohibit dealing with specific individuals and entities which have been listed on the “SDN List.” U.S. persons are prohibited from engaging in any transactions with SDNs and are required to freeze any property or interests belonging to SDNs. 2) Sectoral sanctions prohibit certain types of transactions in selected sectors of the Russian economy listed in OFAC’s Sectoral Sanctions Identification List (the “SSI List”). The sectoral sanctions target entities in Russia’s financial, energy, defense and oil exploration and production sectors. CAATSA authorized the creation of new sectoral sanctions against entities operating in the railway, metal and mining sectors. 3) An embargo against Crimea prohibits new investments in the Crimea region, the importation in the U.S. of any goods, services, or technology from the Crimean region, the exportation, re-exportation, sale or supply of any goods, services, or technology to the Crimea region, and any approval, financing, facilitation, or guarantee by a U.S. person. Who should comply? The regime includes primary and secondary sanctions. Primary sanctions prohibit certain activities with connection to the U.S. and target U.S. persons. This includes activities that involve U.S. companies, U.S. citizens and green card holders regardless of where they reside or touch upon U.S. territory. The secondary sanctions target conduct with no nexus to the United States and are aimed at discouraging non-U.S. entities from engaging in certain Russian-related transactions. If such non-U.S. entities engage in prohibited conduct, they may be designated on the SDN list or otherwise sanctioned. In view of the dynamic nature of the sanctions regime, U.S. companies should carefully review their activities for exposure to sanctioned entities and sectors and enhance due diligence to monitor sanctions development. Partial sanctions – like the Russian ones – increase uncertainty because the rules frequently change. Between starting the negotiations and closing a transaction, your counterparty may find itself on a sanctioned entities list. Hence, it becomes essential for companies of all sizes to institute compliance programs that take into consideration the new reality. If you have question on this topic, please contact Albena Petrakov at apetrakov@offitkurman.com or 212.380.4106
August 22, 2023
Bankruptcy
Demystifying the Bankruptcy Process – Part One
Originally posted on 08/18/2020, content updated on 08/21/2023 The COVID-19 pandemic created a lot of turmoil in every industry and every company. From March to July 2020, at least 171 companies in the energy, transportation, entertainment, health & personal care, retail, travel, lodging, and leisure industries cited COVID-19 as a factor in their decision to file for bankruptcy. The risk of dealing with a company in financial distress was at an all time high. Understanding the bankruptcy tools available to a company that is on the path to or already in a court-supervised reorganization can help you manage and reduce this risk. Reorganizations in a Nutshell: Chapter 11 of the Bankruptcy Code governs the restructuring of businesses and individuals’ assets and liabilities. It provides financially distressed companies and individuals with protections that are attractive for the debtor. Among the key benefits of the US reorganization regime are: The management stays in control of the company, and an outside trustee/administrator is not brought in unless there are extraordinary circumstances; The company can cherry-pick beneficial contracts and reject burdensome ones; The company can sell its business, selected business lines or individual asses free and clear of any encumbrances or interests. Chapter 11 filers choose to opt for bankruptcy relief for various reasons: to stop debt collection action, to revise unworkable capital structure, to address overwhelming litigation, to facilitate the sale of major assets to a prospective buyer, and to reject burdensome contracts, to name a few. Chapter 11 brings all stakeholders to one forum and facilitates the global resolution of claims and liabilities. It may have different impact on the different stakeholders and these mini-series will cover the impact of a bankruptcy proceeding on trade creditors, distressed asset buyers, landlords, and the art world. The final summary is intended to help small business owners better understand how valuable a tool Chapter 11 can be during a time of crisis. What to keep in mind if you are a supplier of goods and services to a distressed company (or in other words, a trade creditor) with a number of open invoices: The commencement of a Chapter 11 proceedings is an automatic prohibition on any action which has the purpose and result of collecting a debt or taking possession of property or assets of the debtor. These include: The commencement or continuation of legal proceedings against the debtor to recover a claim that arose prior to the petition being filed; The enforcement of a prepetition judgment against the debtor or against property of the bankruptcy estate; An act to obtain possession of, or exercise control over, property of the estate; An act to create, perfect or enforce any lien against property of the bankruptcy estate; An act to create, perfect or enforce any lien against property of the debtor, any lien to the extent that such lien secures a prepetition claim; An act to collect, assess or recover a prepetition claim against the debtor; The setoff of any debt owing to the debtor that arose before the commencement of the case against any claim against the debtor; If there are open outstanding invoices that have accumulated over the months (hopefully not years) before your customer’s bankruptcy, you typically would not receive a payment, if any, unless there is a court approval for such payment. A restructuring company in a chapter 11, referred to as a “Debtor in Possession” (“DIP”) generally cannot pay pre-petition debts post-petition until a plan, governed by the Bankruptcy Code priority system and requirements, is confirmed. Critical Vendor Programs There are, however, exceptions to the rule. A potential avenue to receive payment on pre-petition invoices early in the restructuring process is through a critical vendor program. Pursuant to Section 363 of the Bankruptcy Code, a bankruptcy court has the power to authorize a debtor in possession to expand funds outside of the ordinary course of business and has broad flexibility in tailoring its orders as long as the debtor in possession can articulate business justification. The court approval of a critical-vendor program usually requires a DIP to establish that: (1) the vendor is necessary for the successful reorganization, (2) the transaction must be in the sound business judgment of the debtor and (3) the favorable treatment of the critical vendor should not prejudice other unsecured creditors. Debtors in possession consider various factors when identifying critical vendors, among which are whether each vendor (i) provides unique or specifically designed goods or services that are crucial to the continued operation and preparedness of the debtors’ business, and for which no ready alternative and appropriately qualified vendors can be found with reasonable diligence; or (ii) provides essential goods and services, for which replacement with alternative vendors would be prohibitively expensive due to the time required to replace the existing vendor’s institutional knowledge of the debtors’ businesses, the lead-time required by any alternative vendors, required authorizations and clearances alternative vendors would need to obtain through third-parties, the alternative vendors’ geographical remoteness from the debtors’ operations and/or the preferential terms that have been locked in with the current vendor. To take advantage of critical vendor programs, trade creditors in this situation should closely monitor the debtor’s submissions in the first days and weeks of the proceedings. In case you missed it, read part two, three, four, and five here. If you have a question on this topic, please contact Albena Petrakov at apetrakov@offitkurman.com or 212.380.4106
August 21, 2023
Bankruptcy
How Not to Violate the Automatic Stay
The automatic stay is "one of the fundamental debtor protections provided by the bankruptcy laws" of this country.”[1]. It is viewed as a very broad protection that "stops all collection efforts, all harassment, and all foreclosure actions . . . meant to provide “complete, immediate, albeit temporary relief to the debtor from creditors, and also to prevent dissipation of the debtor's assets before orderly distribution to creditors can be effected.”[2] Certain actions (like bringing or continuing a breach of contract action against the debtor) fit neatly in the prohibitions of the Bankruptcy Code while some more nuanced circumstances prove trickier to label as violations, yet they can put a creditor or a counterparty on the naughty list. Here are five examples: 1. The automatic stay applies outside of U.S. geographical borders. A declaration of a setoff and a foreign creditor’s refusal to return the receivables to the debtors upon request was an improper exercise of control over the property of the Debtor's estate, and thus a violation of Section 362(a)(3) of the Bankruptcy Code. [3] 2. The enforcement of provisions in a condominium's bylaws that prohibit a chapter 11 debtor with a pre-petition delinquency in the payment of condominium fees from voting at an annual meeting or holding office as a director of the condominium association violates the automatic stay.[4] 3. A lender proceeding with a foreclosure sale against a limited liability company in which the debtor held 99% of the equity willfully violates the automatic stay under Section 362(a)(1), and to the enforcement of an earlier judgment in that proceeding or action, under Section 362(a)(2) when the foreclosure action named both the company and the debtor as parties in the proceeding.[5] 4. A mortgage company’s attempt to perfect lien against estate property by registering a deed of trust on the debtor’s property, when the stay had not been lifted by the bankruptcy court and when the mortgage company and its counsel had actual knowledge of the bankruptcy filing is a willful violation of the automatic stay.[6] 5. Threatening a debtor with criminal prosecution is a willful violation of the automatic stay. In a case involving a landlord in Tennessee, the Sixth Circuit affirmed the bankruptcy court and the district court in finding that the landlord cannot hide behind the criminal prosecution exception to the automatic stay in Section 362(b)(1).[7] Before the commencement of the bankruptcy case, the debtor had written to the landlord a check that bounced. After the debtor filed for bankruptcy, the landlord wrote letters to the debtor and her mother, claiming he was not attempting to collect back rent but threatened that he would initiate criminal proceedings for the bounced check. __________________ [1] Melanotic Nat'l Bank v. N.J. Dep't of Envtl. Prot., 474 U.S. 494, 503 106 S.Ct. 755, 88 L.Ed.2d 859 (1986) (quoting S. Rep. No. 95-989, at 54-55 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5840, 5963, 6296) [2][2] SEC v. Brennan, 230 F.3d 65, 70 (2d Cir. 2000). [3] In re Arcapita Bank B.S.C.(c), 628 B.R. 414, 480 (Bankr. S.D.N.Y. 2021), aff'd sub nom. In re Arcapita Bank B.S.C.(C), 640 B.R. 604 (S.D.N.Y. 2022); Section 362(a)(3) of the Bankruptcy Code provides that a filed bankruptcy petition filed operates as a stay, applicable to all entities, of any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate. 11 U.S.C. § 362(a)(3). [4] In re Gordon Properties, LLC, 460 B.R. 681, 685 (Bankr. E.D. Va. 2011). [5] Bayview Loan Servicing LLC v. Fogarty (In re Fogarty), 39 F.4th 62 (2d Cir. 2022). Section 362(a)(1) bars the commencement or continuation ... of a judicial, administrative, or other action or proceeding against the debtor ... to recover a claim against the debtor that arose before the commencement of the case. [6] In re Medlin, 201 B.R. 188 (Bankr. E.D. Tenn. 1996). [7] Weary v. Poteat, No. 15-5159, 2015 WL 5712191 (6th Cir. Sept. 30, 2015).
February 28, 2023
Bankruptcy
Foreign Proceedings: When is Chapter 15 Out of Reach for Foreign Liquidators?
This article provides an update on trends in the case law recognition of foreign insolvency proceedings under Bankruptcy law. Global Cord Blood Corp. (the “Company”) is a company registered in the Cayman Islands with headquarters in Hong Kong and primary operations in the People’s Republic of China (“PRC”). The Company is in the business of collecting and storing umbilical cord blood for the stem cells. Two major shareholders had differences about a transaction the Company entered. One of these shareholders challenged the transaction, which purported to transfer millions of new shares of stock and over $600 million in corporate funds to two other companies. The objecting shareholder commenced a proceeding before the Grand Court of the Cayman Islands to challenge the transaction. The Grand Court appointed Joint Provisional Liquidators (“JPLs”) as fiduciaries to investigate and, if appropriate, seek to recover misappropriated funds. Among other things, the petition to the Grand Court asked that the Company be wound up pursuant to section 92(e) of the Companies Act if winding up was “just and equitable.” The order appointing the JPLs authorized them to take any action as may be necessary to obtain recognition of their appointment in the PRC and in any other relevant jurisdiction and to make applications to the courts of such jurisdictions for that purpose or for the purpose of obtaining information to assist them in their investigations. While the proceeding before the Grand Court was pending, the shareholder that petitioned the Cayman Island Court filed an application with the United States District Court for the Southern District of Texas seeking judicial assistance pursuant to 28 U.S.C. § 1782.[1] The Texas Court granted the application, but the transferee of the Company’s funds and shares moved to vacate the order. Shortly thereafter, the JPLs petitioned the Bankruptcy Court for the Southern District of New York for recognition of the proceeding pending in the Grand Court of the Cayman Islands as a foreign main proceeding. The JPLs also sought related relief, including authorization to conduct discovery in the United States in connection with assertedly fraudulent misconduct, including what the JPLs assert was a possible misappropriation of more than $600 million in corporate funds. Judge Jones answered this question in a 2022 opinion in the In this case of Global Blood Cord Corporation; Judge Jones of the Southern District of New York denied recognition of the foreign proceeding under Chapter 15 [2] because he found that the proceeding in the Cayman Islands at that stage fell outside the range of types of proceedings that had been found eligible for assistance under Chapter 15 and outside the meaning of applicable provisions of the Bankruptcy Code. In re Glob. Cord Blood Corp., No. 22-11347 (DSJ), 2022 WL 17478530, at *1 (Bankr. S.D.N.Y. Dec. 5, 2022). At the time of the petition, the JPLs had not taken any steps to wind up the company and no steps related to classification, adjustment, or resolution of specific debts. Accordingly, Judge Jones held that the Cayman Islands proceeding lacked two essential characteristics of a “foreign proceeding” pursuant to Section 101(23). It was not a collective proceeding, and it was not a proceeding for fixing or adjusting debts or creditors rights. The JPLs were not seeking to identify creditors, quantify and classify Global Cord Blood Corp.’s debts, or determine a scheme of distribution to creditors on account of those debts. The creditor body had not even received formal notice of the Cayman Proceeding, and no claim submission or review process was in place. Considering the nature of their appointment, i.e., the investigation of officers and directors conduct in connection with the transaction subject to attack, it appears that pursuing 1782 discovery would be the only avenue for the JPLs at this stage of the Cayman Island Proceedings. For more information about seeking recognition of foreign insolvency proceedings in the U.S. or seeking to collect evidence in the U.S., please contact a member of Offit Kurman’s Creditors’ Rights, Reorganization and Bankruptcy Group. For further information, please feel free to reach out to Albena Petrakov. ___________________________________________ [1] Section 1782 provides foreign parties litigating outside of the U.S. unique access to U.S.-style discovery. Under 28 U.S.C. section 1782 (section 1782), an “interested person” may request that a district court authorize discovery in the United States “for use in” foreign litigation even without the foreign tribunal’s knowledge or involvement. A district court has power to order section 1782 discovery where “(1) the person from whom discovery is sought reside[s] (or [is] found) in the district of the district court to which the application is made, (2) the discovery [is] for use in a proceeding before a foreign tribunal, and (3) the application [is] made by a foreign or international tribunal or ‘any interested person.”’ [2] Chapter 15, enacted pursuant to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), incorporates the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law (UNCITRAL). 11 U.S.C. § 1501 (a) sets forth the objectives of chapter 15, i.e., cooperation between U.S. courts/authorities and those of foreign countries involved in cross-border insolvency cases, greater legal certainty for trade and investment, fair and efficient administration of cross-border insolvencies that protects the interests of all creditors, and other interested entities, including the debtor; protection and maximization of the value of the debtor’s assets and (5) facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.
December 30, 2022
Bankruptcy
Wrinkles in Bankruptcy Court’s Jurisdiction: Assumption of Executory Contracts in A Foreign Company’s Chapter 11
Foreign companies frequently choose to reorganize in the United States under Chapter 11 of the Bankruptcy Code. Examples include various airlines that were forced into bankruptcy because of the pandemic’s effects on the industry, including LATAM Airlines, AeroMexico, and Scandinavian Airlines. Among the often-cited reasons why the U.S. is the jurisdiction of choice for foreign companies are: 1) it has the most well-developed law of any insolvency regime in the world for helping troubled companies restructure their affairs; 2) it allows management control of the restructuring; 3) it provides for approval of prepackaged workouts; 4) U.S. bankruptcy courts can handle corporate groups, and 5) debtors can confirm a reorganization plan with less than unanimous stakeholder support. Another essential feature of the U.S. insolvency regime is the debtor’s right to assume or reject executory contracts and leases with binding effect on the counterparties. The U.S. bankruptcy court’s jurisdictional reach in connection with a motion to assume a contract between a foreign debtor and its foreign counterparty was questioned in early 2022 in the Alto Maipo case. The Court agreed with the counterparty that it did not have personal jurisdiction to approve the assumption of an agreement between Alto Maipo and its counterparty. Alto Maipo SpA and Alto Maipo Delaware L.L.C. sought bankruptcy protection in Delaware to carry out a prepackaged restructuring plan. Alto Maipo SpA is a Chilean company involved in developing, constructing, and operating a run-of-river hydroelectric project in Chile. The counterparty that challenged the Court’s authority to approve the assumption of its executory contract with Alto Maipo SpA, Minera Los Pelambres (“Minera”), is a Chilean company that runs a copper mine. It had a long-term power-purchase agreement with Alto Maipo signed back in 2013. Alto Maipo claimed that the power-purchase agreement was central to the debtors’ reorganization efforts and was the core of their business plan because Minera was obligated to purchase power from the debtors’ hydroelectric project on favorable, predictable, and long-standing terms. The agreement was governed by Chilean law, was written in Spanish, and required Chilean arbitration. Minera had no presence or business activities in the U.S. and was not subject to general or special jurisdiction in the U.S. In response to the Debtor’s Motion for Entry of an Order Pursuant to Sections 363 and 365 of the Bankruptcy Code Approving Assumption of Agreement with Minera (the “Motion”), Minera asserted that the Court could not grant the requested relief without finding and exercising in personam jurisdiction because Alto Maipo had defaulted. The Debtors’ position, supported by the senior secured lender, equity owner of Alto Maipo, the parties to a restructuring support agreement and the unsecured creditor’s committee, was that the requested relief was in rem because (i) the Court had statutory in rem jurisdiction over all property of the Debtors’ estates, wherever located, under 28 U.S.C. § 1334(e)(1), and (ii) separately, it had statutory authority to determine questions of contract-breach under Section 365(b) of the Bankruptcy Code. Minera challenged the position that the Court had the power to address contract breach questions under Section 365(b) exclusively as in rem matter or concerning anyone, including a non-debtor that is not subject to personal jurisdiction in the United States. The Court agreed with Minera because the Debtors sought findings that, among other things, there were no existing defaults and, thus, no required cure under the agreement to comply with Section 365(b). Therefore, the action was not traditionally in rem. “Making the requesting findings regarding default and cure required a determination of the party’s contractual rights and responsibilities in the agreement and would constitute an in personam action. A breach of contract action is a common example of an in personam action and, effectively, the findings sought here would require the same determination whether a breach of contract occurred and the appropriate remedy, if any.” April 26, 2022, Hr’g Tr. at 59, E.C.F. No. 548. This ruling raises the question of whether a bankruptcy court should make an individualized determination on personal jurisdiction for each contract that a foreign debtor is trying to assume and a counterparty raises breach of contract issues, and if it would deter foreign debtor filings in the U.S. For further information, please feel free to reach out to Albena Petrakov.
November 30, 2022
Bankruptcy
Bankruptcy 101 for Mortgage Lenders
In the summer of 2022, First Guarantee Mortgage Company filed for bankruptcy in the District of Delaware. Mortgage market analysts forecast a string of mortgage companies to file for bankruptcy in the months or years ahead. Hence, this is an excellent time to remind mortgage lenders and those that might be impacted by their bankruptcy proceedings of the limitations that the Bankruptcy Code places on sales of consumer credit transactions and the cloud hanging over the mortgage lenders’ metaphorical heads after the decision denying confirmation of the Second Amended Joint Chapter 11 Plan of Ditech Holding Corporation and its Affiliated Debtors (the “Second Amended Plan”) In re Ditech Holding Corp., 606 B.R. 544 (S.D.N.Y. 2019). The vast majority of Chapter 11 cases involve early sales of all assets to a strategic or financial buyer free and clear of liens, encumbrances and interests under Section 363 of the Bankruptcy Code. With a 363 sale, a distressed company can expeditiously and effectively separate the debtor’s past troubles from its future success without going through the process of proposing a Chapter 11 plan and meeting all prerequisites to confirm a plan. The benefit for a potential buyer is that a 363 sale can “cleanse” the assets and eliminate or, at least, minimize successor liability claims. In the context of a mortgage lender bankruptcy, this benefit is somewhat limited. In 2005, Congress added Section 363(o) to the provisions governing asset sales outside of a Chapter 11 plan. Under that section, (a) if a person purchases (i) any interest in a consumer credit transaction that is subject to the Truth in Lending Act or (ii) any interest in a consumer credit contract (as defined in section 433.1 of title 16 of the Code of Federal Regulations (January 1, 2004), as amended from time to time), and (b) if that interest is purchased through a sale under section 363 of the Bankruptcy Code, then, notwithstanding the “free and clear” language in section 363(f), such person remains subject to all claims and defenses assertible by the consumer that is related to such consumer credit contracts and transactions to the same extent as such person would be subject to such claims and defenses had the person acquired the interest pursuant to a sale not under section 363. The reasoning behind the amendment is illustrated with a statement by Sen. Chuck Schumer (NY-D). We have a new problem with these predatory lenders . . . In recent months, several large subprime lenders have obtained orders from bankruptcy courts, providing for the sale of their loans or the servicing rights associated with them under section 363 of the bankruptcy code. Consumers who have attempted to challenge these loans or their servicing obligations based on violations of fair lending laws have been told by the purchasers of these loans they were sold free and clear of any consumer claims and defenses. The fact that innocent borrowers can be left in the lurch is flat-out wrong. 147 CONG. REC. 2018, at *2032 (March 8, 2001). Accordingly, the buyer of a mortgage lender business would inherit consumer claims and defenses to the same extent it would under applicable non-bankruptcy law. Then one may ask, “could a mortgage lender accomplish a free and clear sale through a full-blown confirmation process by incorporating the sale in the Chapter 11 plan?” Judge Garrity said, “maybe” with some caveats when Ditech Holding Corp. and its affiliated debtors (“Ditech”) were pursuing such a sale. Ditech operated as an independent servicer and originator of mortgage loans and servicer of reverse mortgage loans. Accordingly, the bulk of the assets to be transferred were consumer credit transactions. Ditech offered a variety of residential mortgage loans to consumers for its own portfolio and for government-sponsored enterprises, government agencies, third-party securitization trusts, and other credit owners. Ditech was comprised of three primary segments: (i) forward mortgage originations through Ditech Financial LLC (“DFL”); (ii) forward mortgage servicing through DFL; and (iii) reverse mortgage servicing through Reverse Mortgage Solutions, Inc. The Consumer Creditors Committee appointed by the U.S. Trustee in the Ditech case objected to the confirmation of the Second Amended Plan because it did not comply with Section 363(o). Ditech countered that it was free to sell the consumer credit contracts free and clear of consumer claims and interests not expressly assumed by the buyers pursuant to Sections 1123(b)(4) and 1141(c) of the Bankruptcy Code. While the Court agreed that Section 1123 and Section 1141(c) provide an independent basis to accomplish free and clear sale, the plan did not meet the best interest test under Section 1129(a)(7). Judge Garrity held: To satisfy the best interest test, the Debtors must prove that the holders of Class 6 claims will “receive or retain property having a present value, as of the effective date of the plan, not less than the amount such holder would receive or retain if the debtor were liquidated under Chapter 7.” In re Drexel Burnham Lambert Grp., Inc., 138 B.R. at 761. It is undisputed that if the Debtors were liquidated under chapter 7, sections 363(f) and (o) would apply to a sale of the Consumer Creditor Agreements. The Court must apply those provisions in determining whether the Debtors have met their burden under section 1129(a)(7), notwithstanding that the Court has determined that sections 363(f) and (o) are not applicable to the Plan Sale Transactions, and nothing in the Code says otherwise. In a liquidation under Chapter 7, the liquidation analysis has to take into account the consumer claims because these claims: (i) fit the definition of “property,” (ii) have “value,” and (iii) although they are unliquidated, they are “neither speculative nor incapable of estimation.” Ditech’s liquidation analysis failed to do so. The takeaway is that mortgage lenders and buyers of mortgage lenders want to keep in mind that a free and clear sale might be attainable through a planned sale if the liquidation analysis factors in the limitations of Section 363(o). For further information, please feel free to reach out to Albena Petrakov.
October 31, 2022
Bankruptcy
When Bad Things Happen To Good People: Good Faith Is Not Enough When Investing in (What Later Turns Out To Be) a Ponzi Scheme
What happens when a good faith investor learns it invested in a Ponzi scheme and is presented with a claim to return money it withdrew from its account and fights the good fight to protect its investment? On September 20, 2022, the Court of Appeals for the Second Circuit affirmed the district court’s decision granting a motion for summary judgment in favor of Irving Picard, the S.I.P.C. appointed trustee liquidating Bernard L. Madoff Investment Securities L.L.C. (“B.L.M.I.S.”) and ruling that defendants J.A.B.A. Associates L.P. (“J.A.B.A.”) and the general partners of J.A.B.A.: Audrey Goodman, Bruce Goodman, Andrew Goodman, and the estate of James Goodman, were required to pay to the trustee the amount of $2,925,000 together with 4% pre-judgment interest. Considering that the litigation started in 2010 and went through three levels of the court system, the award of pre-judgment interest adds a material amount to the total due to the trustee. Who Are The Parties? J.A.B.A. is a former customer of Bernard L. Madoff who had no knowledge of his fraudulent conduct. Irving H. Picard, the trustee, sued it, alleging that it received voidable transfers from B.L.M.I.S. in the last two years of his operation, from December 11, 2006, to December 11, 2008. The initial claim filed on December 10, 2010, asserted against the defendants, was for $6,065,000 of withdrawals that J.A.B.A. allegedly received in the six-year period prior to the bankruptcy filing. However, in an earlier decision, the Court of Appeals for the Second Circuit ruled that the trustee is limited to recovery of the Two-Year Transfers. See Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. L.L.C. (“Ida Fishman”), 773 F.3d 411, 423 (2d Cir. 2014). As set forth in the Second Circuit’s and the underlying district court’s decision, B.L.M.I.S. was a securities broker-dealer through which the infamous Bernard Madoff operated three business units: (1) a proprietary trading business; (2) a market-making business; and (3) an investment advisory business (the “I.A. Business”). B.L.M.I.S. collected funds from brokerage customers and purported to invest those funds on behalf of the customers, but it did not actually invest the money. Instead, it sent its customers fabricated statements using historical trading activity and returns that had never been generated and therefore were reflecting fictitious trades and gains. When customers sought to withdraw money from the accounts, B.L.M.I.S. satisfied those requests with the proceeds of other customers’ investments that were held in a commingled checking account. See, e.g., In re2 Bernard L. Madoff Inv. Sec. L.L.C., 773 F.3d at 415. The scheme collapsed in 2008. Analysis The finding that the trustee was allowed to claw back the amount transferred out of the B.L.M.I.S. money is not surprising. It is well settled that when a corpus of customer property is insufficient to pay customer claims, a S.I.P.A. trustee may recover certain transfers by the debtor pursuant to Section 548(a)(1)(A) of the Bankruptcy Code. 15 U.S.C. § 78fff-2(c)(3) and 11 U.S.C. § 548(a)(1)(A). A trustee may avoid and recover transfers of fictitious profits where (1) a transfer of an interest of the debtor in property, (2) was made within two years of the bankruptcy petition date, (3) and the transfer was made with “actual intent to hinder, delay, or defraud” a creditor. Adelphia Recovery Tr. v. Bank of Am., N.A., Nos. 05-cv-9050, 03-MD-1529, 2011 WL 1419617, at *2 (S.D.N.Y. Apr. 7, 2011), aff’d sub nom.Adelphia Recovery Tr. v. Goldman, Sachs & Co., 748 F.3d 110 (2d Cir. 2014). Defendants claimed that the S.I.P.C. trustee did not have the standing to pursue the claims and that the account out of which the money was transferred was held in the name of Madoff, not B.L.M.I.S. Both the District Court and the Court of Appeals found these arguments unpersuasive. The novelty here is the somewhat harsh determination concerning pre-judgment interest. The defendants sought to overturn the award of pre-judgment interest as an abuse of discretion because they were innocent victims of fraud and should not have been penalized for defending themselves in court. J.A.B.A. argued that (1) there was no statutory basis for an award of pre-judgment interest under 11 U.S.C. § 548; (2) pre-judgment interest was inappropriate where the defendants did nothing wrong; (3) the trustee was responsible for any delay; and (4) the district court’s award of 4 percent interest was excessive and punitive. The Court of Appeals found that the lack of explicit authorization in the Bankruptcy Code for an award of pre-judgment interest was not dispositive, and that pre-judgment interest had been awarded against other similarly situated six defendants in related S.I.P.A. litigation. See, e.g., Securities Investor Protection Corp. v. 7 Bernard L. Madoff Investment Securities L.L.C., No. 08–01789 (S.M.B.), 2018 W.L. 8 1442312, at *15 (S.D.N.Y. Bankr. March 22, 2018), report and recommendation adopted, 9 596 B.R. 451 (S.D.N.Y. 2019 aff’d, 976 F.3d 184 (2d Cir. 2020); Picard v. Nelson, 610 B.R. 197, 238 (Bankr. S.D.N.Y. 2019); Picard v. BAM, L.P. , 624 B.R. 55, 65-66 (Bankr. S.D.N.Y. 2020). The court further held that wrongdoing by the Defendants was not a pre-requisite to an award of interest. While defendants certainly had a right to litigate their case, they benefited from other customers’ stolen property and had not returned it for over a decade. The Court of Appeals was satisfied that the district court appropriately balanced the equities and surveyed other cases where pre-judgment interest was awarded, ranging from 9 percent to 4 percent. S.I.P.C., 528 F. Supp. 3d at 246. Takeaway The moral of the story here is that when presented with a settlement offer, litigants and their lawyers must carefully analyze how interest impacts the litigation strategy and decide whether it is worth spending money and time pursuing appeals, not just based on existing case law, but the trend in which the law is moving and the reasons behind it. For further information, please feel free to reach out to Albena Petrakov.
September 30, 2022
