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In its recent opinion arising out of the Orexigen Therapeutics Inc. bankruptcy case, the US Court of Appeals for the Third Circuit affirmed that while a creditor retains its direct setoff rights against a debtor under Section 553 of the Bankruptcy Code when both it and the debtor owe debts to one another, so called “triangular” setoffs – setoffs relating to affiliated third party debts –  are not similarly protected, even if provided for contractually.1 In so holding, the Third Circuit became the first US circuit court of appeals to reach the issue and affirmed a substantial body of law on the topic developed by numerous lower courts.…
Continue Reading Opinion of Interest – In re Orexigen Therapeutics Inc.: “Mutual” Means Mutual Third Circuit Confirms that Triangular Setoffs not Entitled to Protection under Section 553 of the Bankruptcy Code

In its recent decision in Matter of First River Energy, LLC,1 the Fifth Circuit resolved a priority dispute between lienholders regarding their competing claims to cash held by the debtor, First River Energy, LLC. The cash at issue was the proceeds of a pre-bankruptcy sale of crude oil that the debtor purchased from certain producers (located in Texas and in Oklahoma) and then sold on to certain downstream purchasers. Following the debtor’s filing, each of the producers asserted a first-priority lien on the cash proceeds, as did the administrative agent for certain of First River Energy’s secured lenders. The administrative agent subsequently filed an adversary proceeding seeking to confirm its first priority status (senior to the producers), based on its perfection by the filing of a first-in-time UCC-1 financing statement with the Delaware Secretary of State in 2015. The two issues before the Bankruptcy Court were what law applied to the priority dispute (as between Delaware, First River’s state of organization, or Texas or Oklahoma, the locations of the producers and the oil sold) and, based on such choice of law, the priority of the parties’ liens. The Bankruptcy Court ruled that Delaware law applied and found that, under Delaware law, the administrative agent’s lien had priority over the lien of the Texas producers, but that the administrative agent’s lien did not have priority over the Oklahoma producers’ lien. The Fifth Circuit took an interlocutory appeal of the decision.
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Continue Reading Opinion of Interest – Matter of First River Energy: Some State-Specific Liens May be no More than “Amazing Disappearing Security Interests”

In a January 2021 decision issued in the re-opened United Refining Company1 bankruptcy case, Judge Lopez of the Southern District of Texas Bankruptcy Court addressed when a tort claim is deemed to arise for purposes of determining whether it was discharged.  In particular, the court had to determine whether an asbestos-related claim arose at the time of exposure (in other words, the time at which the damaging act occurred) or at the time when the harm is diagnosed (in other words, when the claim was discovered).  Complicating things for the court was a lack of records from the 1980s bankruptcy case at issue, which also led to uncertainty as to whether the claimant had notice of the bankruptcy.  That in turn could have led to the conclusion that his claim had not been discharged regardless of the court’s determination of when the claim accrued.  As discussed below, the Court concluded that the claim was a prepetition claim discharged under the plan, and that all creditors were bound by such plan absent a showing that there was no proper notice.
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Continue Reading Opinion of Interest – In re United Refining Company: Destruction of Records and the Accrual of Tort Claims

Mayer Brown partners Sean Scott and Aaron Gavant and associate Josh Gross discussed a recent decision arising out of the Samson Resources Chapter 11 case wherein the U.S. Bankruptcy Court for the District of Delaware concluded that securities transactions with a debtor in which the debtor itself is the “financial participant” may be protected from…

In a recent decision in In re Nuverra Environmental Solutions, Inc., No. 18-3084, 2021 WL 50160 (3d Cir. Jan 6, 2021), a divided Third Circuit panel held that an appeal of a Chapter 11 plan confirmation order was equitably moot and that the dissenting unsecured creditor who filed the appeal, David Hargreaves, was not entitled to individualized relief.  Under the confirmed Chapter 11 plan in Nuverra, secured creditors did not receive payment in full and creditors that were holders of prepetition unsecured notes, including Hargreaves, received cash and securities equal to only six percent of the face value of their note claims, while trade creditors were entitled to be paid in full.  The plan proponents described the full payment to these unsecured trade creditors as a “gift” from the secured creditors, who were undersecured based on the debtors’ enterprise value under the plan.
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Continue Reading Opinion of Interest – In re Nuverra Environmental Solutions, Inc.

In a new opinion issued in the Chuck E. Cheese bankruptcy cases, In re CEC Entertainment, Inc., Case No. 20-33163 (Bankr. S.D. Tex.),1 Judge Marvin Isgur of the U.S. Bankruptcy Court for the Southern District of Texas ruled2 that CEC Entertainment, Inc. (“CEC”), the parent company of the Chuck E. Cheese pizza chain, could not defer its rent obligations due to ongoing COVID-19 disruptions beyond the initial 60-day period authorized by section 365(d)(3) of the Bankruptcy Code.  While CEC had initially sought rent relief with respect to dozens of its store locations, it was able to settle with the landlords for all but six locations in North Carolina, Washington, and California; the non-settling landlords continued to insist that CEC was required to pay rent despite the global pandemic and CEC’s bankruptcy filing.  In its December 14, 2020 opinion, the court agreed with these landlords and rejected each of CEC’s arguments for its proposed relief, including that: (1) sections 105 and 365 of the Bankruptcy Code authorized the Bankruptcy Court to suspend CEC’s rent obligations beyond the 60-day period included in Section 365(d)(3); (2) the COVID-19 pandemic—and related restrictions put in place by state and local governments—constituted a force majeure event under each of the six leases at issue; and (3) CEC’s inability to fully utilize the leased premises as a result of state and local restrictions on indoor dining and entertainment entitled CED to a “frustration of purpose” defense with respect to each lease.
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Continue Reading Opinion of Interest – In re CEC Entertainment Inc.: COVID Disruptions Do Not Justify Additional Rent Deferrals Beyond Initial 60-Day Period Expressly Permitted by Bankruptcy Code

In Manikan v. Peters & Freedman L.L.P., No. 19-55393, 2020 WL 6938318 (9th Cir. Nov. 25, 2020) the Ninth Circuit Court of Appeals addressed whether a debtor was precluded from bringing a Fair Debt Collection Practices Act (“FDCPA”) claim against his homeowner’s association when the claim at issue was based…

Mayer Brown partners Sean Scott and Aaron Gavant and associates Tyler Ferguson and Alexander Berk discussed the United States Bankruptcy Court for the Southern District of Texas’ most recent decision arising out of the Ultra Petroleum Corp. bankruptcy case and its rulings that (1) make-whole premiums are allowed by the Bankruptcy Code under appropriate circumstances…