Restructuring and Finance Litigation partner Steven B. Smith recently met with Phil Neuffer, the Managing Editor of ABF Journal, to discuss the recent United States Supreme Court decision Siegel v. Fitzgerald, No. 21-441, in which the Court unanimously held that a significant quarterly  fee increase applicable to debtors in the United States Trustee

Last November, Judge John Dorsey of the Delaware Bankruptcy Court held in the Mallinckrodt chapter 11 case that the debtors did not have to pay a $94 million “make-whole” premium that was provided for in an indenture governing first lien notes. The indenture provides for automatic acceleration following an Event of Default, which includes a bankruptcy filing. Acceleration makes “the principal of, premium, if any, and interest on all the Notes . . . immediately due and payable . . . .”

A “make-whole” premium is a loan provision to compensate a lender if a borrower repays the debt before maturity for the loss of the lender’s anticipated yield, and can also be called “yield maintenance,” or a “redemption” or “prepayment” premium. The make-whole amount is typically the net present value of the interest payments that the lender would have received if the debt was paid at maturity. While make-whole premiums are generally enforceable under state law outside of bankruptcy, courts have rendered conflicting decisions on their enforceability in chapter 11. Economics drives the continuing bankruptcy court litigation over make-whole payments. For large bond issues, the make-whole amounts can often exceed nine figures.
Continue Reading Landmark Delaware Bankruptcy Court Ruling that Debtors Did Not Have to Pay Make-Whole Premium Was in Error, First Lien Lenders’ Argue on Appeal

The introduction in 2020 of subchapter V for small business chapter 11 cases was the biggest structural reform in business bankruptcies since the enactment of the Bankruptcy Code in 1978. Subchapter V was enacted in 2019 as part of the Small Business Reorganization Act and became effective in February 2020.  It was originally limited to cases with $2,725,625 or less in debt, but when Congress passed the CARES Act in 2020 in response to the COVID pandemic, it increased the subchapter V debt limit to $7.5 million. While that increase was originally scheduled to expire on March 27, 2021, it was extended through March 27, 2022.

Now there appears to be bipartisan support in Washington for making the $7.5 million debt limit permanent. Senator Charles Grassley, a ranking member of the Senate Judiciary Committee, who has had a long interest in reforms of the Bankruptcy Code, has said that he supports a permanent revision in the debt limit.
Continue Reading Congress May Consider Making $7.5 Million Debt Limit for Subchapter V Permanent: Should the Limit Be Increased?

On November 22, 2021, the United States Bankruptcy Court for the Southern District of New York announced a modification to its judge-assignment scheme for “mega chapter 11 cases.” Under the new Local Bankruptcy Rule 1073-1(f), which took effect on December 1, 2021, mega chapter 11 cases will be randomly assigned among each of the district’s

Some recent high profile restructuring debtors made multi-million dollar retention bonuses on the eve of bankruptcy filings. The U.S. Government Accountability Office (GAO) took notice of these pre-petition payments and, in September 2021, published a report with data showing that debtors may be “working around the [Bankruptcy] Code’s restrictions” by paying bonuses prior to filing

The U.S. Bankruptcy Court for the District of Delaware recently denied the US Trustee’s motion to compel post-confirmation quarterly fees from Paragon Offshore, plc under 28 U.S.C. § 1930.[1]

The court described the case’s facts as simple: Paragon (and some related entities) filed for Chapter 11 in early 2016. In June of 2017, its reorganization plan was approved. The plan established a litigation trust (the Paragon Litigation Trust) to pursue certain claims against third parties. The plan (and the litigation trust agreement) became effective in July of 2017, and the claims were transferred into the trust from July through September 2017 (without Paragon retaining any interest in or control over them). During that time, Paragon’s distributions exceeded $623 million, and Paragon paid the US Trustee the then-applicable maximum fee for those distributions under 28 U.S.C. § 1930.

In December of 2017, the litigation trust brought its claims against third parties. The case settled for $90.375 million (approved in February of 2021), and the settlement payments to the trust occurred in mid-March. The trust began distributing those payments to its beneficiaries, and the US Trustee moved to compel Paragon and the Paragon Litigation Trust to pay post-confirmation quarterly fees under Section 1930(a)(6) based on the trust’s payments to its beneficiaries.
Continue Reading Paragon Offshore, plc: US Trustee Denied Quarterly Fees Based on Litigation Trust’s Payments to Its Beneficiaries

On May 22, 2020, amidst the deepest possible gloom about COVID-19’s impact on travel, the car rental giant, Hertz Global, filed for Chapter 11. According to reporting by Barrons,[1] during the reorganization, Hertz drastically cut the size of its fleet and closed locations. Like most shareholders of bankrupt companies, Hertz owners were likely to

Brooks Brothers’ minority shareholders and unsecured creditors, TAL Apparel Ltd. (“TAL Apparel”) and its subsidiary Castle Apparel Ltd. (“Castle”), recently brought an action against the men’s retailer’s former owners, the Del Vecchio family. TAL Apparel and Castle allege bad faith and more than $100 million in damages for losses arising from

On May 11, 2021, Judge Harlin D. Hale dismissed the chapter 11 case filed by the National Rifle Association after finding that it was not filed in good faith. Judge Hale ruled that the case was “filed to gain an unfair litigation advantage” and to “avoid a state regulatory scheme,” which the Court found was “not for a purpose intended or sanctioned by the Bankruptcy Code.”
Continue Reading Texas Bankruptcy Court Dismisses NRA Bankruptcy Cases, Finding They Were Not Filed in Good Faith

In a recent appeal to the Second Circuit, Bronx Miracle Gospel Tabernacle Word of Faith (the “Church”), asks the Second Circuit for relief from the sale of its property by a bankruptcy trustee. The Church’s action seeks damages against the trustee and her counsel and the bankruptcy judge who approved the sale. The action claims that the Church’s religious rights under the Religious Freedom Restoration Act (“RFRA”) and the Constitution have been violated in the bankruptcy court. The Church’s appeal is the latest installment in a foreclosure battle that began with a mortgage loan in 2008. Although the Church has been largely unsuccessful in its years of litigation against its lender, this is nevertheless a cautionary tale about how a determined borrower can take advantage of the legal system to fight on for years to recycle previously dismissed claims and to promote claims of misconduct which lack substantiating evidence.
Continue Reading Bronx Miracle Gospel Tabernacle: Lender’s Nightmare Continues