Justia Bankruptcy Opinion Summaries

Hertz Corporation and its affiliates filed for Chapter 11 bankruptcy protection in May 2020 due to financial difficulties exacerbated by the COVID-19 pandemic. Despite initial bleak prospects, Hertz's financial situation improved significantly, allowing it to emerge from bankruptcy in June 2021 with a confirmed reorganization plan. This plan proposed to pay off Hertz's pre-petition debt, including unsecured bonds, but only at the federal judgment rate of interest for the bankruptcy period, rather than the higher contract rate. Additionally, Hertz did not pay certain make-whole fees, termed "Applicable Premiums," which were designed to compensate lenders for early repayment.The United States Bankruptcy Court for the District of Delaware initially ruled that the Noteholders were not entitled to the contract rate of interest or the make-whole fees, classifying the latter as disallowed unmatured interest under § 502(b)(2) of the Bankruptcy Code. The Noteholders appealed, arguing that as creditors of a solvent debtor, they were entitled to full payment, including contract rate interest and the Applicable Premiums.The United States Court of Appeals for the Third Circuit reviewed the case. The court held that the Applicable Premiums were indeed disallowed as unmatured interest under § 502(b)(2). However, it also determined that the Noteholders, as creditors of a solvent debtor, were entitled to post-petition interest at the contract rate, not the lower federal judgment rate. The court emphasized that the absolute priority rule, a fundamental principle of bankruptcy law, requires that creditors be paid in full, including contract rate interest, before any distribution to equityholders. Consequently, the court reversed the Bankruptcy Court's decision regarding the post-petition interest rate, affirming the Noteholders' right to contract rate interest and the Applicable Premiums. View "In re: The Hertz Corporation v." on Justia Law

Eric Gilbert filed for Chapter 7 bankruptcy, listing his interest in retirement accounts worth approximately $1.7 million. The issue was whether these accounts could be accessed by creditors due to alleged violations of federal law governing retirement plans. The Bankruptcy Court ruled that the accounts were protected from creditors, and the District Court affirmed this decision.The Bankruptcy Court dismissed the trustee John McDonnell's complaint, which sought to include the retirement accounts in the bankruptcy estate, arguing that the accounts violated ERISA and the IRC. The court found that the accounts were excluded from the estate under § 541(c)(2) of the Bankruptcy Code, which protects interests in trusts with enforceable anti-alienation provisions under applicable nonbankruptcy law. The District Court upheld this ruling, agreeing that ERISA's anti-alienation provision applied regardless of the alleged violations.The United States Court of Appeals for the Third Circuit reviewed the case and affirmed the lower courts' decisions. The court held that the retirement accounts were excluded from the bankruptcy estate under § 541(c)(2) because ERISA's anti-alienation provision was enforceable, even if the accounts did not comply with ERISA and the IRC. The court also dismissed McDonnell's claims regarding preferential transfers and fraudulent conveyances, as the transactions in question did not involve Gilbert parting with his property. Additionally, the court found no abuse of discretion in the Bankruptcy Court's decisions to dismiss the complaint with prejudice, shorten the time for briefing, and strike certain items from the appellate record. View "In re: Gilbert" on Justia Law

The case involves the Hertz Corporation and its affiliates, which filed for Chapter 11 bankruptcy protection in May 2020 due to financial difficulties exacerbated by the COVID-19 pandemic. Hertz emerged from bankruptcy a year later with a reorganization plan that promised to leave all creditors unimpaired, meaning their rights would not be altered. However, the plan paid unsecured noteholders post-petition interest at the federal judgment rate rather than the higher contract rate and did not include certain make-whole fees (Applicable Premiums) for early redemption of the notes.The United States Bankruptcy Court for the District of Delaware initially ruled that the noteholders were not entitled to the contract rate of interest or the make-whole fees, considering the latter as unmatured interest disallowed under § 502(b)(2) of the Bankruptcy Code. The court also ruled that the noteholders were not entitled to early redemption fees on the 2024 notes. The noteholders appealed, arguing that as creditors of a solvent debtor, they were entitled to post-petition interest at the contract rate and the make-whole fees.The United States Court of Appeals for the Third Circuit reviewed the case and determined that the make-whole fees (Applicable Premiums) must be disallowed as they fit the definition of unmatured interest under § 502(b)(2). However, the court agreed with the noteholders that they were entitled to post-petition interest at the contract rate because Hertz was solvent. The court emphasized the absolute priority rule, which requires that creditors be paid in full before equity holders receive any distribution. The court concluded that the Bankruptcy Code incorporates this rule, and thus, the noteholders must receive contract rate interest, including the Applicable Premiums, to comply with the absolute priority rule and fulfill the plan's promise to leave their rights unaltered. The court affirmed in part and reversed in part the Bankruptcy Court's decisions. View "The Hertz Corporation v. Wells Fargo Bank, N.A." on Justia Law

The case revolves around Tiffany Smith, who filed a voluntary petition for a Chapter 13 bankruptcy proceeding in May 2019. Smith owned a two-unit rental property in Newark, New Jersey, secured by a mortgage held by Freedom Mortgage Corporation. Smith filed a Chapter 13 payment plan in the Bankruptcy Court, which included a motion to partially void Freedom’s mortgage lien on the property and to reclassify Freedom’s underlying claim as partially secured and partially unsecured. Freedom objected to the plan, particularly the cramdown of its secured claim, the property's listed valuation, the property's rents being applied to reduce its secured claim, and the feasibility of the overall plan.The Bankruptcy Court held a hearing to address Freedom’s objections. During the hearing, Freedom clarified that it was not disputing the listed value of the property. The parties resolved their differences and filed a consent order, in which they agreed to the terms. The Bankruptcy Court confirmed the First Modified Plan, which reflected the terms of the Consent Order.Smith later filed a third modified plan, seeking to extend the payment term due to delinquent tenants and pandemic-related eviction moratoriums. Freedom objected to the Third Modified Plan, arguing among other things, that the plan was not feasible. The Bankruptcy Court held a hearing and concluded that the objections raised by Freedom were precluded by res judicata. The Bankruptcy Court then confirmed the Third Modified Plan in a written order. Freedom appealed the Bankruptcy Court’s order to the District Court, which affirmed it. Freedom then appealed to the United States Court of Appeals for the Third Circuit.The Court of Appeals affirmed the District Court’s decision, holding that res judicata precluded Freedom’s objections to Smith’s use of rental income to pay its secured claim, to the valuation of the property, and to the plan’s stepped-up payment schedule. The Court also concluded that the Bankruptcy Court did not clearly err when it determined the Third Modified Plan to be feasible. View "In re: Smith" on Justia Law

The case revolves around a dispute between Sanofi-Aventis U.S. LLC and Mallinckrodt PLC. Sanofi sold its rights in a drug to Mallinckrodt for $100,000 and a perpetual annual royalty. The drug was successful, but Mallinckrodt filed for bankruptcy and sought to convert Sanofi's right to royalties into an unsecured claim. Mallinckrodt aimed to discharge all future royalty payments and continue selling the drug without paying royalties, leaving Sanofi with only an unsecured claim.The bankruptcy court approved Mallinckrodt's discharge, ruling that since Sanofi had fully transferred ownership years ago, the contract was not executory. It also held that Sanofi's remaining contractual right to future royalties was an unsecured, contingent claim, which Mallinckrodt could discharge. The District Court affirmed these rulings.The United States Court of Appeals for the Third Circuit reviewed these rulings de novo. The court held that Sanofi's right to payment arose before Mallinckrodt filed for bankruptcy, making its royalties dischargeable in bankruptcy. The court rejected Sanofi's argument that the future royalties were too indefinite to be a claim, stating that the Bankruptcy Code allows for claims that are both contingent and unliquidated. The court also disagreed with Sanofi's assertion that bankruptcy cannot resolve its royalties claim because it will not exist until Mallinckrodt hits the sales trigger each year. The court ruled that a claim can arise before it is triggered, and most contract claims arise when the parties sign the contract. The court affirmed the lower courts' decisions, ruling that Sanofi's contingent claim arose before Mallinckrodt went bankrupt and is therefore dischargeable in bankruptcy. View "In re Mallinckrodt PLC" on Justia Law

This case involves Vertiv, Inc., Vertiv Capital, Inc., and Gnaritis, Inc., Delaware corporations, who sued Wayne Burt, PTE Ltd., a Singaporean corporation, for defaulting on a loan. Vertiv sought damages and a declaratory judgment. Later, Wayne Burt informed the court that it was in liquidation proceedings in Singapore and moved to vacate the judgments against it. The District Court granted the motion and vacated the judgments, reopening the cases. Wayne Burt then moved to dismiss Vertiv’s claims, either on international comity grounds in deference to the ongoing liquidation proceedings in Singapore, or due to a lack of personal jurisdiction. The District Court granted Wayne Burt’s motion to dismiss, concluding that extending comity to the Singaporean court proceedings was appropriate.On appeal, the United States Court of Appeals for the Third Circuit vacated the District Court's decision and remanded the case. The court clarified the standard to apply when deciding whether to abstain from adjudicating a case in deference to a pending foreign bankruptcy proceeding. The court held that a U.S. civil action is “parallel” to a foreign bankruptcy proceeding when: (1) the foreign bankruptcy proceeding is ongoing in a duly authorized tribunal while the civil action is pending in the U.S. court; and (2) the outcome of the U.S. civil action may affect the debtor’s estate. The court also held that a party seeking the extension of comity must show that (1) “the foreign bankruptcy law shares the U.S. policy of equal distribution of assets,” and (2) “the foreign law mandates the issuance or at least authorizes the request for the stay.” If a party makes a prima facie case for comity, the court should then determine whether extending comity would be prejudicial to U.S. interests. If a U.S. court decides to extend comity to a foreign bankruptcy proceeding, it should ordinarily stay the civil action or dismiss it without prejudice. View "Vertiv Inc. v. Wayne Burt PTE Ltd" on Justia Law

This case involves the bankruptcy of FTX Trading Ltd., a multibillion-dollar cryptocurrency company that suffered a severe financial collapse. The collapse triggered criminal investigations revealing fraud and embezzlement of customers' funds, leading to the conviction of Samuel Bankman-Fried, FTX's primary owner. Following the financial collapse, the United States Trustee requested the appointment of an examiner to investigate FTX's management as per 11 U.S.C. § 1104(c)(2). The Bankruptcy Court denied the motion, interpreting the appointment of an examiner as discretionary under the statute.The United States Court of Appeals for the Third Circuit reversed the lower court's decision. The Appellate Court held that the appointment of an examiner under 11 U.S.C. § 1104(c)(2) is mandatory when requested by the U.S. Trustee or a party in interest, and if the debtor's total fixed, liquidated, unsecured debt exceeds $5 million. The Court based its decision on the plain text of the statute, ruling that the word "shall" in the statute creates an obligation impervious to judicial discretion. The Court also held that the phrase "as is appropriate" in Section 1104(c) refers to the nature of the investigation and not the appointment of the examiner. The case was remanded with instructions to order the appointment of an examiner. View "FTX Trading, Ltd. v. Vara" on Justia Law

Kapitus purchased receivables from Delloso's company, Greenville Concrete, for $909,775. In 2013, Kapitus sued for breach of contract. Greenville defaulted on a subsequent settlement. Kapitus obtained a state court judgment against Delloso and Greenville for $776,600.25. In 2016, Delloso filed a Chapter 7 voluntary bankruptcy petition in which he listed the $776,600.25 debt and disclosed that his sole employer was “Bari Concrete.” The Bankruptcy Court notified the creditors of the last day to oppose dischargeability; the trustee explained that because this was a “no-asset case,” creditors should not file proofs of claim unless it appeared that assets would be available. Kapitus did not file a proof of claim. None of Delloso’s creditors filed adversary complaints. The Bankruptcy Court granted Delloso’s discharge and, in August 2016, closed the case. In 2021, Kapitus moved to reopen the case, alleging that it learned that Bari used the same addresses previously associated with Greenville, was controlled by Delloso, and appeared to be "a mere continuation of Greenville.”The Bankruptcy Court declined to reopen Delloso’s case under 11 U.S.C. 523(a) or revoke the discharge under section 727(d)(1) as obtained through fraud. The Third Circuit affirmed. Any complaint to assert that the debt was not dischargeable was untimely and the time could not be extended by equitable tolling. Even if Kapitus’s allegations were true, it could obtain appropriate and sufficient relief by suing Delloso and Bari in state court, which Kapitus had already done. View "In re: Delloso" on Justia Law

“Old Consumer,” a wholly owned subsidiary of J&J, sold healthcare products such as Band-Aid, Tylenol, Aveeno, and Listerine, and produced Johnson’s Baby Powder for over a century. The Powder’s base was talc. Concerns that the talc contained asbestos resulted in lawsuits alleging that it has caused ovarian cancer and mesothelioma. With mounting payouts and litigation costs, Old Consumer, through a series of intercompany transactions, split into LTL, holding Old Consumer’s liabilities relating to talc litigation and a funding support agreement from LTL’s corporate parents, and “New Consumer,” holding virtually all the productive business assets previously held by Old Consumer. J&J’s goal was to isolate the talc liabilities in a new subsidiary that could file for Chapter 11 without subjecting Old Consumer’s entire operating enterprise to bankruptcy proceedings.Talc claimants moved to dismiss LTL’s subsequent bankruptcy case as not filed in good faith. The Bankruptcy Court denied those motions and extended the automatic stay of actions against LTL to hundreds of non-debtors, including J&J and New Consumer. In consolidated appeals, the Third Circuit dismissed the petition. Good intentions— such as to protect the J&J brand or comprehensively resolve litigation—do not suffice. The Bankruptcy Code’s safe harbor is intended for debtors in financial distress. LTL was not. Ignoring a parent company’s safety net shielding all foreseen liability would create a legal blind spot. View "In re: LTL Management LLC" on Justia Law

Maxus Trust, represented by White, sued YPF, represented by Sidley. Boelter, a partner at Sidley, participated in Sidley’s initial pitch to represent YPF, helped negotiate the engagement letter, worked on motions, was admitted pro hac vice in the proceeding, was copied on correspondence, attended several meetings, and was considered as “an integral part” of YPF’s legal team. She billed 300 hours to the YPF representation.Lauria, a partner in White’s restructuring group, did not record any time related to the case. He was listed as counsel for a creditor during the Chapter 11 proceedings, but never entered an appearance. Sidley knew Boelter and Luria lived together; it is unclear whether YPF knew. Boelter moved to Luria’s firm, White, and immediately went through a conflict-screening process. White implemented an ethical wall on Boelter’s first day; obtained her acknowledgment that she would comply with it; and periodically certified her compliance. White did not give any portion of its fee from the YPF adversary proceeding to Boelter. White gave YPF written notice of Boelter’s employment the day she began with the firm, with an explanation of the firm’s and of Boelter’s compliance with the ABA Model Rules. YPF believed no screen could be good enough and moved to disqualify White from representing the Trust.The Third Circuit affirmed the Bankruptcy Court's denial of the motion. Exceptional circumstances did not exist to impute Boelter’s conflict to the entire firm despite a screen. View "In re: Maxus Energy Corp" on Justia Law