| December 2009 issue: Your Name Here! The Bankruptcy Section is looking for volunteers to write a Case Analysis for an upcoming edition. The Case Analysis is typically based on Court of Appeals or Supreme Court decisions, although you can use your discretion to discuss relevant BAP, District Court and Bankruptcy Court decisions -- especially those interpreting BAPCPA's amendments to the Code. If you are interested or would like to learn more, please send an email to the Managing Editor. You can view the archive here. Your subscription You have been subscribed to this list as part of your membership in the Bankruptcy Section of the Commercial Law League of America. CLLA 205 N. Michigan, Suite 2212, Phone: 312-240-1400 Newsletter design by: |
Sua SponteDeborah K. Ebner A New Year Resolution It's 2010 already. In the few short months remaining in my term, I'd like to share and implement my New Year's resolution for the Section and the League. For as long as you all have known me, you've listened to my dialog about the strength of League participation for each of us individually, and, for the greater good. My New Year resolution for 2010 is to apply and implement my mantra to at least one obvious opportunity. Everyone who participates will benefit and the world will be a better place. It's a no brainer. I'll be specific. For many years we have sponsored the DePaul Symposium one day prior to the opening of our Chicago conference. The symposium is a vehicle for the presentation of articles published in the DePaul Law Journal. Although created in part to cultivate young legal talent, over the past several years, the symposium has provided diminishing opportunity for the DePaul students. As a result, DePaul and the Section have decided to take a one year break and use the time to restructure the program so that everyone can benefit. So. What is the obvious opportunity? Answer; we bankruptcy practitioners are overwhelmed with work while the employment picture for law school graduates and volunteer internship opportunity is bleak. So. What's the opportunity? If DePaul offered course credit for students accepting internships in the firms of DePaul Symposium /Journal authors, the professional would receive free legal talent and the student, while providing valuable assistance, would gain networking opportunity as well as an opportunity to impress a busy practitioner. It does seem to be a no brainer. It has been presented to DePaul. It is now being presented to you. I can't take credit for this idea. It was suggested by Executive Council Member Paige Barr of Katten Muchin in Chicago. DePaul was intrigued when I shared the idea with the faculty liaison. Our Executive Vice President, Oliver Yandle, likes it as well. My term will soon be finished. I'll return to the Board of Governor's. The Section will be chaired by Peter Califano, and, you won't hear from me on a regular basis. Please call me before my term ends in April. Help me implement this resolution. It will work for everyone. My very best wishes to everyone in the Section and the League for the best of health, happiness and prosperity in the coming year. I look forward to continuing our work together. Case Law AnalysisPeter Califano, Esq. Preference Exposure Expands to Unsuspecting Creditors The Third Circuit of Appeal1 recently held in Schubert v. Lucent Technologies, Inc., 554 F.3d 382 (3rd Cir. 2009) (decided on February 3, 2009) that a creditor could be deemed an "insider" for preference avoidance purposes and thus be subject to the expanded one-year reach back period if the creditor improperly "coerced" its debtor. BACKGROUND Winstar provided telecommunication services to customers and purchased equipment from Lucent. Later, Winstar became a "strategic partner" with Lucent, who with its vast resources could support Winstar's desire to build a global broadband network. Lucent also provided Winstar with a line of credit. Winstar expanded rapidly and entered into a further credit facility with a consortium of banks. Winstar entered into a second line of credit with Lucent that contained financial covenants requiring immediate payments if Winstar's overall debt exceeded a certain amount. Subsequently, Siemens joined the bank facility and advanced an additional $200 million to Winstar. Since these amounts put Winstar over the debt ceiling, Lucent demanded the full amount of the Siemens' loan. Due to Lucent's relationship and "coercive power" over Winstar, the $200 million was eventually paid over to Lucent. Four months later, Winstar filed a voluntary Chapter 11 bankruptcy petition that subsequently converted to a Chapter 7 case. DISCUSSION The claim for preference recovery action depended on whether the defendant was or was not an insider for purposes of section 547(b). The bankruptcy court held that Lucent was an insider of Winstar both under the "person in control" language of Section 101(31)(B)(ii) and as a non-statutory insider. Lucent argued that a party could be a "person in control" or non-statutory insider only if that party exercised managerial control over the day-to-day operations of the debtor. The trustee contended that actual managerial control was only a requisite for determination of "person in control" insider, but not for a non-statutory insider. The court observed that not all categories of insiders enumerated in the Code possess actual control over the debtor. As such, the court determined that the proper inquiry for non-statutory insider was not whether a the party exercised control over the debtor but whether the party has such a close relationship with the debtor as to suggest that transactions between the party and the debtor were not made at arms' length. The court reviewed the extensive evidence submitted and found numerous situations in which Lucent was able to coerce Winstar to enter into various transactions not in Winstar's interest, thus establishing Lucent's insider status and the basis for finding that Lucent was subject to the extended one-year (instead of 90 day) preference period. COMMENT Creditors must now have greater awareness of falling into the dreaded non-statutory insider status in its dealings with debtors. Even if creditors appear to be operating within contractual terms Schubert now forces creditors to ask an additional and essential question – "have we forced the debtor into a pattern of behavior where the debtor is not acting in its self interest". Winstar often used Lucent as a "mere instrumentality" to improve its internal financial position and to otherwise act for the benefit of Winstar. Probably not an absurd result. But one can imagine how the Schubert ruling may be expanded to unsuspecting creditors who are driving a hard bargain and have gained some type of unique leverage to force a debtor to act. Further case law developments will sign just how worrisome Shubert will be and whether bankruptcy trustees and debtor-in-possession have a new arrow in their quiver for the prosecution of avoidance actions.
Case Law UpdateCLLA Staff In re W.R. Grace & Co. In proceedings involving asbestos litigation against mining company W.R. Grace, who had sought Chapter 11 protection, and against the State of Montana, judgment of the bankruptcy court and the district court that subject matter jurisdiction does not exist to expand a preliminary injunction to include the Montana actions is affirmed as a federal bankruptcy court does not have related-to-jurisdiction over a third-party lawsuit if that lawsuit would affect the bankruptcy proceeding only through the intervention of yet another lawsuit. In re: Baker In the debtor's appeal from the bankruptcy court's order that her Keogh plan was the property of her bankruptcy estate, the order is reversed where the debtor's Keogh plan did not have to be maintained under ERISA for the debtor to claim an exemption under 11 U.S.C. section 222.21(2)(a)(1). |