Partially walking back her prior pronouncements suggesting that she would rule to the contrary (which we previously wrote about here), on October 13, 2021, District Court Judge Colleen McMahon denied the U.S. Trustee’s request for an emergency stay pending appeal of the Purdue Pharma confirmation order.  In a related order issued three days earlier, Judge McMahon had noted that she “fully” intended to grant the stay request so long as she had jurisdiction to do so.  In the end, however, the District Court was persuaded to deny the request based on the debtors’ agreement not to raise equitable mootness as a defense to the appeal and by the debtors’ commitment to provide 14 days’ advance notice of the plan going fully effective.  The U.S. Trustee had argued that a stay was still required, notwithstanding these conditions, given the weightiness of the issues at stake and the potential for later equitable mootness-related issues.  While sympathizing with this position, the District Court ultimately found that the U.S. Trustee had not shown a sufficient likelihood of any “concrete harm” that could arise between the date of the District Court’s ruling and the next-scheduled hearing on the nearly identical stay motion back in the Bankruptcy Court.  The District Court nonetheless emphasized that it would “not allow this appeal to be equitably mooted” and if, at any time, “it appears that imminent action might lead to that result,” the movants were invited to “knock on [Judge McMahon’s] door.”

Continue Reading Stay and Direct Appeal Requests Denied in Purdue Pharma; District Court Commits to Shielding Case from Equitable Mootness Concerns

In its August 5th, 2021 VeroBlue Farms decision,[1] the Eighth Circuit lent its voice to a growing body of criticism of the equitable mootness doctrine contending that its use to bar challenges to confirmed reorganization plans should be circumscribed.  Laying out a new investigation that must be undertaken before using the doctrine to bar confirmation order appeals, the Eighth Circuit emphasized that reviewing courts must: (1) make “at least a preliminary review of the merits” of an appeal to determine the strength of the claims at issue; (2) assess the “amount of time that would likely be required” to resolve the merits of such claims on an expedited basis; and (3) consider the potential equitable remedies that might still be available even after a plan’s implementation, should the appeal prove successful, which would not undermine the plan or harm third parties.

Continue Reading Mootness Muted? – Eighth Circuit Circumscribes Use of Equitable Mootness Doctrine to Bar Bankruptcy Plan Appeals

Perhaps proving the maxim that people should be careful what they wish for, in a second significant ruling stemming from the Jevic Holding Corp. bankruptcy case, on May 5, 2021, the US Bankruptcy Court for the District of Delaware found that Jevic’s Chapter 7 trustee, appointed following the conversion of the debtors’ cases from Chapter 11 to Chapter 7, did not have standing to continue claims originally brought against the debtors’ prepetition lenders by the Chapter 11 creditors’ committee. Assuming it is upheld on appeal, the decision leaves Jevic’s unsecured creditors without any further remedy against Jevic’s prepetition lenders—in other words, leaving those employees who successfully fought approval of a prior settlement offer by the same lenders all the way to the United States Supreme Court with no recovery from those lenders. Indeed, the decision appears to be a significant victory for secured lenders generally, underscoring the importance of “challenge” provisions typically included in DIP and cash collateral orders.

Continue Reading Be Careful What You Wish For: Jevic Court Denies Chapter 7 Trustee’s Substitution Request, Potentially Ending Action Versus Prepetition Lenders

With more than $1.7 trillion in student loan debt outstanding in the United States, student loan borrowers sometimes try to turn to the bankruptcy courts for relief, often without success due to the fact that most student loans are presumed to be nondischargeable.[1]  In its July 15, 2021 decision in In re Homaidan,[2] the Court of Appeals for the Second Circuit considered one aspect of this issue—whether certain private student loans made directly to a borrower are automatically presumed to be nondischargeable as “educational benefits” under Section 523(a)(8) of the Bankruptcy Code.  The Second Circuit found they are not, ruling against the appealing student loan lender.
Continue Reading Opinion of Interest – In re Homaidan: Not all Private Student Loans are Presumptively Nondischargeable in Bankruptcy

In a March 2021 decision in the jointly administered bankruptcy cases of Fencepost Productions, Inc. and certain of its affiliates, Judge Dale L. Somers of the Bankruptcy Court for the District of Kansas declined to enforce a voting restriction in subordination agreements between two of the debtors’ creditors, but nonetheless found that the deeply subordinated creditors were barred from voting on the debtors’ plan because they lacked prudential standing.[1] In declining to enforce the contractual voting restriction, the decision defies a trend toward enforcing subordination and intercreditor agreement terms – so long as they are specific and express – even if such terms may limit a party’s statutory rights as a creditor in bankruptcy. Instead, Judge Somers applied a federal court jurisdictional doctrine, the relevance of which can only be determined on a case-by-case basis.
Continue Reading In re Fencepost Productions: Prudential Standing Doctrine Blocks a Subordinated Creditor from Voting

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

Breaking with a Sixth Circuit decision to the contrary, in a March 2021 decision in Stewart v. Holland, the District Court for the Western District of Pennsylvania held that unfair labor claims brought by the Department of Labor against a debtor under the Fair Labor Standards Act (“FLSA”) were not barred by the automatic stay but could instead proceed under the “police powers exception.”1

Continue Reading Opinion of Interest – When the Automatic Stay is No Shield – Pennsylvania Court Holds that Government’s Unfair Labor Claims Are Subject to Police Power Exception

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.

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 recent opinion issued in the Cinemex theater bankruptcy cases, In re Cinemex USA Real Estate Holdings, Inc., Case No. 20-14695-BKC-LMI, 2021 WL 564486 (Bankr. S.D. Fla. Jan. 27, 2021), Judge Laurel M. Isicoff of the U.S. Bankruptcy Court for the Southern District of Florida ruled that while Cinemex was excused from paying rent under a lease for one of its Florida theaters for the time period during which Cinemex, and other non-essential businesses, were barred entirely from opening under Florida’s COVID shutdown orders, Cinemex’s obligation to pay rent was not excused, and the lessors were entitled to payment of rent as an administrative priority expense, once Florida’s shutdown orders were lifted and Cinemex was allowed to reopen, even if only at partial capacity.

Continue Reading Opinion of Interest – In re Cinemex:  COVID or Not, Parties Still Bound by Lease Terms

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.

Continue Reading Opinion of Interest – In re United Refining Company: Destruction of Records and the Accrual of Tort Claims