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Business Restructuring Review September-October 2023 | Vol. 22 No. 5

In This Issue:

Court's Broad Interpretation of Definition of "Securities Contracts" Promotes Expansive Scope of Bankruptcy Code "Safe Harbor"

In Petr v. BMO Harris Bank N.A., 2023 WL 3203113 (S.D. Ind. May 2, 2023), appeal filed, No. 23-1931 (7th Cir. May 17, 2023), the U.S. District Court for the Southern District of Indiana district court broadly construed the "safe harbor" precluding avoidance in bankruptcy of certain securities, commodity, or forward-contract payments to bar a chapter 7 trustee from suing under state law and section 544(b) of the Bankruptcy Code to avoid an alleged constructive fraudulent transfer made by the debtor shortly after it had been acquired in a leveraged buy-out ("LBO"). According to the district court: (i) all of the agreements related to the LBO acquisition were "securities contracts" for purposes of the section 546(e) safe harbor, which insulated from avoidance a transfer made by the debtor one month after the LBO to refinance a loan incurred as part of the transaction; (ii) the safe harbor is not limited to transfers involving publicly traded securities; and (iii) section 546(e) preempted the trustee's state law constructive fraudulent transfer claims. [read more …]

Texas Bankruptcy Court Blesses Serta Chapter 11 Plan Over Objections of Lenders Excluded from "Position Enhancement Transaction"

In In re Serta Simmons Bedding, LLC, 2023 WL 3855820 (Bankr. S.D. Tex. June 6, 2023), notice of appeal filed, No. 23-90020 (Bankr. S.D. Tex. June 6, 2023), stay pending appeal denied, No. 23-90020 (Bankr. S.D. Tex. June 21, 2023), stay pending appeal denied, No. 4:23-cv-2173 (S.D. Tex. June 29, 2023), direct appeals certified, No. 23-90026 (5th Cir. Sept. 18, 2023), the U.S. Bankruptcy Court for the Southern District of Texas confirmed the chapter 11 plan of bedding manufacturer Serta Simmons Bedding, LLC and its affiliates (collectively, "Serta"). In confirming Serta's plan, the court held that: (i) a 2020 "uptier," or "position enhancement," transaction ("PET") whereby Serta issued new debt secured by a priming lien on its assets and purchased its existing debt from participating lenders at a discount with a portion of the proceeds did not violate the terms of a 2016 credit agreement; (ii) the plan's nonconsensual exculpation provision was overly broad because it covered Serta's independent directors and managers, but was approved as amended to remedy this defect; (iii) the plan did not impermissibly indemnify lenders that participated in the PET; and (iv) distribution under the plan of $1.5 million to existing equity holders without paying in full the claims of nonparticipating lenders did not violate the "absolute priority rule" because equity provided "new value" in exchange. [read more …]

Circuit Split Widens on Extent of Abrogation of Sovereign Immunity for Governmental Units in Bankruptcy Avoidance Litigation

The federal circuit courts of appeals (and many lower courts) are split regarding whether the abrogation of sovereign immunity by governmental units under section 106(a) of the Bankruptcy Code with respect to avoidance actions commenced under section 544(b) also extends to the causes of action arising under applicable nonbankruptcy law that a "triggering" or "predicate" creditor could not assert under the nonbankruptcy law outside of bankruptcy due to sovereign immunity. The U.S. Court of Appeals for the Tenth Circuit weighed in on this debate as a matter of first impression in U.S. v. Miller, 71 F.4th 1247 (10th Cir. 2023). Expanding what had been a 2–1 majority in the circuit courts on this issue, the Tenth Circuit ruled that the abrogation of sovereign immunity in section 106(a) permitted a chapter 7 trustee to sue the Internal Revenue Service to avoid and recover a fraudulent transfer under section 544(b)(1), even though an eligible existing creditor could not have sued the IRS outside of bankruptcy. [read more …] 

Sixth Circuit: Equitable Mootness Does Not Bar an Appeal in a Chapter 7 Case

The court-fashioned doctrine of "equitable mootness" has frequently been applied to bar appeals of bankruptcy court orders under circumstances where reversal or modification of an order could jeopardize, for example, the implementation of a negotiated chapter 11 plan or related agreements and upset the expectations of third parties who have relied on the order. The doctrine, however, arguably contravenes the principle that federal courts have an obligation to address the merits of controversies that fall within their appellate jurisdiction. The U.S. Court of Appeals for the Sixth Circuit recently weighed in on one aspect of the debate. In In re Kramer, 71 F.4th 428 (6th Cir. 2023), a divided Sixth Circuit panel ruled that equitable mootness does not apply in a chapter 7 liquidation. The panel accordingly reversed a district court decision finding that appeals of bankruptcy court orders approving the fees of chapter 7 trustees and their attorneys were equitably moot and must be dismissed because the appellant failed to obtain a stay pending appeal. [read more …]

Ninth Circuit: Standard for Constitutional Standing Applies to Bankruptcy Appeals

In Clifton Capital Group LLC v. Sharp (In re East Coast Foods Inc.), 66 F.4th 1214 (9th Cir. 2023), as amended and rehearing denied, 2023 WL 5965812 (9th Cir. Sept. 14, 2023), the U.S. Court of Appeals for the Ninth Circuit reversed a district court ruling affirming a bankruptcy court order approving an award of enhanced fees to a chapter 11 trustee, concluding that the appellant lacked constitutional standing to appeal the fee order because any injury to the appellant was "too conjectural and hypothetical." In so ruling, the Ninth Circuit held that an appellant must satisfy the requirements for constitutional standing in the first instance rather than the more exacting "person aggrieved" standard. [read more …]

Seventh Circuit: No Avoidance of Preferential or Fraudulent Transfer Absent Diminution of the Estate

In Mann v. LSQ Funding Group, L.C., 71 F.4th 640 (7th Cir. 2023), reh'g denied, 2023 WL 4684702 (7th Cir. July 21, 2023), the U.S. Court of Appeals for the Seventh Circuit affirmed the entry of summary judgment by a Wisconsin bankruptcy court dismissing litigation commenced by a chapter 7 trustee seeking to avoid as a fraudulent and preferential transfer a pre-bankruptcy payment made by a third party to satisfy the debtor's obligation under a factoring agreement because the transferred funds were never "an interest of the debtor in property." The Seventh Circuit reasoned that the transferred funds did not diminish the amount available for distribution to the debtor's creditors because the funds were not estate property. [read more …]


Jeffrey B. Ellman (Atlanta)Thomas M. Wearsch (New York/Cleveland), Caitlin K. Cahow (Atlanta/Chicago), Gary L. Kaplan (Miami), Ryan Sims (Washington), Heather Lennox (Cleveland/New York), Daniel J. Merrett (Atlanta), Gregory M. Gordon (Dallas), Corinne Ball (New York),Hannah Rozow Owolabi (San Diego)T. Daniel Reynolds (Cleveland), Kevyn D. Orr (Washington), Aldo L. LaFiandra (Atlanta), Carl E. Black (Cleveland), Bruce Bennett (Los Angeles), Brad B. Erens (Chicago), Amanda S. Rush (Dallas), Genna Ghaul (New York), and Nicholas J. Morin (New York) were recognized in the 2024 edition of Best Lawyers™ in the field of "Bankruptcy and Creditor Debtor Rights/Insolvency and Reorganization Law."

Bruce Bennett (Los Angeles), Heather Lennox (Cleveland/New York), Corinne Ball (New York), Jeffrey B. Ellman (Atlanta), Caitlin K. Cahow (Atlanta/Chicago), Gary L. Kaplan (Miami), and Carl E. Black (Cleveland) were recognized in the 2024 edition of Best Lawyers™ in the field of "Litigation-Bankruptcy."

Fabienne Beuzit (Paris), Rodolphe Carrière (Paris), Elodie Fabre (Paris), and Isabelle Maury (Paris) were recognized in the 2024 edition of Best Lawyers in France™ in the practice area "Insolvency and Reorganization Law" and/or "Insolvency and Reorganization Law/Distressed Investing and Debt Trading."

Katie Higgins (Sydney) was included in the 2024 edition of Best Lawyers™ in the practice area "Insolvency and Reorganization Law/Distressed Investing and Debt Trading."

Juan Ferré (Madrid) was recognized in the 2024 edition of Best Lawyers™ in the practice area "Insolvency and Reorganization Law/Banking and Finance."

Roger Dobson (Sydney) was included in the 2024 edition of Best Lawyers™ in the practice area "Banking and Finance Law."

Ben Larkin (London) andSion Richards (London) were included in the 2024 edition of Best Lawyers™ in the practice area "Insolvency and Restructuring Law."

Olaf Benning (Frankfurt) was recognized in the 2024 edition of Best Lawyers™ in the practice area "Restructuring and Insolvency Law."

In the first-ever combined utilization of the U.S. Bankruptcy Code and the recently enacted Dutch restructuring law, automatic teller machine manufacturer Diebold Nixdorf, Incorporated and certain of its U.S., Canadian, and European subsidiaries (collectively, "Diebold") restructured more than $2.7 billion in debt through coordinated cross-border restructuring proceedings in just 71 days. Jones Day used all of its resources to achieve this monumental and historic outcome for its long-time client. Cross-practice and cross-office teams based throughout the United States and Europe guided Diebold through each step of the negotiations with creditors and dual court proceedings in the United States and the Netherlands. Members of the Jones Day team in the Business Reorganization & Restructuring Practice included Heather Lennox (Cleveland/New York), Jasper Berkenbosch (Amsterdam), Nicolas J. Morin (New York), Dan T. Moss (New York/Washington), Sid Pepels (Amsterdam), T. Daniel Reynolds (Cleveland), Matthew C. Corcoran (Columbus), Erik Schuurs (Amsterdam), and Ryan Sims (Washington).

Kevyn Orr (Washington) was featured in news coverage of the 10th anniversary of the Detroit bankruptcy filing and his role as Emergency Manager.

An article written by Corinne Ball (New York) titled "PETs, Winner Take All and New Protections for Independent Directors/Serta Confirms Plan" was published in the August 23, 2023, edition of the New York Law Journal.

Corinne Ball (New York) and Bruce Bennett (Los Angeles) were named to the "Hall of Fame" in the practice area "Finance: Restructuring (including bankruptcy): corporate" in the 2023 edition of The Legal 500 United States. Bruce was also named to the Legal 500 Hall of Fame in the practice area "Finance: Restructuring (including bankruptcy): municipal."

Heather Lennox (Cleveland/New York) was designated a "Leading Individual" in the 2023 edition of The Legal 500 United States in the practice area "Finance: Restructuring (including bankruptcy): corporate." She was also named a "Next Generation Partner" in the practice area "Finance: Restructuring (including bankruptcy): municipal."

Genna Ghaul (New York) is one of the lawyers named by the New York Law Journal as a "Rising Star," an award recognizing the New York legal community's emerging leaders.

An article written by Christopher DiPompeo (Washington) and Mark G. Douglas (New York) and titled "Supreme Court Roundup" was published on July 25, 2023, in Lexis Practical Guidance.

An article written by Daniel J. Merrett (Atlanta) and Mark G. Douglas (New York) titled "Delaware Bankruptcy Court Rules that Due Diligence Is Element of Preference Claim Rather Than Basis for Affirmative Defense" was published on July 25, 2023, in Lexis Practical Guidance.

Ben Larkin (London) and Hannah Plumb (London) recently coauthored a Jones Day Alert titled "Clintons Puts Its Cards on the Table: Part 26A Restructuring Plan Sanctioned," which discusses an August 24, 2023, ruling by an English court approving a restructuring plan for Esquire Retail Limited, trading as Clintons, with distinctive treatment of business rates. Clintons is one of the first mid-market companies to successfully achieve a cross-class cramdown through the use of a restructuring plan. 

An article written by Oliver S. Zeltner (Cleveland) and Mark G. Douglas (New York) titled "'Straight' Dismissal of Chapter 11 Case Did Not Violate Jevic's Prohibition of 'Structured Dismissals' That Do Not Conform with Bankruptcy Code's Priority Scheme" was published on July 25, 2023, in Lexis Practical Guidance.

An article written by Charles M. Oellermann (Columbus) and Mark G. Douglas (New York) titled "Liquidating Chapter 11 Plan Confirmed Despite Provision Temporarily Enjoining Litigation Against Corporate Debtors" was published on July 25, 2023, in Lexis Practical Guidance.

Lawyer Spotlight: Kathryn Sutherland-Smith

Kathryn Sutherland-Smith, of counsel in the Sydney and Melbourne offices, is an experienced insolvency and restructuring lawyer who has practiced law in Australia and in the United States. Kathryn strives to provide clients with innovative commercial solutions but is also adept working in contentious and litigious situations. Over the past decade, Kathryn has structured and implemented multibillion-dollar global reorganizations through schemes of arrangement, external administrations, and proceedings under chapters 11 and 15 of the U.S. Bankruptcy Code. She also has handled complex insolvency litigation and represented debtors and creditors in an array of out-of-court restructuring matters, including distressed M&A deals, capital markets transactions, and refinancings.

Kathryn works with private credit institutions, ad hoc creditor groups, companies experiencing financial distress, and external administrators. Her experience covers an array of industries including energy and resources, aviation, transport and logistics, real estate, financial services, and digital assets.

Highlights of Kathryn's company-side experience prior to joining Jones Day include representing: Hertz in its US$19 billion global restructuring; Swissport, the world's leading provider of airport ground services and air cargo handling, on its €1.9 billion recapitalization; and Constellation, a Brazilian offshore drilling operator, in its US$1.5 billion cross-border restructurings.

Recent creditor-side representations include advising an ad hoc group of bondholders holding more than US$630 million of unsecured bonds in the chapter 11 case of LATAM Airlines, and a U.S. private credit fund in connection with the distressed acquisition of Australian corporate and superannuation trustee Sargon Capital.

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