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The remedy of involuntary bankruptcy “exists as an avenue of relief for the benefit of the overall creditor body …. [I]t was not intended to redress the special grievances, no matter how legitimate, of particular creditors ….” In re Murray, 900 F.3d 53, 59-60 (2d Cir. 2018). The courts of appeals have been consistent. In re Edgar A. Reyes-Colon, 2019 WL 1785039, at 1 (1st Cir. Apr. 24, 2019) (affirmed dismissal of involuntary petition filed by only two creditors; at least three petitioners required; parties engaged in “twelve years of litigation concerning the number of [debtor’s] creditors and whether he might … be placed in bankruptcy involuntarily for ‘equitable’ reasons.”); In re 8 Speeds 8, Inc., 2019 WL 1891802, at 3 (9th Cir. Apr. 29, 2019) (dissent) (“Involuntary bankruptcy is a drastic course of action that carries significant consequences, and ‘[f]iling an involuntary petition should be a measure of last resort’ …. The fee-shifting and damages provision of [Bankruptcy Code] §303(i) are intended to deter frivolous filings …. The Majority holds that … a third party who appears for a debtor and successfully defends against an involuntary petition can never request that the debtor be awarded costs, a reasonable attorney’s fee, or damages.”).
By Rick Antonoff
Courts Are Divided on the Issue of Whether the Fraudulent Transfer Recovery Provision Applies Extraterritorially
The U.S. Court of Appeals for the Second Circuit recently issued an opinion concluding that trustees can pursue recovery from foreign subsequent transferees who received property in transactions that occurred entirely outside the United States. The opinion reversed two lower court rulings and arguably conflicts with Supreme Court precedent on extraterritoriality of U.S. legislation.
By Rena Andoh and Kate Ross
When a company declares bankruptcy, avoidance actions under Chapter 5 of the Bankruptcy Code can assist in securing extra cash for the debtor’s dwindling estate. When a debtor-in-possession does not pursue these claims, creditors’ committees often seek the bankruptcy court’s authorization to pursue them on behalf of the estate. Once granted such authorization through a “standing order,” a creditors’ committee is said to “stand in the debtor’s shoes” because it has permission to litigate certain claims belonging to the debtor that arose before bankruptcy. However, for parties whose cases advance to discovery, such a standing order may cause issues by leaving undecided the allocation of attorney-client privilege and work product protection between the debtor and committee.
By Dan T. Moss and Mark G. Douglas
It has been generally understood that recognition of a foreign bankruptcy proceeding under Chapter 15 is a prerequisite to the enforcement by a U.S. court of an order or judgment entered in such a foreign bankruptcy proceeding under the doctrine of "comity." A ruling recently handed down by the U.S. District Court for the Southern District of New York directly challenges that principle.
By Michael L. Cook
The U.S. District Court for the Southern District of New York denied a litigation trustee’s motion for leave to file a sixth amended complaint that would have asserted constructive fraudulent transfer claims against 5,000 Tribune Company shareholders. The safe harbor of Bankruptcy Code §546(e) barred the trustee’s proposed claims.