Supreme Court

The Gorsuch Nomination: The Return of the Business Friendly Court?

 

President Donald Trump nominated Judge Neil Gorsuch, a federal appellate judge on the Tenth Circuit Court of Appeals, to fill the Supreme Court seat of Justice Antonin Scalia. Our Supreme Court and appellate team, led by partner Bob Loeb, took a look at Judge Gorsuch’s track record as a judge on key business issues like securities litigation, arbitration and bankruptcy, to speculate on his future as a potential justice. To read the full article, please click here.

Supreme Court Hears Oral Argument in Jevic on Whether Distribution of Settlement Proceeds May Depart From Statutory Priority Scheme

 

The United States Supreme Court heard oral arguments on December 7, 2016 in Czyzewski v. Jevic Holding Corp. The case poses a question that has divided the Second, Third, and Fifth Circuits: Whether a bankruptcy court may authorize the distribution of settlement proceeds in a way that departs from the statutory priority scheme in the Bankruptcy Code, including through a so-called “structured settlement.” READ MORE

Supreme Court to Resolve Circuit Split Over Structured Dismissals

 

The Supreme Court again will be addressing the powers of bankruptcy courts. At the end of the term, the Court granted certiorari in Czyzewski v. Jevic Holding Corp. to decide whether a bankruptcy court may authorize the distribution of settlement proceeds in a way that violates the statutory priority scheme in the Bankruptcy Code.  No. 15-649, 2016 WL 3496769 (S. Ct. June 28, 2016).  The Supreme Court is expected to address this fundamental bankruptcy issue sometime early next year. READ MORE

Not So Fast – Supreme Court Holds Prepetition Fraudulent Transfer Precludes Post-Petition Discharge in Husky International

One of the goals of the Bankruptcy Code is to provide a debtor with a fresh start. The discharge of prepetition debts at the conclusion of a bankruptcy case is one of the most important ways to attain this fresh start.  On May 16, 2016, the Supreme Court made it harder for debtors to obtain a fresh start by broadening an exception to discharge.

Section 523(a)(2)(A) of the Bankruptcy Code provides that an individual debtor is not discharged from any debt “for money, property [or] services … to the extent obtained by false pretenses, a false representation, or actual fraud[.]” Circuits split as to whether actual fraud under Section 523(a)(2)(A) requires an affirmative misrepresentation; the Fifth Circuit had held that this was a necessary element to prevent discharge, but the Seventh Circuit had held that “actual fraud” encompassed a broader range of behaviors.

The Supreme Court resolved this split, rejecting the Fifth Circuit’s narrow interpretation and finding that the term “actual fraud” does not need to include an affirmative misrepresentation by the debtor. With this broader reading, debtors will be unable to discharge prepetition debts where there is evidence that they inappropriately siphoned of their assets prior to filing for bankruptcy. Husky Int’l Elecs., Inc. v. Ritz, No. 15-145, 2016 WL 2842452 (U.S. May 16, 2016). READ MORE

Supreme Court to Decide Extent of Puerto Rico’s Sovereign Powers

On Wednesday, January 13, 2016, the U.S. Supreme Court will hear arguments in the appeal styled under the caption Commonwealth of Puerto Rico v. Sanchez Valle, No. 15-108. In this case, the Supreme Court is asked to determine whether Puerto Rico and the United States are separate sovereigns for purposes of the Double Jeopardy Clause contained in the Fifth Amendment of the U.S. Constitution. Puerto Rico wants to be able to prosecute crimes in its courts even though the federal government had already prosecuted respondents for those same crimes. In order to do that, Puerto Rico and the United States must be treated as separate “sovereigns.”

On December 23, 2015, the United States Solicitor General filed an amicus brief on behalf of the United States taking the position that Puerto Rico and the United States are not separate sovereigns for purposes of the Double Jeopardy Clause. The United States asserts that U.S. territories, such as Puerto Rico, are not sovereigns.[1] This position is contrary to the position taken by Puerto Rico. Instead, the United States asserts that territories are under the sovereignty of the United States and subject to the plenary authority of Congress. (Brief for the United States as Amicus Curiae Supporting Respondents (“U.S. Amicus Brief”) filed in Commonwealth of Puerto Rico v. Sanchez Valle, No. 15-108, at 7.) The United States argued that “In the Territories of the United States, Congress has the entire dominion and sovereignty, national and local, Federal and state, and has full legislative power over all subjects upon which the legislature of a State might legislate within the State.” (Id. at 16.) The United States further argued that “Puerto Rico’s transition to self-government did not change its constitutional status as a U.S. territory. The United States did not cede its sovereignty over Puerto Rico, and Puerto Rico did not become a State or an independent nation.” (Id. at 21). As stated previously, Puerto Rico takes the position that it is a separate sovereign and, as such, it is able to separately prosecute crimes in its courts even if the federal government has already prosecuted for the same crimes.

Sanchez Valle will be the first of two appeals to be heard by the U.S. Supreme Court this term involving Puerto Rico. As we had previously reported, by order dated December 4, 2015, the Supreme Court also agreed to consider the appeals by the Commonwealth and the Government Development Bank regarding the constitutionality of the Commonwealth’s Debt Enforcement & Recovery Act (DERA) in the appeals styled under the caption Puerto Rico v. Franklin California Tax-Free Trust, 15-233, and Acosta-Febo v. Franklin California Tax-Free Trust, 15-255 (the “Franklin Fund Appeals”).

The Supreme Court’s decision in Sanchez Valle could have an impact on the Supreme Court’s decision regarding the constitutionality of the DERA. In filing its amicus brief, the United States asserted that “The Court’s decision [in Sanchez Valle] . . . may affect the federal government’s defense of federal legislation and policies related to Puerto Rico across a broad range of substantive areas, including congressional representation, federal benefits, federal income taxes, bankruptcy, and defense.” (Id. at 1). The hearing on the Franklin Fund Appeals has not yet been scheduled, but briefs by the parties will be filed in the coming weeks.

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Update on Puerto Rico

Supreme Court to Determine Constitutionality of DERA

By order dated December 4, 2015, the US Supreme Court has agreed to consider the appeal by the Commonwealth and the Government Development Bank regarding the constitutionality of the Commonwealth’s Debt Enforcement & Recovery Act (DERA). In requesting the Supreme Court to consider its appeal, the Commonwealth stated that this case “presents a question of extraordinary importance and urgency and that the lack of a bankruptcy framework is hindering negotiations to reach a restructuring agreement.

For additional Puerto Rico updates, including information on the proposed Supervisory Oversight Board, continue below.

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Supreme Court Rules Against Fees For Fee Application Defense

Issuing its third bankruptcy ruling in a month, the Supreme Court held, by a 6-3 margin, that the Bankruptcy Code does not permit awarding fees to debtor’s counsel, when counsel incurred those fees defending its own fee application.  The Court held that services defending fee applications were not rendered to the debtor’s estate, and therefore the fees did not constitute “actual, necessary services”  payable under section 330(a)(1) of the Bankruptcy Code as reasonable compensation.  This decision could increase leverage on parties seeking to rein in bankruptcy litigation by threatening to challenge attorney’s fees.  Baker Botts L.L.P. et al. v. ASARCO LLC, No. 14-103, 2015 WL 2473336 (S. Ct. June 15, 2015) (hereinafter, the “Opinion”).

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The Unappealing Prospects For Debtors Whose Bankruptcy Plans Are Denied Confirmation

The United States Supreme Court decided a bankruptcy appeal on May 4th that holds that, even though creditors and others aggrieved by the confirmation of a bankruptcy plan can appeal the order confirming the plan as a matter of right, a debtor has no such right to appeal an order denying confirmation.  The basic logic employed by the Court is that an order confirming a plan moves the case forward and alters the rights of the parties, whereas an order denying confirmation does neither because the debtor can merely propose another, different plan.

The case is Bullard v. Blue Hills Bank,[1] an appeal from the Bankruptcy Court for the District of Massachusetts that made its way through the Bankruptcy Appellate Panel for the First Circuit and the First Circuit Court of Appeals.  The unanimous decision was authored by Chief Justice John Roberts.

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Momentive: Case Update

As an update to our prior blog post, on May 4, 2015, Vincent Briccetti, United States District Court Judge for the Southern District of New York, issued a decision affirming the Bankruptcy Court’s order confirming Momentive’s cramdown chapter 11 plan.  The decision was long awaited with the parties having completed briefing in December 2014.

Judge Briccetti followed the reasoning of the Bankruptcy Court and affirmed the use of the “formula” approach to determine the cramdown interest rate.  Under the formula approach, the cramdown interest rate is equal to the sum of a “risk free” base rate (such as the prime rate) plus a risk margin of 1-3%.  Judge Briccetti rejected the “efficient market” approach advocated by the first and 1.5 lien noteholders, affirming the view that rates should not include any profit to secured creditors.  Under the efficient market approach, the cramdown interest rate is based on the interest rate the market would pay on such a loan.

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Should Underwater Junior Liens Survive Bankruptcy?

This article is an excerpt written for the Distressed Download.  The full article is available here.

Introduction

On March 24th, the Supreme Court heard oral argument on the consolidated appeals of two decisions from the Eleventh Circuit Court of Appeals, Bank of America v. Caulkett[1] and Bank of America v. Toledo-Cardona.[2]  The appeals address an issue left unresolved by the Supreme Court’s decision in Dewsnup v. Timm:[3] that is, does section 506 of the Bankruptcy Code void, i.e., “strip off” a valid junior mortgage lien in a chapter 7 case if the mortgage loan is completely underwater.  These cases involve the treatment in chapter 7 bankruptcy cases of “undersecured” or “underwater” second-lien home mortgages.  Debtors who have granted such mortgages have no equity in their houses because the houses are worth less than the amount outstanding on the mortgage loans.

In a chapter 7 case, an individual debtor is able to obtain a discharge of his or her debts following the liquidation of the debtor’s non-exempt assets by a bankruptcy trustee, who then distributes the proceeds to creditors.  In Dewsnup, the Supreme Court held that section 506 does not permit an individual chapter 7 debtor to reduce (or “strip down”) a first-lien mortgage loan to the value of the real property where the amount owed is greater than the property value.  Relying on Dewsnup, every circuit court to consider the issue except the Eleventh Circuit has determined that section 506 also does not permit individual debtors to void completely underwater junior mortgage.[4]

Although the housing market has been rebounding in many jurisdictions, there are numerous properties subject to multiple mortgage liens that are worth less than the amount of the first-priority mortgage.  The Supreme Court’s resolution of the Caulkett and Toledo-Cardona cases will either ratify the trend of other circuits, which would benefit junior lenders, or overturn it, which would favor homeowners and first-lien mortgagees. A ruling prohibiting lien stripping also could severely impair the ability of business and individual debtors to use the statutory power to restructure and avoid liens in chapters 11, 12 and 13. Regardless of the outcome, the decision will have widespread ramifications through the secondary housing market.

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