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| vol 20, num 2 | October 2022 |
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| Pleading “Reasonable Due Diligence” Under the Amendment to § 547(b) (Preferences) |
| The Small Business Reorganization Act of 2019 (SBRA), Pub. L. No. 116-54 § 3(a), is probably the largest wholesale change to the Bankruptcy Code since BAPCA in 2005. Enacted in February 2020, the SBRA essentially created subchapter V of chapter 11 and made it easier for small business owners to keep their equity without having to liquidate and sell the remainder of their assets. However, in addition to creating subchapter V and making it easier for small businesses to reorganize, the SBRA also revised § 547(b) of the Bankruptcy Code with little fanfare associated with the change. Essentially, the amendment to § 547(b) requires a preference
plaintiff to take into account a defendant’s affirmative defenses prior to filing an adversary proceeding, noting that “the trustee may, based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses under subsection (c), avoid any transfer of an interest of the debtor in property.” |
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| Getting Paid: Section 326 and the Limits of Trustee Compensation |
| Chapter 7 panel trustees play an integral role in the bankruptcy system and perform a number of duties to effectively liquidate an estate for a debtor’s discharge. One of the trustee’s most important duties is to “collect and reduce to money the property of the estate ... and close such estate as expeditiously as is compatible with the best interests of parties in interest.” Chapter 7 trustees must also investigate the financial affairs of the debtor and evaluate any potential assets. |
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| Contractual Reasonableness May Override the Bankruptcy Code’s Exception for “Applicable Law” in IP Contracts |
| The Hawaii Bankruptcy Court’s ruling in In re Minesen Co. is a cautionary tale of how seemingly innocuous contract language can have unintended consequences — effectively waiving applicable nonbankruptcy law and overriding contract language to allow assignment without counterparty consent. Well-established federal law protects certain contracts (commonly IP contracts) from being assigned in a chapter 11 or other bankruptcy proceeding without counterparty consent. For example, courts have long held that nonexclusive licenses cannot be assigned without consent because they are personal and generally nonassignable under nonbankruptcy
law. After Minesen, however, whether these contracts are ultimately protected remains up for debate.
In Minesen, the bankruptcy court held that a contract counterparty had waived the protections of the Anti-Assignment Act applicable to federal government contracts by including language in the contract that provided that such party’s “consent [to assignment] will not be unreasonably withheld.” If applied broadly to intellectual property licenses, the holding of Minesen could potentially result in otherwise-protected intellectual property contracts being assigned in bankruptcy over counterparty objection, regardless of whether consent is being “reasonably” withheld.
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| The Career Clerkship: A Road Well Taken |
| In August 2001, after two state trial court clerkships, a short stay at a small, matrimonial law firm, and then a position as a staff attorney with a committee of our state supreme court, I declined an offer to work for Legal Services (the goal that had been the sole purpose of my entering law school in 1989) and accepted a one-year position as a shared (“swing) law clerk with the U.S. Bankruptcy Court for the District of New Jersey. It meant a significant salary reduction at a time when my spouse had just left his job to attend art school and potential unemployment for me at the end of the one-year term. But, as one mentor observed,
“Vocation is that which you can’t not do.” I stepped off the end of the board, and, grace upon grace, through a sequence of recommendations and one sad transition, the unstable year became 21 years, and I am on the brink of retiring from as long and fulfilling a career as one can have in court without serving as a judge. I found my calling as a lawyer and have enjoyed these past 21 years more than I could ever have anticipated. |
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| The Crypto Conundrum: Difficulties in Valuing Cryptocurrency Assets Held in Exchange Custody: Part One |
| Popular cryptocurrency exchange Coinbase surprised many in its first 2022 quarterly report when it informed customers that “custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy,... customers could be treated as our general unsecured creditors.” While Coinbase assured customers it was not in danger of bankruptcy and was issuing this guidance in accordance with new Securities and Exchange Commission guidelines, customers understandably panicked, resulting in a 15.6% drop in Coinbase’s stock price in after-hours trading. By way of background, crypto asset custody is an
agreement by which the record owner of crypto assets (the “record owner”) asks the exchange to hold the assets’ private keys in safekeeping for the benefit of the record owner. |
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