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
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 Brooks Brothers bankruptcy. TAL Apparel alleges that the Del Vecchio family did not engage “in good faith” with potential buyers in 2019, and “put their own financial interests ahead of the Company” by refusing to pursue bids for acquisition prior to filing for chapter 11 in 2020. According to TAL Apparel and Castle, Brooks Brothers was sold for $325 million to SPARC group in 2020, “for a fraction of the price set forth in the 2019 bids.” This case will test the extent of protection provided to business owners who liquidate in chapter 11.
The case is Castle Apparel Ltd. et al. v. Del Vecchio et al., No. 1:21-cv-04406, (S.D.N.Y. 2021).
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 an anomalous decision by the Bankruptcy Court in the District of Kansas, the court declined to enforce the voting provisions in subordination agreements that allowed the senior creditor to vote on behalf of a group of subordinated creditors. Reversing a trend of enforcing express voting restrictions in intercreditor agreements, the court invalidated the voting provision at issue, yet ultimately barred the subordinated creditors from participating in the confirmation process entirely. The decision bucks the trend of enforcing intercreditor agreements that limit the voting rights of junior creditors, but nevertheless, holds that such creditors can be precluded from exercising other rights to participate in a chapter 11 case.
The Debtor—Fencepost Productions Inc., a designer and distributor of outdoor clothing, together with its related debtors—filed for chapter 11 in late 2019. In 2018, the Debtors’ principal creditor, Associated Bank, N.A. (“Associated”), made a $14 million secured loan. At the same time, a group of unsecured creditors, BMS Management, Inc. and related individuals (collectively the “BMS Group”), entered into subordination agreements with Associated, under which Associated had the right to vote the claims of the BMS Group. Continue Reading Voting Rights Provisions in Intercreditor Agreements May Not Be Enforceable As Expected
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
Despite a relatively strong 2020, New York Classic Motors, LLC, a unit of Classic Car Club Manhattan, filed for chapter 11 protection on April 9, 2021. Classic Car Club Manhattan is a private club where members can drive an impressive fleet of luxury vehicles both new and restored classics. Members are also entitled to attend a calendar of events and access the private clubhouse on the Hudson River. The clubhouse is located at Pier 76, 408 12th Avenue, near the Javits Center in Manhattan. New York Classic Motors holds the lease on the clubhouse and is a tenant of Hudson River Park.
In an interview, Classic Car Club Manhattan’s co-founder called the bankruptcy a “defensive move” to preserve its clubhouse space after Hudson River Park gave notice in January that it needed to vacate the space as part of a planned development even though the club had more than four years remaining on the lease. Because of the filing, the club will be able to continue operations at Pier 76 while the case is pending. The club has not filed a declaration or disclosure statement yet. Continue Reading Car Club Seeks Chapter 11 Protection Despite Growing Membership in “Defensive Move”
A First Department decision from last month makes it harder for mezzanine borrowers to enjoin UCC foreclosure sales.
When there is a default under mezzanine loan documents, the lenders can retake their collateral by noticing and conducting foreclosure sales under the UCC. But mezzanine borrowers can seek relief from a court to enjoin UCC foreclosure sales.
During the COVID-19 pandemic, some borrowers succeeded in preventing mezzanine lenders from exercising their rights to a prompt UCC sale by obtaining injunctive relief in New York courts. One example was in the supreme court decision appealed from in Shelbourne BRF LLC v. SR 677 Bway LLC, No. 2020-03604 (1st Dep’t Mar. 4, 2021). The supreme court granted plaintiff borrowers’ motion for a preliminary injunction and enjoined a UCC foreclosure sale of interests in LLCs. Continue Reading Prospective Loss of Equity Is No Basis to Enjoin a UCC Foreclosure, Appellate Division Holds
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