The Supreme Court declined to take up a case this month concerning the doctrine of equitable mootness, a topic that continues to rile bankruptcy courts and generate controversy amongst practitioners and scholars. The Eighth Circuit Court of Appeals recently described the doctrine as one that is “misleadingly” labeled, but which allows courts to dismiss an appeal from a bankruptcy court’s ruling because the appeal has been rendered moot due to “equitable, prudential, or pragmatic considerations.” In most situations, the appeal is “equitably” moot because the bankruptcy court’s order has already been implemented by the debtor by the time the appeal is heard. Meanwhile, in bankruptcy cases big and small, appeals primarily from confirmation plans are focused on the issue. With Courts of Appeals divided on the issue, it will continue to generate objections, expedited appeals, and uncertainty going forward. Continue Reading Equitable Mootness Doctrine Will Continue to Generate Controversy After Supreme Court Declines to Hear Appeal on the Issue

On September 23, 2021, United States Senators Elizabeth Warren (D-Mass.) and John Cornyn (R-Texas) introduced the Bankruptcy Venue Reform Act of 2021 (the “Venue Reform Act”), which would tighten the Bankruptcy Code’s venue rules for corporate debtors. A corporate filer would be limited to the district containing its principal place of business or the district where its principal assets have been located for the preceding 180 days. For a public company, the location listed in its SEC filings would be its presumptive principal place of business. The Venue Reform Act is intended to eliminate forum shopping by corporate debtors seeking to file their chapter 11 cases in traditionally debtor-friendly courts.  

This blog post describes some of the main changes that would go into effect if the Venue Reform Act were approved. The full text of the proposed Venue Reform Act may be found here: https://www.warren.senate.gov/imo/media/doc/SIL21A87.pdf  Continue Reading What the Bankruptcy Venue Reform Act of 2021 Could Mean for Corporate Debtors

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

The House of Delegates for the American Bar Association recently passed Resolution 512 urging Congress to amend the Bankruptcy Code to permit student loans to be discharged in bankruptcy without proving “undue hardship” as is currently required. The resolution was co-sponsored by the Young Lawyers Division, the Law Student Division and the Standing Committee on Paralegals. The Young Lawyers Division submitted a report in support of the resolution (the “YLD Report”) which discussed the history of student loans and borrowers’ ability to discharge them bankruptcy.

There is no question discharging student debt in bankruptcy is a hot political topic worthy of ABA attention. The Biden administration has forgiven over $9 billion in student debt and many congressional leaders call for complete student debt forgiveness. Since March 27, 2020, pursuant to the Coronavirus Aid, Relief and Economic Security Act, repayment of federal loans has been frozen. The freeze was extended several times and will not expire until at least January 31, 2022. We also wrote about the recent Second Circuit decision—Homaidan v. Sallie Mae, Inc.—which will make it easier for borrowers to discharge certain student debt in bankruptcy, even under existing law. The YLD Report explains how young lawyers are particularly affected: the average debt for law school graduates is around $145,000 (although the default rate for law school grads is traditionally better than the pre-freeze 11% figure for all student loan borrowers). Continue Reading Discharging Student Loan Debt: The ABA Takes a Stand

Student loans are a big issue in the United States. According to the most recent data by the Federal Reserve Bank of New York, there is currently $1.57 trillion in outstanding student debt, up from just $0.26 trillion 17 years ago.[1] Before the CARES Act suspended payments and interest accruals from August 2020-January 2022, student debt holders were also the most likely borrowers to be 90+ days delinquent, hovering around 11% from 2012 – 2019. Current bankruptcy law makes the discharge of most student loans extremely difficult; the borrower has to establish “undue hardship,” a term not defined in the Bankruptcy Code, but which has been interpreted very strictly against student borrowers. The stratospheric rise in total student debt has many causes, but the exemption from discharge in bankruptcy for student debt is one of the more contentious. After a recent decision by the Court of Appeals for the Second Circuit, the extent of that exemption may be narrowing. Continue Reading Discharging Student Loan Debt – Private Loans Are Not Always Exempt

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 <i>Paragon Offshore, plc: </i> US Trustee Denied Quarterly Fees Based on Litigation Trust’s Payments to Its Beneficiaries

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 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 be wiped out. But the economy is improving: travel has returned, Hertz’s creditors are being paid in full, and according to reporting by Barrons, its shareholders are getting a package of stock, cash, and warrants. According to reporting by Barons, the 30-year warrants have an unusually long exercise period – and therefore particularly valuable.

Because of the improving economy, investors that bought Hertz shares in the first quarter of 2021 will see gross returns of 300-400% with greater potential upside on the warrants. According to reporting by Barrons, even with the run-up since April, there is still potential for investors buying the reorganized company’s shares. It’s rare for public stockholders to do so well after a bankruptcy, but it’s not unknown. Hertz looks similar to the General Growth Properties case arising out of the 2008 financial crisis. There, as in Hertz, the economy rebounded, General Growth’s business improved, and equity recovered in full.

For most public companies in Chapter 11, equity ends up with nothing. But in rare cases a debtor’s business can soar back, leading to spectacular returns for investors with an eye for value and the stomach to endure the bankruptcy process.

[1] Andrew Barry, Hertz Is About to Exit Bankruptcy. Why Its Stock is a Buy (Barrons) (https://www.barrons.com/articles/buy-hertz-stock-51624661301?tesla=y)

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 <i>US v. Holmes</i>: Limits of the Attorney-Client Privilege in Communications with Corporate Clients and their Executives

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