Fraudulent Transfer

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

What You Need to Know About the Uniform Voidable Transactions Act

Last year, the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) rolled out one of its latest projects, the Uniform Voidable Transactions Act (“UVTA”).[I]  According to NCCUSL’s website,[ii] the model statute has already been enacted in eight states, including California (where it takes effect on January 1, 2016), and has been introduced in four others, including Massachusetts.

The first thing to know about the UVTA is that it is the Uniform Fraudulent Transfer Act (“UFTA”)[iii] with a new name and the legal equivalent of a fresh coat of paint. In a lengthy article about the drafting of the model statute[iv], the reporter for the NCCUSL drafting committee, Professor Kenneth C. Kettering, describes the model statute as “the UFTA, renamed and lightly amended.”  As light as the amendments may be, however, Kettering notes that they are “significant enough to warrant attention”[v]—significant enough, at least, to justify his publishing a 57-page law review article on the subject. The extensive “Official Comments” that were promulgated by NCCUSL along with the model statute also provide some insight into the thinking of the drafters, but Professor Kettering’s article is far more forthcoming about the reasoning behind the proposed statutory changes. Anyone who wants the full story should, therefore, consult Professor Kettering’s article.   We will try here instead simply to describe the most significant provisions in the new or, at least, improved model statute.

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Oregon Bankruptcy Court Denies Administrative Priority Status to Potential DIP Lender for Breakup Fee Claim

On April 8, 2014, Chief Bankruptcy Judge Frank R. Alley, III for the United States Bankruptcy Court for the District of Oregon found that Sunstone Business Finance, LLC’s claim against debtor C&K Market, Inc. did not constitute an administrative expense claim.  The claim arose from a breakup fee for proposed DIP financing after C&K selected an alternative DIP lender.

The Court denied Sunstone’s request for an administrative claim for two reasons.  First, the Court found that the breakup fee did not arise from a transaction with a debtor in possession because the parties executed the DIP term sheet prepetition.  Second, the Court found that Sunstone, as a potential lender, did not provide a direct and substantial benefit to the estate because the alleged benefits either occurred prepetition or were too indirect and intangible to qualify for priority treatment.  If this opinion were to gain acceptance beyond this case, it could chill prepetition offers to serve as new DIP lenders, or possibly even affect the market for stalking horse bidders in a section 363 sale.  In re C&K Market, Inc., No. 13-64561-fra11 (Bankr. D. Or. Apr. 8, 2014) [Dkt. No. 786].  Read More.

SDNY Holds Trustee Cannot Evade Section 546(g) Safe Harbor by Bringing Avoidance Action Under State Law

On June 11, 2013, Southern District of New York Judge Jed Rakoff dismissed the complaint of the Trustee for the SemGroup estate seeking to avoid a novation made to Barclays pre-bankruptcy under a swap agreement.  The Court held that the pre-bankruptcy transaction constituted a safe harbored transfer made in connection with a swap agreement and thus could not be avoided by the estate.  The Court held further that the safe harbor applied to actions brought under state law fraudulent transfer theories, not just those brought under federal law.  Judge Rakoff stated that to permit the trustee to proceed under state law would allow estates to evade the safe harbor by delaying litigation until post-bankruptcy.  Whyte v. Barclays Bank PLC, 12 Civ. 5318 (JSR), 2013 U.S. Dist. Lexis 82040 (S.D.N.Y. June 11, 2013).  Read More.