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If you think public policy favoring the freedom to file a Chapter 11 trumps the freedom to negotiate specific restrictions to such a filing, think again. On July 22, 2021, Bankruptcy Judge Michael Kaplan of the United States Bankruptcy Court for the District of New Jersey dismissed the Chapter 11 case of 3P Hightstown, LLC, finding that the debtor lacked the proper authority to commence its Chapter 11 due to its failure to comply with its LLC agreement. Unwilling to follow Judge Walrath’s approach in a COVID-related Delaware Chapter 11 case, Judge Kaplan concluded that the governing LLC agreement — which contained a provision restricting the debtor’s ability to commence a bankruptcy case — was not void as contrary to public policy. In making its determination, the court provided analysis that is helpful and instructive to anyone considering filing a bankruptcy petition for an LLC, particularly where the LLC is organized under Delaware law. This article explores Judge Kaplan’s analysis and the basis for his opinion.
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By Adam Shpeen, Aryeh Ethan Falk and Stephen Ford
Two Recent Cases Shed Light on Potential Risks to Preferred Equity Holders in Chapter 11
Preferred equity is a varied and flexible instrument, but, in practice, it typically has a limited number of common features. One feature is that it is entitled to a “liquidation preference” ahead of common stock. Whether the liquidation preference of preferred equity entitles preferred shareholders to priority over common shareholders in a Chapter 11 reorganization is a question that figured prominently in two recent high profile cases.
By Michael L. Cook
“Good-faith purchasers enjoy strong protection under [Bankruptcy Code] §363(m),” but the silent asset buyer (“B”) with “actual and constructive knowledge of a competing interest” lacks “good faith,” held the U.S. Court of Appeals for the Seventh Circuit.
By David E. Sklar and Cheryl A. Santaniello
Federal bankruptcy courts have been unavailable to marijuana businesses due to the Schedule I status of marijuana. The United States Trustee’s policy is to move to dismiss or object in each case involving marijuana assets, because they cannot be administered under the Bankruptcy Code.
By By Stuart B. Newman and Steven H. Newman
The Small Business Reorganization Act created a new pathway for small businesses to remain in control of running their businesses, which is the usual reason for choosing to seek relief under Chapter 11, while eliminating many of the reasons that typical Chapter 11 proceedings exhausted the patience, and wallets, of both debtors and creditors.