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BUSINESS RESTRUCTURING REVIEW
RECENT DEVELOPMENTS IN BANKRUPTCY AND RESTRUCTURING
VOLUME 3 NO. 1 JANUARY 2004
2003: THE YEAR IN REVIEWAfter 2002’s record-breaking volume of business bankruptcies, 2003 was bound to
be a bit of a letdown. Unlike personal bankruptcies, which continued to soar, busi-
ness filings declined nearly 8% in fiscal 2003 (from 39,091 to 36,183), according to U.S.
court officials. At year-end, public company chapter 11 filings dropped from 195 in
2002 to approximately 140, representing a decrease in total aggregate assets under
administration from $382 billion to $97 billion. Electric services provider Mirant Corp.
was the largest public company to file for chapter 11 in 2003. Closely on its heels
were energy producer NRG Energy, Inc. and insurer Trenwick Group Ltd. Rounding
out the top 15 largest public filings in 2003 were three telecoms (Touch America
Holdings, Inc., Leap Wireless International, Inc. and Allegiance Telecom, Inc.), one
retail chain (Speigel, Inc.) and representatives of eight other industries ranging from
oil and gas exploration to chemical production. Jones Day’s global team of restruc-
turing professionals was and continues to be actively involved in most of these
cases and a great many others.
Despite the decrease in filings, bankruptcy courts continued to provide a forum for
airing and attempting to remedy the ills of the beleaguered telecom, airline, health-
care and steel industries. The emergence of MCI, Global Crossing and AboveNet
(formerly Metromedia Fiber Networks) from chapter 11 in 2003 could be a sign that
better days are in store for a telecom industry still reeling from over expansion.
Still, analysts postulate that 2004 promises additional rounds of consolidation and
upheaval as companies scramble to snap up broadband capability and compete for
a share of the lucrative internet telephone market.
IN THIS ISSUE
1 Bankruptcy Strategy
A discussion of strategic considerations highlighted in 2003 ranging from claims trading to critical vendor motions and tax-free asset transfers under a plan of reorganization.
2 Legislative Update
A summary of breaking developments at home and abroad concerning bankruptcy, insolvency and related legislation.
3 Transnational Bankruptcies
As global commerce explodes, so too proliferates the number of cross-border bankruptcy cases, underscoring the need for comprehensive and coordinated judi-cial and legislative infrastructures to deal with them.
4 Noteworthy Decisions in 2003
A brief survey of the most notable court decisions reported in the Business Re-structuring Review in 2003. Review in 2003. Review
2
2003 also galvanized attention to developments abroad, as
European Union member nations and the rest of the world
grappled with a global economic downturn and the need to
reform outmoded insolvency laws to afford some measure
of relief for struggling businesses. Europe, like the U.S., was
tinged with corporate scandal in 2003. Italian dairy giant
Parmalat disclosed massive accounting indiscretions to the
tune of several billions of euros and filed for protection from
its creditors at the end of December with an estimated $9 bil-
lion dollar deficit. The war in Iraq showed that bankruptcy is
a national as well as a business issue: President George W.
Bush tapped former U.S. Secretary of State James Baker to
preside over one of the largest out-of-court debt restructur-
ings ever in an effort to deal with Iraq’s $120 billion national
debt.
We have attempted to keep you abreast of these
and other significant developments in bankrupt-
cy and insolvency during 2003 as they occurred.
This special edition of the Business Restructuring
Review will briefly recap what we believe to be
the most important events. Refer to the Business
Restructuring Review Cumulative Index for 2003 to
find a more detailed discussion of the issues and/or
cases involved.
■ BANKRUPTCY STRATEGY
2003 saw the emergence or continuation of a number of
trends that may affect strategic planning during or in antici-
pation of a bankruptcy case. One of these involved restric-
tions on claims trading. High profile chapter 11 cases involv-
ing foundering corporate giants like United Airlines, Conseco,
Kmart, WorldCom and Enron brought renewed attention in
The prognosis for the airline sector in 2004 isn’t much bet-
ter, notwithstanding U.S. Airway’s successful emergence from
bankruptcy in 2003. Federal loan guarantees issued to U.S.
carriers in the aftermath of the 2001 terrorist attacks did little
to shore up the industry, as tourists and businesspeople alike
thought better of traveling far afield while war and recon-
struction smolders in Iraq. The $2.75 billion scandal at Health
South is widely perceived by experts as merely the tip of an
iceberg that may fully surface in 2004 to plague the troubled
healthcare industry. Finally, consolidation of both the steel
and textile industries continued in 2003, owing in large part
to the efforts of financier Wilbur Ross. International Steel
Group, of which Ross is chairman, became one of the lead-
ing U.S. producers in May of 2003 with its $1.5 billion takeover
of bankrupt Bethlehem Steel Corp. Late in 2003, W.R. Ross &
Co. acquired textile giant Burlington Industries out of chapter
11 for over $600 million.
If 2002 was the year that the nation’s attention turned to cor-
porate responsibility, 2003 was the year that enforcement of
the new rules went into full swing. The headlines were littered
with the continuing sagas of corporate executives whose
indiscretions propelled corporate giants such as Enron,
WorldCom, Global Crossing, Adelphia Communications and
HealthSouth into bankruptcy in the last two years. 2004 may
see the same for companies embroiled in the late-breaking
mutual fund scandal. Perhaps as a testament, albeit belated,
to his foresight, 2003 marked the death of Marvin Bower, a
one-time Jones Day lawyer who more than 50 years before
the enactment of the Sarbanes-Oxley Act in 2002 lobbied for
the creation of restrictions on the ability of auditors to pro-
vide consulting services to the corporations whose books
they were auditing.
Reform was supposed to be the watchword on several fronts
in 2003, but with limited success. For the seventh year in a
row, lawmakers left on the table proposed amendments that
would effect the most sweeping changes to U.S. bankruptcy
law since 1994. The creation of a $10 billion trust to deal with
the spiraling asbestos litigation morass — a subject that also
got a significant amount of press coverage in 2003 — looked
as if it might succeed until negotiations concerning the extent
of contributions and victim recovery broke down late in 2003.
3
approach a potential bankruptcy filing and the best means to
preserve ongoing relationships with vendors deemed critical
to the success of a reorganization.
The utility of a bankruptcy case to facilitate the sale of a debt-
or’s property free of otherwise applicable transfer taxes was
the subject of the Third Circuit’s opinion in In re Hechinger
Investment Company of Delaware, Inc. The Court of Appeals Investment Company of Delaware, Inc. The Court of Appeals Investment Company of Delaware, Inc.
ruled that a transfer must be “authorized” by a plan of reorga-
nization to be eligible for the Bankruptcy Code’s tax exemp-
tion. From a strategic viewpoint, the decision is significant
because it limits a debtor’s options in deciding the best
means to derive value from its assets — i.e., by selling them i.e., by selling them i.e.
under a plan or in standalone non-ordinary course sale trans-
actions prior to confirmation.
■ LEGISLATIVE UPDATE
The rocky road to the most comprehensive overhaul of U.S.
bankruptcy laws since 1994 was once again paved with dis-
appointment in 2003. Congress never really took the mat-
ter up seriously this year, after the legislation died on Capitol
Hill in 2002 due to lawmakers’ inability to reach an accord
on a controversial provision in the proposed legislation that
would make certain debts incurred by abortion protesters
nondischargeable in a bankruptcy case. On March 19, 2003,
the House of Representatives resurrected the reforms, but
the measure was not taken up in the Senate as lawmakers
grappled with other legislative priorities, such as funding
the occupation of Iraq and sweeping Medicaid reform, and
looked ahead to next year’s presidential election. A behind-
the-scenes effort in December by Senators Charles Grassley
and Orrin Hatch to attach the measure to the catchall, year-
end bill to fund the government was not successful.
Reporting on legislative developments abroad
affecting bankruptcy, insolvency and restructuring
was a regular feature of the Business Restructuring
Review in 2003.
2003 to the role played by bankruptcy courts in regulating
the multibillion dollar distressed securities industry. This is
so chiefly because a significant volume of trading during a
bankruptcy case can cause the debtor to forfeit tax attri-
butes (e.g., net operating losses) that may be essential to the e.g., net operating losses) that may be essential to the e.g.
success of a reorganization. Debtors intent upon preserving
those attributes have increasingly looked to the bankruptcy
court as a means of limiting and in some cases precluding
stock and claim transfers — so much so, in fact, that NOL
preservation motions are almost routine in large chapter 11
cases.
Another major development during 2003 in the realm of
bankruptcy strategy pertained to “first day” motions. Chapter
11 debtors in large bankruptcy cases routinely seek court
authority at the inception of a case to pay the pre-bankrupt-
cy claims of certain “critical” vendors whose continued rela-
tionship with the debtor is deemed essential to a successful
reorganization. However, notwithstanding the prevalence of
the practice rationalized by the court-fashioned “doctrine of
necessity,” it is not specifically authorized in the Bankruptcy
Code. The absence of express authority led an Illinois district
court to conclude in Kmart Corporation’s chapter 11 cases
that the bankruptcy court erroneously authorized Kmart to
make over $280 million in “first day” payments.
Although the court was not the first to find that such pay-
ments are not authorized by the Code, the payments at issue
were unquestionably the largest ever to be deemed invalid.
Kmart, as it turned out, was able to confirm a plan of reorgani-
zation despite the ruling. Other debtors may not be so lucky.
Courts in the aftermath of Kmart have already begun to train
a more critical eye on routine critical vendor motions. For
instance, in Mirant Corporation’s chapter 11 case, the bank-
ruptcy court ruled that such payments will be authorized only
where the debtor can demonstrate that: (1) a continued rela-
tionship with the creditor is critical; (2) failure to do so creates
the risk of harm or loss of economic advantage to the estate
that is disproportionate to the amount of the creditor’s pre-
petition claim; and (3) there is no practical or legal alternative
by which the debtor can cause the creditor to deal with it
other than by payment of the pre-petition claim. These rul-
ings will undoubtedly cause debtors to rethink the way they
4
Canada, Britain, France, Bulgaria, Brazil, Thailand, Italy and
China are among the countries that took steps to overhaul
their insolvency laws in 2003. We will continue to keep read-
ers informed concerning these developments in the Review’s Review’s Review
periodic “Focus Abroad” feature articles. For example, a
detailed comparison of chapter 11 of the U.S. Bankruptcy
Code and the recently enacted U.K. Enterprise Act of 2002
accompanied the October 2003 edition of the Review (vol. Review (vol. Review
2., no. 10). The December edition (vol. 2, no. 12) described
proposed reforms to France’s insolvency laws designed to
establish a legislative framework comparable to chapter 11 of
the U.S. Bankruptcy Code.
■ TRANSNATIONAL BANKRUPTCIES
2003 saw more than its fair share of cross-border bankrupt-
cies involving competing proceedings in the courts of two
or more countries. As commerce continues to go global,
these cases highlight the need for lawmakers throughout
the world to devise a workable framework of rules govern-
ing insolvency proceedings involving companies, creditors
and investors from two or more countries based upon a spirit
of cooperation and mutual respect between and among sov-
ereign nations. U.S. lawmakers’ efforts to rise to this chal-
lenge by enacting new laws specifically designed to apply
to cross-border cases (in a new chapter 15 of the Bankruptcy
Code) once again came to naught when Congress adjourned
for another year without considering proposed bankruptcy
amendments that have long been stalled on Capitol Hill.
The long-heralded European Union Regulation on Insolvency
Proceedings finally became effective in 2002. Much specu-
lation ensued concerning the impact that it would have on
non-EU companies doing business in the EU and vice versa.
Some of the fallout was evident in 2003 based upon bank-
ruptcy/insolvency proceedings involving English and U.S.
companies. BRAC-Rent-a-Car saw a group of companies
incorporated in Delaware but whose operations were con-
ducted almost exclusively in England file parallel bankrupt-
cy cases in the U.S. and the U.K. Regus Group involved an
England-based and registered office property rental com-
pany with extensive operations in the U.S. filing for chapter
11 in the U.S. U.K. ferry operator Cenargo International PLC
and various affiliates filed for chapter 11 protection in the
U.S. in early 2003 even though Cenargo was incorporated in
England and its principal assets consisted of stock in sub-
sidiaries that were largely U.K. companies. Global commerce
means that these kinds of cross-border cases will continue
to proliferate.
NOTEWORTHY DECISIONS IN 2003
2003 did not lack for significant and sometimes troubling
developments in the bankruptcy and appellate courts regard-
ing a host of issues ranging from the scope of a creditor’s
rights in a bankruptcy case to the permissible parameters
of a chapter 11 plan of reorganization. Some of the most
noteworthy decisions that were analyzed in the Business
Restructuring Review in 2003 (in addition to those mentioned Restructuring Review in 2003 (in addition to those mentioned Restructuring Review
in the “Bankruptcy Strategy” section) are briefly discussed
below.
■ USE, SALE OR LEASE OF ESTATE PROPERTY
Asset sales free and clear of competing interests were the
subject of several opinions in 2003. In In re Qualitech Steel
Corp., the Seventh Circuit ruled that such sales are not lim-Corp., the Seventh Circuit ruled that such sales are not lim-Corp.
ited to liens and security interests, but can include a lessor’s
possessory interest under an unrecorded lease despite the
protections afforded to the interests of non-debtor lessees
in the Bankruptcy Code. In In re Trans World Airlines, Inc.,
the Third Circuit Court of Appeals ruled that the Bankruptcy
Code’s free and clear sale provisions apply to employment
discrimination and other successor liability claims. Finally, in
In re WDH Howell LLC, a New Jersey district court held that In re WDH Howell LLC, a New Jersey district court held that In re WDH Howell LLC
a chapter 11 debtor cannot sell real property free and clear
of all liens unless the sales price is greater than the aggre-
gate face value, rather than economic value, of all liens on
the property.
A debtor’s business judgment in deciding to sell assets was
called into question by a New York district court in In re Enron
Corp., where the court vacated a bankruptcy court order Corp., where the court vacated a bankruptcy court order Corp.
approving certain aspects of a sale involving affiliated debt-
ors because it may have been infected by self-dealing. The
finality of an order approving a bankruptcy asset sale was
the subject of the Eighth Circuit’s ruling in In re Trism, Inc.,
where the Court held that a committee’s appeal was moot
because it failed to obtain a stay pending appeal and the
5
aspect of the sale challenged by the committee was integral
to the transaction. In In re M Capital Corporation, the Ninth In re M Capital Corporation, the Ninth In re M Capital Corporation
Circuit bankruptcy appellate panel concluded that the “good
faith” harbor afforded to the buyer of an asset in bankruptcy
is available only if the court expressly includes a finding to
that effect in its order approving a sale on the basis of evi-
dence presented to it.
■ PLANS OF REORGANIZATION
Addressing the “cure” amount controversy to leave a credi-
tor unimpaired by reinstating a defaulted obligation and the
Bankruptcy Code’s dictate that a plan be proposed in good
faith, the Ninth Circuit Court of Appeals held in In re Sylmar
Plaza, L.P. that a plan “crafted solely” to deprive a secured Plaza, L.P. that a plan “crafted solely” to deprive a secured Plaza, L.P.
creditor of a contractual default rate of interest was unobjec-
tionable. The Eighth Circuit bankruptcy appellate panel dis-
cussed the circumstances that warrant extension of the peri-
od during which a debtor has the exclusive right to propose
and solicit acceptances for a plan of reorganization in In re
Hoffinger Industries, Inc., ruling that the bankruptcy court did Hoffinger Industries, Inc., ruling that the bankruptcy court did Hoffinger Industries, Inc.
not abuse its discretion in granting a third extension to the
debtor. In In re Dial Business Forms, Inc., the Eighth Circuit In re Dial Business Forms, Inc., the Eighth Circuit In re Dial Business Forms, Inc.
Court of Appeals ruled that the priority of a secured claim
granted to a creditor under a plan of reorganization vis-
à-vis the claims of other plan creditors was unaffected by
the secured creditor’s failure to file a continuation financing
statement required by applicable state law.
■ CLAIMS AND PROPERTY BELONGING TO THE
BANKRUPTCY ESTATE
Courts were called upon to adjudicate a number of significant
issues in 2003 related to the scope of the bankruptcy estate
and litigation commenced on behalf of the bankruptcy estate
by trustees, chapter 11 debtors-in-possession and other par-
ties. Whether the proceeds of a directors’ and officers’ insur-
ance policy constituted estate property was addressed by
a New York district court in In re Adelphia Communications
Corporation. Addressing a matter of first impression in the Corporation. Addressing a matter of first impression in the Corporation
Second Circuit, the court concluded that the proceeds were
not estate property because the proceeds were payable to
the officer and director beneficiaries under the policy and
the debtor had no interest in them.
In In re ORBCOMM Global, L.P., a Delaware bankruptcy court In re ORBCOMM Global, L.P., a Delaware bankruptcy court In re ORBCOMM Global, L.P.
ruled that public debt must be valued at face value rather
than market value to determine whether the issuer was sol-
vent at the time it made certain allegedly preferential trans-
fers. Standing to sue was the subject of the Second Circuit’s
ruling in In re The Bennett Funding Group, where the Court of In re The Bennett Funding Group, where the Court of In re The Bennett Funding Group
Appeals held that a debtor could not sue its pre-bankruptcy
professionals for malpractice and related claims because a
claim alleging that a third party defrauded a corporation with
the cooperation of management accrues to creditors under
state law.
In In re Metropolitan Electric Manufacturing Company,
a New York bankruptcy court concluded that claims or
causes of action belonging to the bankruptcy estate can-
not be sold to third parties unless the estate benefits from
the sale. The preclusive nature of a stipulated order allow-
ing a claim was addressed by a Delaware bankruptcy court
in In re Cambridge Industries Holdings, Inc., where the court In re Cambridge Industries Holdings, Inc., where the court In re Cambridge Industries Holdings, Inc.
ruled that the allowance of a claim pursuant to an agreement
between the creditor and an entity designated under a plan
of reorganization to resolve claims precluded the commence-
ment of preference litigation against the creditor. Finally, in
In re Farmland Industries, Inc., the Eighth Circuit bankruptcy In re Farmland Industries, Inc., the Eighth Circuit bankruptcy In re Farmland Industries, Inc.
appellate panel ruled that, because the bankruptcy court
never included a specific directive in its retention order that
success fees payable to a committee’s financial advisors
were to be paid from the entire pool of estate assets, such
fees had to be paid with funds that were earmarked for dis-
tribution to the committee’s constituency under the debtor’s
plan of reorganization.
■ CREDITOR’S RIGHTS
2003 saw several noteworthy decisions concerning the scope
of creditor rights in bankruptcy. Perhaps the most significant
of these was the Third Circuit Court of Appeals’ reconsidera-
tion of an issue it had first presided over in 2002. In In re
Cybergenics Corporation, the Court initially ruled that no one Cybergenics Corporation, the Court initially ruled that no one Cybergenics Corporation
other than a trustee or chapter 11 debtor-in-possession can
prosecute an avoidance action on behalf of the bankruptcy
estate. The decision was widely criticized as being con-
trary to the express language of the Bankruptcy Code itself
and bankruptcy practice according to which committees or
individual creditors are commonly authorized to bring litiga-
6
tion on the estate’s behalf. The Third Circuit later vacated its
ruling and agreed to rehear the case in 2003. The upshot
was an abrupt about-face. Observing in its opinion that “the
Code itself anticipates the existence of derivative standing”
and that “derivative standing is a prudent way for bankruptcy
courts to remedy lapses in a trustee’s execution of its fiducia-
ry duty,” the Court of Appeals reaffirmed the continued vitality
of a longstanding bankruptcy practice.
In In re Sunbeam Corporation, a New York district court held In re Sunbeam Corporation, a New York district court held In re Sunbeam Corporation
that the unqualified right of a creditor to intervene in an
adversary proceeding does not confer derivative standing
upon the creditor to prosecute estate claims. The interaction
between a creditor’s obligation to turn over estate property
to a bankruptcy trustee and its right to adequate protection
was the subject of a New York bankruptcy court’s decision
in In re Metromedia Fiber Network, Inc. The court held that In re Metromedia Fiber Network, Inc. The court held that In re Metromedia Fiber Network, Inc.
the creditor’s refusal to surrender collateral violated the auto-
matic stay and that its obligation to do so is not conditioned
upon adequate protection of the creditor’s security interest.
A Massachusetts district court addressed a senior creditor’s
right to post-bankruptcy interest under a subordination agree-
ment in In re Bank of New England Corporation, ruling that In re Bank of New England Corporation, ruling that In re Bank of New England Corporation
the language of a subordination agreement was not explicit
enough to warrant the payment of post-petition interest to
senior creditors before subordinated creditors could receive
a distribution from the estate. A creditor’s right to assign
its claim in a bankruptcy case was the featured issue in
Commodore Holdings, Inc. v. Exxon Mobil Corporation, where Commodore Holdings, Inc. v. Exxon Mobil Corporation, where Commodore Holdings, Inc. v. Exxon Mobil Corporation
the Eleventh Circuit Court of Appeals refused to impute an
assignee’s misconduct to the assignor and emphasized that
assigning a claim is not an unlawful collection practice. In
In re Bethlehem Steel Corporation, a New York district court In re Bethlehem Steel Corporation, a New York district court In re Bethlehem Steel Corporation
ruled that section 503(b) of the Bankruptcy Code is not
the exclusive mechanism for a creditor to recover expense
incurred in connection with a bankruptcy case.
■ EXECUTORY CONTRACTS AND LEASES
Continuing a split among the courts concerning payments
due under a nonresidential real property lease during a bank-
ruptcy case, the Tenth Circuit bankruptcy appellate panel,
in In re Furr’s Supermarkets, Inc., adopted the “proration In re Furr’s Supermarkets, Inc., adopted the “proration In re Furr’s Supermarkets, Inc.
approach” in ruling that a bankruptcy trustee need only pay
as an administrative expense that portion of a commercial
lease obligation that actually “accrues” after the case is filed.
The Seventh Circuit Court of Appeals presided over a similar
case in HA-LO Industries v. Center Point Properties Trust, rul-HA-LO Industries v. Center Point Properties Trust, rul-HA-LO Industries v. Center Point Properties Trust
ing that the proration approach does not apply to ordinary
post-petition rent such that a debtor must pay the monthly
rent due under a lease in full even if it rejects the lease and
surrenders the premises.
In RCC Technology Corp. v. Sunterra Corp., a Maryland district RCC Technology Corp. v. Sunterra Corp., a Maryland district RCC Technology Corp. v. Sunterra Corp.
court chose sides in a conflict that has been smoldering for
15 years, ruling that Bankruptcy Code section 365(c) does not
preclude the debtor from assuming a contract that cannot be
assigned nonconsensually under applicable non-bankruptcy
law.
■ FILING REQUIREMENTS
The Eleventh Circuit Court of Appeals, confronting a debt-
or that engaged in “bankruptcy abuse” by filing to prevent
a purchaser from acquiring property sold by the debtor
before undergoing a change in control, ruled in In re The Bal
Harbour Club, Inc. that the case should be dismissed as hav-Harbour Club, Inc. that the case should be dismissed as hav-Harbour Club, Inc.
ing been filed in bad faith. A creditor’s eligibility to file an
involuntary bankruptcy was broached by the Second Circuit
in In re BDC 56 LLC. There, the Court of Appeals, in a case of In re BDC 56 LLC. There, the Court of Appeals, in a case of In re BDC 56 LLC
first impression, ruled that an “objective” test must be applied
to determine whether an unsecured claim is subject to bona
fide dispute such that its holder cannot qualify as an involun-
tary petitioner.
■ AUTOMATIC STAY
The Second Circuit Court of Appeals ruled in Queenie, Ltd. v.
Nygaard that the automatic stay could be expanded to pre-Nygaard that the automatic stay could be expanded to pre-Nygaard
clude continued litigation against the debtor’s wholly owned
corporation because adjudication of a claim against the
corporation would have an “immediate adverse economic
impact” on the debtor.
■ PROFESSIONALS
In a decision indicative of an emerging trend among courts
assessing the propriety of indemnifying professionals
retained during a chapter 11 case, the Third Circuit Court of
Appeals, in a case of first impression, rejected any per se
ban on indemnifying financial advisors for ordinary negli-
7
gence in In re United Artist Theatre Corp. The Sixth Circuit In re United Artist Theatre Corp. The Sixth Circuit In re United Artist Theatre Corp.
bankruptcy appellate panel also weighed in on professional
retentions in 2003, ruling in In re Airspect Air, Inc., that a bank-In re Airspect Air, Inc., that a bank-In re Airspect Air, Inc.
ruptcy court can revisit its decision to approve the retention
of a professional under a special fee arrangement only if the
arrangement proves to be ill-advised due to circumstances
that could not have been contemplated at the time of the
retention.
A professional’s obligation to disclose potential conflicts
of interest before being retained in a bankruptcy case was
the subject of a New York district court’s ruling in In re Enron
Corporation. There, the court ruled that so long as counsel to Corporation. There, the court ruled that so long as counsel to Corporation.
the creditors’ committee disclosed its connections with other
parties involved in the bankruptcy case, it need not speculate
concerning how those connections might ripen into actual
conflicts that would preclude its employment.
■ ALLOWANCE AND PRIORITY OF CLAIMS
There were several interesting decisions in 2003 regarding
the validity and priority of creditor claims, including the prior-
ity claims of administering a debtor’s bankruptcy estate. In
In re Tama Beef Packing, Inc., the Eighth Circuit bankruptcy In re Tama Beef Packing, Inc., the Eighth Circuit bankruptcy In re Tama Beef Packing, Inc.
appellate panel held that a break-up fee payable to a poten-
tial (but disappointed) assignor under a letter of intent was
entitled to administrative status because it benefited the
estate by allowing the debtor to auction its lease. The prior-
ity of a subrogee’s claim was the subject of a New York dis-
trict court’s opinion in In re Premier Operations Ltd., where the In re Premier Operations Ltd., where the In re Premier Operations Ltd.
court ruled that a creditor’s claims against a debtor cruise
line based upon chargebacks associated with customer
deposits on travel tickets were not entitled to the same prior-
ity as the deposits themselves.
In re FBI Distribution Corporation dealt with the priority of an In re FBI Distribution Corporation dealt with the priority of an In re FBI Distribution Corporation
executive’s claims for severance pay under pre-bankruptcy
employment agreement. In that case, the First Circuit Court
of Appeals held that the executive’s claims would be entitled
administrative priority only if the debtor assumed her employ-
ee agreement after filing for bankruptcy. The consequence
of a post-petition lender’s failure to advance funds under a
final bankruptcy court order was illustrated by In re Visionaire
Corporation, where the 8th Circuit bankruptcy appellate panel Corporation, where the 8th Circuit bankruptcy appellate panel Corporation
held that part of the financing was not entitled to administra-
tive “super-priority” because it was advanced after the expi-
ration of an interim financing order.
Both In re Brown and In re Brown and In re Brown In re EXDS, Inc. dealt with proof of a In re EXDS, Inc. dealt with proof of a In re EXDS, Inc.
creditor’s claim. In the former, the Third Circuit Court of
Appeals ruled that an untimely filed proof of claim would
not be disallowed because a stay relief motion filed by the
creditor qualified as an informal proof of claim. In the latter,
a Delaware bankruptcy court denied a creditor’s request to
withdraw its claim and held that the creditor waived its right
to a jury trial in preference litigation by filing a proof of claim.
■ CONSTITUTIONAL CHALLENGES/POWER OF
BANKRUPTCY COURTS
In Hood v. Tennessee State Assistance Corporation, the Sixth Hood v. Tennessee State Assistance Corporation, the Sixth Hood v. Tennessee State Assistance Corporation
Circuit weighed in on the interaction between the Bankruptcy
Code and a state’s constitutional immunity from suit .
Departing from the majority view, the Court of Appeals ruled
that the Bankruptcy Code’s abrogation of sovereign immunity
is constitutional. The power of a bankruptcy court to treat a
debt obligation as if it were an equity interest was the sub-
ject of an Illinois district court’s opinion In re Outboard Marine
Corporation, where the court ruled that a bankruptcy court Corporation, where the court ruled that a bankruptcy court Corporation
has the inherent power to recharacterize debt as equity not-
withstanding the Bankruptcy Code’s omission of any express
authority to do so.
■ FROM THE TOP
Most of the U.S. Supreme Court’s decisions in 2003 involv-
ing bankruptcy issues dealt with consumer or individual
bankruptcies. However, the Court did address commercial
bankruptcy issues in one case. In FCC v. NextWave Personal
Communications, Inc., the Court held that the Bankruptcy Communications, Inc., the Court held that the Bankruptcy Communications, Inc.
Code prohibited the Federal Communications Commission
from revoking licenses auctioned to a telecommunications
company that later filed for bankruptcy due to the company’s
failure to pay the full amount of the purchase price in a time-
ly manner. The decision reaffirmed the broad scope of the
Bankruptcy Code’s protection of debtors against discrimina-
tory treatment by governmental entities. It also put an end to
protracted litigation that had for many years limited access
to dispute broadband capacity. The repercussions of the
decision were swift but predictable. NextWave was merely
one of many companies that prevailed at auction and later
found that the capital market for telecom development had
dried up. Closely on the heels of the NextWave ruling, the NextWave ruling, the NextWave
Tenth Circuit ruled in In re Kansas Personal Communications
Services, Ltd. that the FCC was barred from taking any action Services, Ltd. that the FCC was barred from taking any action Services, Ltd.
against broadband licenses awarded to the debtor without
first obtaining court authority to do so.
The Court later turned its sights on individual bankruptcies,
ruling in Archer v. Warner that a debt owed under a settle-
ment agreement in which an underlying fraud claim was
released in exchange for an obligation to pay on a promis-
sory note should be considered a debt for money obtained
by fraud such that it is not dischargeable in bankruptcy.
As of this writing, the Court had yet to issue rulings in three
cases that it heard in 2003. In Lamie v. U.S. Trustee, the Court Lamie v. U.S. Trustee, the Court Lamie v. U.S. Trustee,
must decide whether a chapter 7 debtor’s attorney can be
compensated by the bankruptcy estate even though amend-
ments to the Bankruptcy Code in 1994 omitted a debtor’s
lawyer from the list of professionals eligible for compensation
during a bankruptcy case. Three circuits have found the omis-
sion to be a scrivener’s error and continue to allow payment
from the estate; three other circuits have not. The Supreme
Court granted certiorari to resolve the split. On November 3, certiorari to resolve the split. On November 3, certiorari
2003, the Court heard argument in Kontrick v. Ryan, where it Kontrick v. Ryan, where it Kontrick v. Ryan
will decide whether procedural rules creating the deadline for
objecting to a debtor’s discharge in bankruptcy are manda-
tory and jurisdictional, and thus cannot be waived.
The High Court heard argument on December 2, 2003 in Till
v. SCS Credit Corporation. That case involves the “cramdown” v. SCS Credit Corporation. That case involves the “cramdown” v. SCS Credit Corporation
provisions of the Bankruptcy Code, which allow courts to con-
firm a chapter 13 plan even if a secured creditor objects, pro-
vided that the plan allows the creditor to retain its lien on the
collateral and offers the creditor property (usually a stream
of payments) that is not less than the value of the collater-
al. To calculate the amount of the payments, the court must
select an interest rate. Courts have used at least three differ-
ent methods for selecting the rate. Presumably, the Supreme
Court granted certiorari to establish a uniform rule.certiorari to establish a uniform rule.certiorari
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The Supreme Court was also busy in 2003 modifying vari-
ous procedural rules applying to bankruptcy cases. Notable
among the changes to the Federal Rules of Bankruptcy
Procedure that became effective on December 1, 2003. are
certain corporate disclosure requirements. Under the new
rules, a corporate debtor must disclose as part of its bank-
ruptcy filings the identity of any corporation owning 10% or
more of its equity. The amendments contain similar disclo-
sure requirements for a corporation that is party to an adver-
sary proceeding in a bankruptcy case. Other rules have
been modified to reflect the eligibility of multilateral clearing
organizations for bankruptcy relief.