Creditors' Rights Law Blog
Bankruptcy
The Art of Eliminating a $13 Million Obligation
The Chapter 11 plan of Nikola Corporation wiped out the company's obligation to pay $13 million under a prepetition settlement agreement resolving a securities fraud class action. The result illustrates the power of Bankruptcy Code section 510(b) to transform certain categories of unsecured claims into equity-type claims. The underlying securities litigation arose from one of the most publicized corporate collapses of the last decade. Nikola was founded with an ambitious vision of developing hydrogen-powered and electric commercial vehicles. For a time, it became one of the market's most celebrated emerging clean-energy companies, achieving a multibillion-dollar valuation despite having only limited commercial operations. The company's fortunes changed dramatically after a series of public allegations that many of its statements concerning vehicle capabilities, technological achievements, development milestones, and commercial prospects were materially misleading. Investors alleged that they purchased Nikola stock at artificially inflated prices based on those representations. When contrary information became public through a series of corrective disclosures, Nikola's stock price declined sharply, generating substantial losses for shareholders. A securities class action followed in the United States District Court for the District of Arizona. The class plaintiffs alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. As is typical in securities fraud litigation, the claimed damages were tied directly to the decline in Nikola's stock price following the corrective disclosures. The theory was straightforward: investors allegedly paid more for Nikola shares than they otherwise would have paid had the market known the truth. Prior to its bankruptcy filing, Nikola and the class plaintiffs participated in mediation and reached a settlement memorialized in a January 2025 term sheet. Under the proposed settlement, Nikola agreed to pay the class $13 million in cash together with other consideration. The settlement appeared to transform a disputed securities fraud claim into a fixed contractual payment obligation. Indeed, the settlement term sheet contemplated that if Nikola later filed bankruptcy, it would seek court approval of the settlement under Bankruptcy Rule 9019. Less than a month later, however, Nikola commenced its Chapter 11 cases. The class plaintiffs filed a proof of claim asserting entitlement to at least the $13 million. At first glance, the claim appeared stronger than a typical unliquidated securities claim. The parties had already negotiated a resolution, agreed on a payment amount, and documented the settlement terms. Yet bankruptcy law focuses not merely on the form of a claim but on its origin. That distinction became outcome-determinative. Section 510(b) requires mandatory subordination of claims "for damages arising from the purchase or sale" of a debtor's securities. Congress enacted the provision to preserve the traditional risk allocation between creditors and shareholders. Creditors bargain for repayment. Equity investors bargain for potential upside while assuming the risk that the enterprise may fail. When an investor's losses stem from ownership or purchase of stock, section 510(b) generally prevents that investor from elevating those losses to parity with ordinary unsecured creditors. Nikola argued that the class claim, even after settlement, still arose from the purchase and sale of Nikola stock. The settlement had changed the amount of the claim, but not its essential character. The economic injury remained the same: losses allegedly suffered because investors purchased Nikola shares at inflated prices and later experienced a decline in value when the truth emerged. The bankruptcy court agreed, characterizing the claim as a textbook section 510(b) claim seeking damages measured by the diminution in value of the debtor's equity securities. As a result, Nikola's plan placed the securities settlement claim into a separate subordinated class reserved for claims subject to section 510(b). Because senior creditor classes were not being paid in full, the subordinated class was projected to receive no recovery. A claim that had been negotiated down to a $13 million settlement and appeared destined for payment outside bankruptcy was relegated to the bottom of the distribution waterfall and effectively eliminated. The class plaintiffs did not seriously dispute that section 510(b) applied. Instead, they focused on procedure, arguing that Nikola could not subordinate their claim through plan confirmation alone. According to the plaintiffs, the debtor was required to file a formal claim objection or commence an adversary proceeding before subordinating the claim. Both the bankruptcy court and the district court rejected that argument, concluding that section 510(b) subordination concerns priority and treatment rather than claim allowance and that Bankruptcy Rule 7001(h) expressly permits subordination to be implemented through a chapter 11 plan. The lesson from Nikola is that a settlement agreement may create a contractual right to payment. Still, it does not necessarily erase the nature of the underlying injury that gave rise to the obligation. Where the economic reality remains shareholder loss arising from the purchase or sale of the debtor's stock, section 510(b) may continue to apply. In Nikola, that principle transformed a seemingly fixed $13 million settlement obligation into a subordinated claim that ultimately recovered nothing.
September 29, 2026
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
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
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
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
