Student Loan Discharge Proceeding Not a 'Suit'
May 27, 2004
The Supreme Court, in its May 17, 2004 decision in <i>Tennessee Student Assistance Corporation v. Hood</i>, __ U.S. ___ (2004), declined to reach the issue of whether the Bankruptcy Clause in Article I of the Constitution grants authority to Congress to abrogate state sovereign immunity from private suits. Instead, in a 7-2 decision, the Court ruled that a proceeding to determine whether an otherwise nondischargeable student loan can be discharged because of an undue hardship on the debtor is not a "suit" against the state for purposes of the Eleventh Amendment. The Court's decision, written by Chief Justice Rehnquist, turned on the in rem nature of the proceeding and reasoned that the bankruptcy court did not need jurisdiction over the state where it had jurisdiction over the debtor and her property.
Draw on Letter of Credit Has Same Effect As Cash Forfeiture
May 27, 2004
It is well-settled that "property of the estate" is broadly defined under section 541 of the Bankruptcy Code as including all legal and equitable interests of a debtor. Therefore, the breadth of property of the estate includes a debtor's indirect, residual or reversionary interest in the return of funds. It is also equally acknowledged that, in general, a letter of credit (LC) is an independent obligation of the issuing bank and, under the "independence principle," is not necessarily property of the estate. From time to time, these two concepts -- broad estate interest in property versus the treatment of a LC -- clash in bankruptcy. In these instances, some courts will look at "substance" and not "form" to determine whether the debtor's residual interest in an LC is property of its estate.
Section 502(d) Roulette
May 27, 2004
Case management in large and complex Chapter 11 bankruptcies has never been easy. Successfully navigating the morass of filing requirements and deadlines contained in the Bankruptcy Code, its accompanying procedural rules and various local court rules can be challenging. When added to the remaining issues that routinely need to be addressed during the course of a case -- among many others, claims resolution, development of a business plan and plan of reorganization, analysis of executory contracts and investigation of potential litigation claims -- the array of activities that must be carefully coordinated can be daunting.
Partnership Taxation in Bankruptcy
May 27, 2004
Most of the debtors involved in our restructuring work are corporations. On occasion, however, we find ourselves working on a matter involving a bankrupt partnership. Partnerships in bankruptcy raise a host of tax issues that differ from the issues we deal with in our typical corporate debtor work. In this article, we first discuss some basic elements of partnership taxation, and then review some of the tax issues unique to partnerships in bankruptcy.
The 'Doctrine of Necessity'
April 26, 2004
Last month, we explained that a bankruptcy court lacks "either the statutory or equitable power to authorize" the debtor's payment of pre-bankruptcy nonpriority unsecured claims, as noted in <i>Capital Factors, Inc. v. Kmart Corp. (In re Kmart Corp.)</i> We explained that the clear, no-nonsense opinions of the district court and the Court of Appeals reversed four bankruptcy court orders, and we explained why the Seventh Circuit's <i>Kmart</i> decision is noteworthy. We went on to discuss the "Doctrine of Necessity" (the Doctrine), a current justification used by some bankrtupcy courts to permit the post-petition payment of certain assertedly "essential" pre-petition claims in Chapter 11 reoganized cases. This month, we discuss Principal Judicial Precedents, Decisions Favorable to the Doctrine, Cases Rejecting the Doctrine, and The Rebirth of the "Doctrine of Necessity."
Preferential Transfers
April 26, 2004
Last month, we explained that when a once steady and reliable customer becomes delinquent in payment and eventually files for bankruptcy protection, your client becomes one of many creditors trying to recover a portion of its investment. We explained how, whenever a creditor receives a benefit from a debtor shortly before the debtor files for bankruptcy, a preferential transfer may occur. And we showed how section 547(b) of the Bankruptcy Code permits a trustee to avoid pre-bankruptcy transfers as "preferences." The first tactic we discussed for defending such preference actions was to dispute plaintiff's <i>prima facie</i> case. In this month's installment, we discuss preference avoidance by statutory exception, and the availability of a jury trial.
True Lease or Secured Financing?
April 26, 2004
In the Chapter 11 context, it is common for interested parties to challenge the characterization of a Chapter 11 debtor's obligations under an agreement styled as a lease. A Bankruptcy Court's determination as to whether a transaction is a "true" lease or a secured financing can have far-reaching consequences on the administration of a debtor's Chapter 11 case and the respective rights of each party to the agreement. As the recent decision by the Third Circuit Court of Appeals in <i>Duke Energy Royal, LLC v. Pillowtex Corp. (In re Pillowtex, Inc.)</i>, 349 F.3d 711 (3d Cir. 2003) illustrates, when faced with the question of whether a transaction constitutes a "true" lease or a secured financing, bankruptcy courts will look beyond the form to the substance of the parties' agreement.
Litigation
April 22, 2004
Recent rulings of importance to you and your practice.
