Federal district court judge Paul Gardephe recently spared Keleil Isaza Tuzman from additional jail time, despite Tuzman’s December 2017 convictions for securities and mail fraud, the latest twist in the long, strange saga of KIT Digital. Tuzman was the founder and former CEO of KIT Digital Inc., a publicly traded software startup that offered video management products, but which ended up bankrupt and is now called Piksel Inc. The US Attorney sought a prison term of 17.5-22 years for Tuzman.

Tuzman, and co-defendant Omar Amanat, who was sentenced to five years in jail and fined $175,000, were convicted on multiple counts of manipulating the stock price for KIT Digital and for defrauding investors in a hedge fund known as Maiden Capital.
Continue Reading Judge Spares Ex-CEO of Bankrupt KIT Digital from Additional Jail Time

Philadelphia Entertainment and Development Partners LP, the bankrupt limited partnership that did business as Foxwoods Casino Philadelphia (“Foxwoods”), will not be able to recover the $50 million it paid to the Pennsylvania Gaming Control Board for a slot machine license. Foxwoods planned to open a sizable slot machine facility in Philadelphia and paid for the license in 2007 before its location was final. Neighborhood opposition forced substantial delays and when Foxwoods missed a series of deadlines the Board revoked the license in December 2010.

Foxwoods filed for bankruptcy in 2014 after it unsuccessfully tried to get the license back in state court. In bankruptcy court, it brought a fraudulent transfer claim against the Commonwealth of Pennsylvania to recover the payment it made for the revoked license. The claim was initially dismissed in 2016, remanded on appeal, and then dismissed by the Eastern District of Pennsylvania on sovereign immunity grounds. Foxwoods appealed again, arguing it had a property interest in the revoked license. A sovereign immunity defense is not available in cases that further a bankruptcy court’s in rem jurisdiction. In other words, if Foxwoods had a property interest in the revoked license, the claim could move forward.
Continue Reading Recovering a Fraudulent Transfer? A Slot Machine License Is No Safe Bet.

On June 3, 2021, U.S. Magistrate Judge Nathanael M. Cousins ruled that ex-Theranos CEO Elizabeth Holmes could not assert attorney-client privilege to block disclosure of her communications with Theranos’s former counsel, Boies Schiller Flexner LLP, in connection with her upcoming criminal trial. Judge Cousins found that Holmes had not made it clear to Boies Schiller’s attorneys that she was seeking legal advice in her personal capacity, and as an executive of Theranos. As a result, her communications with Boies Schiller are protected only by Theranos’s corporate privilege, which the company had waived, and therefore could be used at trial against Holmes.
Continue Reading Lessons from US v. Holmes: Limits of the Attorney-Client Privilege in Communications with Corporate Clients and their Executives

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

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

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

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

On January 13, 2020, the Supreme Court denied petitions for writ of certiorari on the question of whether payments on municipal bonds secured by special revenues are required during the issuer’s bankruptcy. Special revenue bonds are paid from pledged revenues generated from a specific activity. The case arose because after the Puerto Rico Highway and Transportation Agency (PRHTA) commenced its municipal reorganization case in 2017, it refused to make a July 2017 payment of $219 million, arguing that the automatic stay of the Bankruptcy Code precluded such payments. That dispute followed actions by Puerto Rico’s governor and legislature in 2015 and 2016, in which they had diverted PRHTA’s special revenues, which consisted of tolls, motor fuels, taxes and other transportation-related revenues, for payment of the Commonwealth’s other obligations.
Continue Reading Bond Market Shaken (Not Stirred) As Supreme Court Declines To Hear Puerto Rico Municipal Bonds Dispute