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Business Restructuring Review

Business Restructuring Review | May - June 2019

Second Circuit Rules That Bankruptcy Code's Fraudulent Transfer Recovery Provisions Can Reach Foreign Transferees

In In re Picard, Trustee for the Liquidation of Bernard L. Madoff Inv. Sec. LLC, 917 F.3d 85 (2d Cir. 2019), the U.S. Court of Appeals for the Second Circuit vacated a bankruptcy court order dismissing a trustee's litigation against various non-U.S. defendants to recover payments by a U.S. debtor that were allegedly avoidable as intentionally fraudulent transfers. The Second Circuit held that neither the "presumption against extraterritoriality" nor the doctrine of comity barred recovery because, among other reasons, the initial transfer occurred within the United States, meaning that the case involved domestic, rather than foreign, application of section 550(a) of the Bankruptcy Code, which authorizes recovery of fraudulent transfers from subsequent transferees. However, because the Second Circuit found that the case involved a domestic application of the provision, it "express[ed] no opinion on whether § 550(a) clearly indicates its extraterritorial application."

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New York District Court Rules That Chapter 15 Recognition Is Not Prerequisite to Enforcement of Foreign Bankruptcy Judgment Under Principles of Comity

In EMA Garp Fund v. Banro Corp., 2019 WL 773988 (S.D.N.Y. Feb. 21, 2019), the U.S. District Court for the Southern District of New York dismissed litigation against a Canadian company and its former CEO, finding that, under principles of comity, the lawsuit was barred by orders approving the company's Canadian bankruptcy proceeding and releasing all claims against the defendants. The district court did so despite the absence of any order issued by a U.S. bankruptcy court recognizing the Canadian bankruptcy proceeding under chapter 15.

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Fourth Circuit Bolsters Claims for Postpetition Attorney's Fees Incurred by Unsecured or Undersecured Creditors

In SummitBridge Nat'l Invs. III, LLC v. Faison, 915 F.3d 288 (4th Cir. 2019), the U.S. Court of Appeals for the Fourth Circuit ruled that an unsecured or undersecured creditor may include postpetition attorney's fees and costs as part of its allowed claim in a bankruptcy case. However, many lower courts in the circuits have taken the opposite position.

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Tribune District Court Rules That LBO Payments May Not Be Avoided Because Debtor Was "Customer" of "Financial Institution"

In In re Tribune Co. Fraudulent Conveyance Litig., 2019 WL 1771786 (S.D.N.Y. Apr. 23, 2019), the U.S. District Court for the Southern District of New York denied a litigation trustee's motion to amend a complaint seeking to avoid alleged fraudulent transfers made to selling shareholders as part of the debtor's 2007 LBO, ruling that the safe harbor in section 546(e) of the Bankruptcy Code continues to bar such claims notwithstanding the U.S. Supreme Court's decision in Merit Management Group v. FTI Consulting. According to the district court, payments made to shareholders as part of the LBO transaction were insulated from avoidance as constructive fraudulent transfers because Tribune hired a commercial bank to serve as the exchange agent for the transfers. As the "customer" of a "financial institution," the court reasoned, Tribune became a "financial institution" itself, thereby triggering application of the safe harbor and avoiding the strictures of Merit.

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In Brief: On Remand, Momentive Bankruptcy Court Rules That Cramdown Notes Should Bear "Process Efficient" Market Interest Rate

In In re MPM Silicones, LLC, No. 14-22503 (RDD) (Bankr. S.D.N.Y. Apr. 19, 2019), the U.S. Bankruptcy Court for the Southern District of New York issued an order on remand from the U.S. Court of Appeals for the Second Circuit's ruling in Momentive Performance Materials Inc. v. BOKF, NA (In re MPM Silicones, L.L.C.), 874 F.3d 787 (2d Cir. 2017), determining that the appropriate rate of interest on first-lien and 1.5-lien cramdown notes issued under the debtors' chapter 11 plan should be a "process efficient" market rate, even though "the existence of an efficient market for chapter 11 exit financing with a term, size and collateral comparable to the [cramdown notes] under traditional definitions of market efficiency was not established."

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From the Top in Brief: Nonjudicial Foreclosure Not Regulated by the FDCPA

On March 20, 2019, the U.S. Supreme Court ruled unanimously in Obduskey v. McCarthy & Holthus LLP, 17-1307, 2019 WL 1264579 (U.S. Mar. 20, 2019), that nonjudicial foreclosure is not subject to regulation under the Fair Debt Collection Practices Act.

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