Update on Bankruptcy Court Subject Matter Jurisdiction
Last month, we reported on two recent Delaware cases that came to opposite conclusions as to whether a bankruptcy court has subject matter jurisdiction over state law claims asserted by a post-confirmation litigation trust: <i>IT Litigation Trust v. D'Aniello, et al.</i> (<i>In re: IT Group, Inc., et al.</i> held that the court had subject matter jurisdiction over such claims, while <i>Shandler v. DLJ Merchant Banking, Inc., et al.</i> (<i>In re Insilco Technologies, Inc.</i>)(<i>Insilco</i>) held that it did not. After the article went to press, the Delaware courts weighed in on the subject for the third time in only 3 months. This article provides the update.
Advising a Private Equity Fund
As anyone who has advised a private equity fund in connection with the potential insolvency of one of its portfolio companies knows, reconciling the duty of the fund's designated directors sitting on the portfolio company's board with the fund's duties to its investors can feel like a high wire act at times. As fiduciaries for its investors, the fund's managers must act in a manner consistent with maximizing the return on invested funds. Yet, these same managers are often directors of the fund's portfolio companies. While a portfolio company is thriving, the duties to the fund's investors and the fund manager's duties as a director of the portfolio company are typically in harmony. However, when the portfolio company's business turns sour, and it approaches insolvency or is insolvent, the shifting of the directors' fiduciary duties to the company's creditors can cause irreconcilable conflicts of interest along with consternation on how to fund ongoing operations. This article discusses possible structural mechanisms to address and potentially avoid these irreconcilable conflicts while still maintaining the ability to manage the fund's investment and fund the portfolio company's ongoing business.
Labor News: 2005 in Review
More than 500 leaders and officials of the seven Change to Win federation unions met Nov. 17-19 in Las Vegas to strategize how to work together in organizing campaigns. Organizers, researchers, and communicators from each of the seven unions met to discuss campaigns and strategy to grow the labor movement. This marked perhaps the first time since the founding of the CIO in the 1930s that so many union officials met to discuss joint targeting and strategy.
Subject Matter Jurisdiction over Pre-Petition State Law Claims
Two recent bankruptcy opinions out of the Delaware Court, <i>IT Litigation Trust v. D'Aniella, et al.</i> (<i>In re: IT Group, Inc., et al.</i>), and <i>Shandler v. DLJ Merchant Banking, Inc., et al.</i> (<i>In re Insilco Technologies, Inc.</i>), each of which addresses post-confirmation bankruptcy court subject matter jurisdiction over state law causes of action, have potentially significant implications on both litigation in the Delaware Bankruptcy Court and plan structure for Chapter 11 debtors.
Third Circuit Opens the Door to Breach of Fiduciary Duty Claims
Recently, the Third Circuit Court of Appeals, in In re Tower Air, Inc., 416 F.3d 229 (3rd Cir. 2005), queried: 'How far will the federal courthouse door swing open for a direct suit against corporate directors and officers for Breaches of Fiduciary Duties?' In firmly answering this question, the Third Circuit has widened the door for bankruptcy trustees and creditors' committees, by making it easier, at the pleading stage, to assert a claim for breach of fiduciary duty in federal court.
Inequitable Subordination?
In an article in last month's issue, we questioned the desirability of equitably subordinating or disallowing claims transferred post-petition, and explored the implications that a decision pending in the Enron bankruptcy court might have on distressed debt markets. Now, in an expansively reasoned opinion, the Enron court partially answered those questions. The court denied a motion to dismiss certain counts seeking to equitably subordinate certain bank claims in the hands of post-petition assignees on the basis of allegedly inequitable prepetition conduct engaged in by Enron's pre-petition lenders.
United's Long Journey into the Far Reaches of ' 1110
It looks like James Sprayregen and his team at Kirkland & Ellis have brought United Airlines to the verge of a successful exit from Chapter 11. That is all the more remarkable because a year ago, they seemed nowhere close. United was struggling with a host of problems, not the least the one that concerned me, the retention of its fleet of aircraft. The creditors who controlled those aircraft had the leverage of ' 1110 of the Bankruptcy Code that allowed them to repossess the planes as if the bankruptcy did not even exist. When some of those creditors attempted to exercise the right, however, the bankruptcy court -- notwithstanding ' 1110 -- enjoined them. And it did so on a theory that seemed to contradict the essential idea that bankruptcy is a procedure for the collective negotiation and resolution of creditors' claims: by coordinating their bargaining, United successfully argued, the aircraft creditors were guilty of an unlawful conspiracy in restraint of trade. The ensuing litigation finally established that United was wrong: There are no qualifications to ' 1110's absolute protection of aircraft creditors' rights, and coordinated bargaining by creditors of a common debtor in bankruptcy is permitted under the antitrust laws. But, it took not one, but two opinions of the Seventh Circuit Court of Appeals to establish those principles.
When Is a Lease a 'True Lease'?
Financing deals have become increasingly complicated as parties attempt to raise capital and take advantage of accounting and tax incentives. These transactions often face scrutiny when one party files for bankruptcy. During a Chapter 11 reorganization, a debtor must use all tools at its disposal to best restructure its obligations. In contrast, a creditor must work to ensure it receives the best possible return. The term "lease" is not defined in the Bankruptcy Code. Due to this lack of a clear definition, creditors and debtors will often attempt to recharacterize agreements between the parties. In this context, a secured creditor or debtor may argue that a "lease" is actually a disguised secured financing. In the converse, a party could also argue a secured financing is actually a "true lease." This is due to the Bankruptcy Code's different treatment of secured debt and leases. Depending on the factual scenario, this differing treatment could significantly change the parties' obligations. This article reviews the Seventh Circuit Court of Appeals' recent decision in <i>United Airlines, Inc. v. HSBC Bank USA, N.A.</i>, 416 F.3d 609 (7th Cir. 2005). In this decision, authored by Judge Easterbrook, the court held that it must look to the substance of a transaction and beyond the label given by the parties to determine whether it is a "true lease."
