In re Concepts America, Inc., 625 B.R. 881 (Bankr. N.D. Ill. 2021), weighs in on a murky question: Can a creditor make an administrative expense priority claim because it made a substantial contribution in a case under chapter 7? The court answered no.

In Concepts America, creditor Galleria Mall Investors LP moved the bankruptcy court for allowance and payment of an administrative expense claim pursuant to sections 503(b)(3)(A), (b)(3)(D), and (b)(4) of the Bankruptcy Code.

Around May 2011, the Galleria entered into a lease with a restaurant affiliated with Concepts America, which guaranteed the lease. The restaurant eventually breached the lease, and a Texas state court entered judgment against the restaurant and Concepts America.

The Galleria tried to collect its judgment for nearly a year. Eventually, on September 19, 2014, it joined two other creditors in filing an involuntary chapter 7 petition against Concepts America. About two months later, Concepts America consented to the entry of an order for relief under chapter 7.
Continue Reading Illinois Bankruptcy Court Weighs In on Chapter 7 Substantial Contribution Claims

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

The Great Atlantic and Pacific Tea Company, better known as A&P, recently moved for approval of a structured dismissal of its most recent chapter 11 case. Debtors seek structured dismissal of their chapter 11 cases when they cannot confirm a chapter 11 plan. In this case, the A&P estate is massively administratively insolvent, meaning that it can’t pay expenses that became due after the bankruptcy filing.

In theory, the bankruptcy judge, the United States trustee and the creditors committee monitor the case to prevent administrative insolvency; if a case becomes administratively insolvent, the case should be converted to chapter 7. But there is often an enormous reservoir of inertia among the case professionals to resist conversion, particularly in big cases, even where administrative insolvency is clear. The costs of that inertia are asymmetrical. Typically, the professionals receive all or most of their fees, while administrative creditors are involuntarily exposed to loss.
Continue Reading A&P Liquidation Will Pay Administrative Creditors Just $.20 on the Dollar: Is There a Better Way?

A decision in the Delaware District Court allowing nonconsensual third-party releases in plans of liquidation has a surprising origin – the Harvey Weinstein scandal.

In October of 2017, the Weinstein scandal exploded across the nation, bringing to light over 80 sexual assault allegations against Hollywood mogul Harvey Weinstein. Weinstein saw swift retribution: his businesses, The Weinstein Company Holdings and affiliates (the “Weinstein Debtors”), faced multiple lawsuits and filed for chapter 11 bankruptcy in March of 2018. Weinstein himself was arrested two months later. The scandal triggered the #MeToo social justice movement, empowering victims of sexual assault and harassment across the globe to voice their claims. Weinstein was ultimately convicted on two felony counts of sexual assault, and the chapter 11 proceeding involving The Weinstein Debtors is drawing to a close in the Delaware Bankruptcy Court.
Continue Reading Nonconsensual Third-Party Releases Not Limited to Plans of Reorganization

On January 28, Judge David Jones of the Bankruptcy Court for the Southern District of Texas sanctioned BP after finding that its conduct in an arbitration proceeding involving the Seadrill debtors amounted to a “willful, knowing, and intentional” violation of the Bankruptcy Code’s automatic stay provisions. Judge Jones also sanctioned BP by awarding Seadrill their attorneys’ fees and costs in bringing the motion.

Seadrill brought an emergency motion to enforce the automatic stay pursuant to Section 362 of the Bankruptcy Code in connection with a post-petition order issued by an arbitration tribunal that required Seadrill to post a $1.7 million bond should it lose the arbitration. If Seadrill did not post the bond, the arbitration would not continue.
Continue Reading Seadrill Bankruptcy Court Sanctions BP For Willful Violation of Automatic Stay in Arbitration Proceeding

On January 15, 2021, the Supreme Court unanimously ruled in City of Chicago v. Fulton that a secured party in possession of a debtor’s collateral does not violate the automatic stay by passively retaining possession after a debtor commences a bankruptcy case. When a debtor files a bankruptcy case, the Bankruptcy Code protects the debtor by imposing an automatic stay on efforts to collect prepetition debts or “any act . . . to exercise control over property” of the bankruptcy estate.
Continue Reading Recent Supreme Court Ruling Provides Important Protection for Secured Creditors

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

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