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.
The 'Doctrine of Necessity': Missing Authority
March 24, 2004
<i>Nothing ... in the Code covers payments made to pre-existing, unsecured creditors, whether or not the debtor calls them 'critical.' Judges do not invent missing language ... A 'doctrine of necessity' is just a fancy name for a power to depart from the Code. In re Kmart Corp.</i>, 2004 U.S. App. LEXIS 3397, *5, *11 (7th Cir. Feb. 24, 2004) (Easterbrook, J.)
Tactics for Defending Preference Actions
March 24, 2004
In a troubled business climate, a scenario all too often occurs wherein a once steady and reliable customer becomes delinquent in payment and eventually files for bankruptcy protection. In this common situation, your client's good customer becomes a debtor and your client becomes one of many creditors jockeying to recover a small portion of its investment. To make matters worse, your client receives a letter from the debtor or court appointed trustee demanding repayment of a pre-petition preferential payment pursuant to section 547(b) of the Bankruptcy Code (the Code).
Investors May Be Liable to WARN Act Plaintiffs
March 02, 2004
Major investors in companies that commit violations of the federal Worker Adjustment and Retraining Notification (WARN) Act may not be immune to liability, according to a federal court sitting in the Southern District of New York. <i>Vogt v. Greenmarine Holding, LLC</i>, No. 02 Civ. 2059 (S.D.N.Y. Jan. 1, 2004). Relying on Department of Labor (DOL) regulations, the court denied a motion to dismiss the claims of a class of plaintiffs who were terminated by a bankrupt company against the investors in the bankrupt entity.
