Chapter 11

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Earlier this month, three student loan borrowers filed an involuntary Chapter 11 petition under 11 U.S.C. § 303(b)(1) for Navient Solutions LLC, a student loan servicer. Three or more entities who each hold a claim against an involuntary debtor can file an involuntary bankruptcy petition on that debtor’s behalf if each claim is neither a contingent liability nor the subject of a bona fide dispute as to liability or amount. The borrowers alleged that Navient is insolvent and wrongfully collected about $45,000 in loan repayments from the petitioners after their loans were discharged in bankruptcy. On February 17, 2021, Navient filed an expedited motion to dismiss the petition, arguing that it was frivolous and filed in bad faith by petitioners’ counsel: for an advantage in other Navient suits and to harm Navient’s reputation. Navient asserted that the petitioners failed to allege specific facts or provide documentary evidence supporting the debtors’ right to file under section 303(b)(1).
Continue Reading Navient’s Expedited Motion to Dismiss Student Loan Borrowers’ Involuntary Chapter 11 Petition

Greylock Capital Associates, LLC, a New York-based hedge fund founded in 2004, recently filed for chapter 11 protection under subchapter V for small businesses. Assets under management for Greylock have halved since 2017 and the hedge fund has cut its staff from 21 people to just nine now. Greylock filed to reject its $100,000 per month Madison Avenue lease that the hedge fund no longer needs. Greylock leased the 11,400 square foot premises in 2014, but when the fund’s growth stalled after its height in 2017 there was no need for such a large office in the heart of midtown Manhattan.
Continue Reading Greylock Capital Associates, LLC May Preview A Rash of Filings To Reject New York City Leases

Herrick congratulates its Restructuring & Finance Litigation Group on the success it has enjoyed over the last two years. The team, which now has 18 members and counting, has grown substantially while taking on a variety of complex litigation matters and Chapter 11 Restructurings. Below is a small sampling of our recent work.
Continue Reading Herrick’s Restructuring & Finance Litigation: 2019-2020 In Review

Introduction

In In re VP Williams Trans, LLC,[1] Judge Michael Wiles of the United States Bankruptcy Court for the Southern District of New York confirmed that a secured creditor may make an election under section 1111(b) of the United States Bankruptcy Code (the “Bankruptcy Code”) in a proceeding under subchapter V of the Bankruptcy Code for small business debtors. Judge Wiles’s decision appears to be the first decision on this issue in this Circuit since subchapter V of the Bankruptcy Code came into effect this year.
Continue Reading Bankruptcy Court Affirms Availability of 1111(b) Election in Subchapter V Cases

On August 11, 2020, the Second Circuit addressed the long-standing question of whether flip clauses are enforceable in bankruptcy. Affirming a Southern District of New York decision, the Court found in Lehman Brothers Special Financing Inc. v. Bank of America N.A. that flip clauses are protected under the safe harbor and therefore enforceable in bankruptcy.[1] Investors should take comfort that this decision puts the final nail in the coffin of the earlier controversial decisions in the Lehman Brothers chapter 11 proceedings that had ruled such provisions unenforceable.
Continue Reading Second Circuit Does Not Flip Flop on Enforceability of Flip Clauses

Dan Kamensky, the founder and principal of the prominent hedge fund, Marble Ridge Capital LP and Marble Ridge Master Fund LP (“Marble Ridge”), was arrested on Thursday, September 3, 2020, by the FBI, the most recent development in a dramatic chain of events in the Chapter 11 proceedings of retailer Neiman Marcus. According to the U.S. Attorney’s Office for the Southern District of New York, Kamensky’s criminal charges stem from his attempt to pressure a rival bidder to abandon its higher bid for assets in the Neiman Marcus bankruptcy – which would have allowed Marble Ridge to purchase the assets at a lower price – and then pressuring the rival to cover up the scheme.[1] Mr. Kamensky faces one count each of securities fraud, wire fraud, extortion, and obstruction of justice.[2] If convicted, Mr. Kamensky faces up to 50 years in prison. Also on September 3, the Securities and Exchange Commission filed a civil complaint against Mr. Kamensky alleging violations of the federal securities laws and seeking permanent injunctive relief and civil money penalties.[3] Mr. Kamensky appeared in federal court yesterday afternoon, at which the terms of his pretrial release were set, including a $250,000 bond. At the time of this article, a spokesman for Mr. Kamensky has declined to comment.
Continue Reading Hedge Fund Founder Faces Criminal and SEC Charges Based on Alleged Misconduct in Neiman Marcus Bankruptcy

In In re Pace Industries, LLC, Judge Mary Walrath of the United States Bankruptcy Court for the District of Delaware denied a motion to dismiss a chapter 11 where the debtor circumvented a preferred stockholder’s blocking rights by filing bankruptcy petitions without the preferred stockholder’s consent.[1] Judge Walrath ruled, in a decision that has not yet been published, that she was “prepared to be the first court” to find a stockholder’s blocking rights were invalid. Judge Walrath held that use of a blocking right to preclude access to bankruptcy relief was against public policy, and that a stockholder in possession of such a right has a fiduciary duty to act in the best interests of the corporation, and not its own interests. This decision suggests that blocking rights, which are commonly used in structured finance and real estate transactions to prohibit voluntary bankruptcy filings, may not always be effective.
Continue Reading Delaware Bankruptcy Court Voids Preferred Stockholder’s Right to Block Bankruptcy Filing

Introduction:

New York bankruptcy courts have long adhered to the 2007 ruling by the Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) in In re Enron Corp., 379 B.R. 425 (S.D.N.Y. 2007) (“Enron”), which held that Section 502(d) “disallowance taint” – the possibility that a bankruptcy claim may be disallowed if the claimholder received an avoidable, yet unpaid transfer – would not follow a claim that was sold, rather than assigned. However, an April 22, 2020 ruling by Judge Sean H. Lane in the case In re Firestar Diamond, Inc., 615 B.R. 161 (“Firestar Diamond”) reverses course, holding that a debtor could assert defenses against buyers of claims to the same extent that it had claims or defenses against the original owner of the claim.[1] Holding that disallowance taint travels with the claim, Judge Lane’s opinion effectively puts the onus on a would-be buyer to conduct diligence into the potential for a claim’s reduction, compensate for the risk in negotiating the purchase price for the claim, prepare for a future indemnity claim against the original seller, or otherwise protect its purchase.
Continue Reading S.D.N.Y. Bankruptcy Court Pivots from Enron; Holds “Disallowance Taint” Transfers With Purchased Claim in Firestar Diamond Case

Introduction

Creditors of an insolvent debtor may avoid certain transfers as fraudulent conveyances under state or federal law. A fraudulent conveyance is a transfer made without the transferor receiving adequate consideration and which satisfies one of three insolvency conditions: 1) the transferor was insolvent when the transfer was made; 2) the transferor was rendered insolvent by the transfer; or 3) the transferor was left with unreasonably small capital to carry on his/her or its business.[1]
Continue Reading S.D.N.Y. Bankruptcy Court Holds that Allegedly Fraudulent Conveyances are Safe Harbored Under Section 546(e) and Provides a New Avenue of Defense

In Rodriguez v. Federal Deposit Insurance Corp., the United States Supreme Court ruled on February 25, 2020, that a $4.1 million tax refund belonged to the bankruptcy estate of a failed Colorado bank’s parent company, United Western Bancorp, Inc. (“UWBI”), rather than to its subsidiary, United Western Bank (the “Bank”). The Federal Deposit Insurance Corporation (“FDIC”) is the receiver for the Bank.
Continue Reading The Importance of Clear Tax Allocation Agreements