Digest of Recent “Deepening Insolvency” Cases and an Index of Deepening Insolvency Cases and Articles
Views from the Bench and Bar Presentation: Recent “Deepening Insolvency” Cases
In connection with the failure of two leasing corporations allegedly operated as a “Ponzi scheme,” an unsecured creditors committee brought claims on behalf of the debtors against the individuals allegedly responsible for perpetrating the scheme, including third-party professionals. On an appeal from the district court ruling dismissing certain claims against the debtors’ independent underwriters, R.F. Lafferty & Co., the Third Circuit held that “deepening insolvency” constitutes a valid cause of action under Pennsylvania law but that the committee was asserting the claims against Lafferty because the committee, having the status of the debater corporations, was in pari delicto with the sole shareholder that had perpetrated the fraud.
Read the full article. (Materials from the 2006 Delaware Views from the Bankruptcy Bench and Bar)
Reverse Cramdown in the Brave New Post-Armstrong World
by John P. Whittington
HealthSouth Corp.; Birmingham, Ala
Christopher L. Hawkins
Bradley Arant Rose & White LLP; Birmingham, Ala
The basic purpose of chapter 11 is to provide the debtor an opportunity to rehabilitate through a confirmed reorganization plan. The Bankruptcy Code provides the debtor considerable flexibility in operating its business, including the ability to assume or reject leases and contracts, obtain financing and sell assets during the bankruptcy case. The Code, however, contains limitations on how the debtor may emerge from bankruptcy through confirmation of a chapter 11 plan. Without limitation, and as set forth in more detail below, §1129 of the Bankruptcy Code contains an extensive list of requirements that must be met in order to confirm a plan. With a consensual confirmation, all classes of creditors and investors accept the plan or are not impaired. In a “cramdown” confirmation, one or more impaired classes and have rejected or are deemed to reject the plan, and the debtor may obtain confirmation only if the plan is determined to be fair and equitable and does not discriminate unfairly.
Read the full article. (Materials from the 2006 Southeast Bankruptcy Workshop)
Business Bankruptcy Developments under BAPCPA and other Current Issues
Prof. Jack F. Williams
Georgia State University College of Law; Atlanta
Susan H. Seabury
BDO Seidman, LLP; Atlanta
Historically, the months and days prior to the filing of a bankruptcy case were spent getting financing in order, determining what professionals needed to be hired, determining who may be a critical vendor, and like activities. With the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), those activities are still important, but a few additional items need to be added to the list: ensuring necessary goods are available, but not purchased within 45 days of the petition if not covered by a floating lien; ensuring that goods that will not be used immediately prior to the filing or post-petition are not ordered within 20 days of the petition date; the analysis process for nonresidential real property leases needs to be substantially underway, particularly if there are a significant number of leases; and some idea regarding the exit strategy needs to be considered, particularly if there are competing constituencies that may wish to offer differing plans.
Read the full article. (Materials from the 2006 Southeast Bankruptcy Workshop)
Post-CitX Recent Development in Deepening Insolvency
The Delaware Chancery Court issued a significant opinion last week, (8/10/06), essentially stating that Delaware does not recognize a claim for deepening insolvency. In the court's view, existing causes of action for breach of fiduciary duty, fraud or breach of contract sufficiently cover the landscape. The court emphatically defended directors and other fiduciaries and their right to the protection of the business judgment rule - specifically, the court stated: “...the words ‘zone of insolvency’ should not declare open season on corporate fiduciaries.” See Trenwick America Litigation Trust v. Ernst & Young, L.L.P. et al., C.A. No. 1571-N (Delaware Chancery Court, New Castle County 08/10/06).
This decision comes on the heels of a handful of cases recently reigning in the “cause of action” for deepening insolvency - including the CitX case discussed here, in the ABI Journal’s September issue and in In re Oakwood Homes, 340 B.R.510 (Bankr. D. Del 2006). In Oakwood Homes, the Delaware Bankruptcy Court was following the 3rd Circuit case of Lafferty, which recognizes deepening insolvency under Pennsylvania law, but specifically noted that Delaware had not yet spoken on the issue, that the nature of the debate was “rapidly changing,” and therefore, the court treated the deepening-insolvency issue as pending. Now Delaware has specifically spoken on the issue. Look for a further discussion of the Trenwick decision in future newsletters as well as the ABI Journal.