Judicial Update
by Ian Fredericks, Young Conaway Stargatt & Taylor LLP
July – September 2005
Below are summaries of cases that I thought members of the committee may find interesting. The summaries appear in date order beginning in July. Please contact me at ifredericks@ycst.com with any suggested areas of the law that members would prefer that I focus on, including consumer or business and legal areas of importance (i.e., retention, compensation, plan process, etc.).
PREFERENTIAL PAYMENT ACCORDING TO CONTRACT TERMS IS NOT PER SE “ORDINARY”
TWA Post Confirmation Estate v. World Aviation Supply Inc. (In re TWA Inc. Post Confirmation Estate), 327 B.R. 706 (Bankr. D. Del. Jun. 28, 2005) (Walsh, J.)
Holding that payments made within contract terms and during the 90 days prior to the petition date are not per se “made in the ordinary course of business or financial affairs of the debtor and the transferee.” In fact, payments made within contract terms during the preference period, when the history of dealings between the parties was that of payments being made well outside such terms, is far more likely to be preferential than it is to be “ordinary.”
A PAYMENT MADE IN ACCORDANCE WITH A SETTLEMENT AGREEMENT IS PREFERENTIAL AND MAY NOT SATISFY THE CONTEMPORANEOUS EXCHANGE FOR NEW VALUE DEFENSE
In re Ramba Inc., 416 F.3d 394 (5th Cir. Jul. 7, 2005) (Jolly, J.)
Holding that the payment of a pre-existing debt in exchange for new consideration is a preferential transfer because such a payment is made “on account of an antecedent debt.” Also, in order to satisfy the affirmative defense set forth in §547(c)(1), the new consideration must fall within the definition of “new value” set forth in §547(a)(2). Where a creditor entered into a settlement agreement wherein the creditor agreed to dismiss an involuntary bankruptcy proceeding in exchange for payment of a pre-existing debt, in the debtor’s subsequent voluntary bankruptcy, the agreement to dismiss was not “new value” and the payment by the debtor was recoverable.
ABSENT “UNUSUAL CIRCUMSTANCES,” A NONDEBTOR RELEASE UNDER A REORGANIZATION PLAN WILL NOT BE APPROVED
Deutsche Bank AG, London Branch v. Metromedia Fiber Network Inc. (In re Metromedia Fiber Network Inc.), 416 F.3d 136 (2d Cir. Jul. 21, 2005) (Jacobs, J.)
Holding that a nondebtor release under a reorganization plan should not be approved absent unusual circumstances rending the release terms “important to the success of the plan." Courts should consider whether the following circumstances exist: (1) there is substantial consideration; (2) claims were channeled rather than extinguished; (3) the enjoined claims indirectly impact the debtor’s reorganization (i.e., by way of indemnity or contribution); (4) the plan provides for full payment of enjoined claims; and (5) the creditors consent. A “material contribution” by a nondebtor is insufficient to justify a release under a reorganization plan.
SEIZURE OF AN ARGUABLE INTEREST IN PROPERTY VIOLATES THE AUTOMATIC STAY
In re Chesnut, 422 F.3d 298 (5th Cir. Aug. 18, 2005) (Clement, J.)
Holding that a creditor violates the automatic stay if, without permission of the bankruptcy court, it obtains possession of or exercises control over an asset to which the debtor has only an arguable claim of right.
THIRD CIRCUIT ADOPTS STANDARD FOR SUBSTANTIVE CONSOLIDATION
In re Owens Corning, 419 F.3d 195 (3d Cir. Aug. 23, 2005) (Ambro, J.)
Adopting the standard first articulated in the Second Circuit and holding that, absent consent, proponents of substantive consolidation must prove that the entities for whom substantive consolidation is sought (1) pre-petition, disregarded separateness so significantly, that their creditors relied on the breakdown of entity borders and treated them as one legal entity, or (2) post-petition, their assets and liabilities are so scrambled that separating them is prohibitive and hurts all creditors. Applying this standard, the Third Circuit rejected substantive consolidation in this because there was no evidence of pre-petition disregard of the Owens Corning entities. To the contrary, the court found that each subsidiary was a separate entity, observed governance formalities, had a specific purpose for existing separately, maintained its own books and records, prepared separate accounting and financial records, paid its own expenses from its own accounts, and routinely and adequately documented intercompany transactions, including payment of interest on intercompany obligations. In addition, the court found that there was no question which entity owned the principal assets and which had the material liabilities.
If you would like a copy of any of the above opinions, please contact Ian S. Fredericks.