The Confirmed Chapter 11 Plan, Closing The Case, And Termination Of The Automatic Stay

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One recent decision from the 10th Circuit Bankruptcy Appellate Panel highlights the interplay between a confirmed Chapter 11 plan, the persistence of the automatic stay, and the closing of a case.  The case also brings into focus the need for caution before opting to close a case without awareness of the consequences.  The case in question is In Re Rael, B.A.P. No. WY-14-048, decided February 27, 2015.

The case in question was an individual Chapter 11 case.  The debtors filed an individual Chapter 11 bankruptcy petition in 2008, and their plan was confirmed in January 2010. The plan provided they would not receive a discharge until they completed all payments under their plan. About a year after their plan was confirmed, they filed a final report and motion for final decree, seeking to close their case to avoid paying the United States Trustee’s quarterly fee assessments. Over objections by both the United States Trustee and Wells Fargo, the bankruptcy court entered a Final Decree and Order Closing Case in 2011.

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Construction Contracts, Bankruptcy, And Objections To Discharge Under 523(a)(4): Fraud Or Defalcation In A Fiduciary Capacity

Adversary proceedings objecting to the discharge of certain debts sometimes arise in the context of bankruptcy cases.  One such type of adversary proceeding, one based on “fraud or defalcation while acting in a fiduciary capacity,” is based on Section 523(a)(4) of the Bankruptcy Code.  But to prevail under this section requires that certain conditions must exist.  A recent case illustrated how such conditions may in fact exist.  The case was a 10th Circuit B.A.P. case, NM-12-017, Hawks Holding LLC v. Kalinowski, decided in 2012.

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In 2008, Hawks Holdings, LLC (“Hawks”) contracted with K2 Construction Company, LLC (“K2”) to build three homes on property Hawks owned near Santa Fe, New Mexico, for a contract price of more than $3.6 million. K2 was formed in 2007 as a New Mexico limited liability company, and held a general contractor’s license issued under the New Mexico Construction Industries Licensing Act (the “Contractors Act”). K2 neither completed the construction 1 called for by the Hawks contract, nor paid all of the subcontractors and material suppliers that had contributed to the project.

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Kansas Exemptions For Life Insurance Proceeds In Bankruptcy

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Under what circumstances are life insurance policies exempt in bankruptcy? Can the exemption ever be forfeited? These were some of the questions considered by the 10th Circuit Bankruptcy Appellate Panel in the case of In Re Larry Erickson and Betty Moore, filed in August 2011 (KS-11-005). Life insurance proceeds are normally exempt in bankruptcy provided certain conditions are met, but this case had an unusual set of facts.

Husband and wife Larry J. Erickson and Betty L. Moore filed a petition for Chapter 7 relief on March 30, 2010. At the time the petition was filed, Erickson owned several insurance policies on his life with respect to which Moore was the designated beneficiary. Debtors neither scheduled the life insurance policies as assets, nor claimed them as exempt.

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What Is A “Core Proceeding” In A Bankruptcy Case?

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What is a “core proceeding” arising from a bankruptcy case?  What standard is used to evaluate this issue?  These were the questions asked by the Eighth Circuit case of In Re Schmidt, decided in 2011 (11-6028 to 11-6030).  In this case, Klein Bank appealed the bankruptcy court’s order  denying its motions to remand its replevin actions which had been removed from the state court to the bankruptcy court.

In denying the motions, the bankruptcy court had originally concluded that the replevin actions were core proceedings. The Eighth Circuit B.A.P. disagreed, stating that  core proceedings are limited to those “arising under or arising in” a bankruptcy case.

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Copyright Violations Can Be Willful And Malicious Injuries In Adversary Proceedings Under Section 523(a)(6)

Can a bankruptcy debtor’s copyright violation ever rise to the level of a willful and malicious injury, such that it would be excepted from a bankruptcy discharge under 11 U.S.C. §523(a)(6)?  The answer is yes, according to the Bankruptcy Appellate Panel for the 8th Circuit (which includes Missouri).  The case here is In Re Walker, decided in August 2014 by the 8th Circuit B.A.P. (No. 14-6012).

The facts of the case were these.  The debtor (Walker) was a managing member of an establishment called Twister’s Iron Horse Saloon.  Twister’s often played music and hosted musical performances. Some of the music played or performed was included in the repertoire of the American Society of Composers, Authors and Publishers. ASCAP is a professional membership organization of song writers, composers and music publishers.  In accordance with Federal copyright law, ASCAP licenses and promotes the music of its members. It also obtains compensation for the public performances of their works and distributes the royalties based upon on those performances. Several music companies granted ASCAP a nonexclusive right to license public performance rights of their works.

Twister’s did not hold a public performance license. ASCAP became aware of this and promptly contacted the debtor to offer him a license. The debtor did not respond to ASCAP’s offer. ASCAP unsuccessfully attempted to contact the debtor an incredible 44 times: twice in person, 14 times by mail and 28 times by telephone.  None of the mail was returned as undeliverable. The phone calls were made on various days and at various times.  The debtor was often on the Twister’s premises but refused to acknowledge the communications.  An investigator from ASCAP visited Twister’s and noted that unauthorized musical performances were taking place.

ASCAP in 2009 informed the debtor of the violations and offered to settle for a monetary amount. The letter was delivered to Twister’s return receipt requested. The receipt was signed by the debtor and confirmed that delivery was made on September 23, 2009.  The debtor signed for the letter but claimed not to have read it.

In June 2010, the music companies brought an action for copyright infringement against the debtor in the Eastern District of Missouri.  The debtor did not contest the case and lost by default.  A judgment of $41,231 was entered against him.  When the debtor filed a Chapter 7 bankruptcy, the music companies filed an adversary proceeding against him under §523(a)(6), which prevents the discharge of debts incurred through “willful or malicious” injury.  The trial court found that the debtor had willfully failed to obtain an ASCAP license and maliciously disregarded the rights of ASCAP’s members and Federal copyright law. The debtor appealed.

The case is an interesting one, since adversary proceedings under §523(a)(6) are rare.  Proving “malice” and a “willful injury” is not an easy matter.  An intentional tort must be inflicted on some opposing party.  The B.A.P.’s analysis focused on the meaning of the words “willful,” “malicious,” and “injury.”  Under case law in the Eighth Circuit, the terms must be separately analyzed.  Furthermore:

Malice requires more than just reckless behavior by the debtor. Scarborough, 171 F.3d at 641 (citing In re Miera, 926 F.2d at 743). The defendant must have acted with the intent to harm, rather than merely acting intentionally in a way that resulted in harm…

If the debtor was aware of the plaintiff-creditor’s right under law to be free of the invasive conduct of others (conduct of the sort redressed by the law on the underlying tort) and nonetheless proceeded to act to effect the invasion with particular reference to the plaintiff, willfulness is established. If in so doing the debtor intended to bring about a loss in fact that would be detrimental to the plaintiff, whether specific sort of loss the plaintiff actually suffered or not, malice is established. Sells v. Porter (In re Porter), 375 B.R. 822, 828 (B.A.P. 8th Cir. 2007) aff’d, 539 F.3d 889 (8th Cir. 2008) (quoting KYMN, Inc. v. Langeslag (In re Langeslag), 366 B.R. 51, 59 (Bankr. D. Minn 2007)).

The debtor made the rather unconvincing argument that he did not “intentionally” injure the music companies because he was not aware he needed an ASCAP license.  He claimed he was not aware of the violations until suit was filed against him in court.  The court was not persuaded, noting that he had been contacted 44 times, and never responded.  Furthermore, the court found that Walker (the debtor) failed to distinguish between the concepts of injury and harm:

The Supreme Court [has] analyzed willfulness in terms of injury. Injury is the “invasion of any legally protected interest of another.” Restatement (Second) of Torts § 7(1). Under § 523(a)(6), a judgment debt cannot be exempt from discharge unless it is based on an intentional tort, which requires the actor to intend “the consequences of the act rather than the act itself.” Restatement (Second) of Torts § 8A, comment a, at 15; Geiger, 523 U.S. at 61. In effect, Geiger requires that the debtor intend the injury.

The debtor had a duty, the court found, the obtain the required license.  He also signed for a settlement letter from the plaintiffs, but later claimed he had not read it. These types of arguments did little to win the debtor friends among the judges.  The court then turned its attention to the concept of harm:

The Eighth Circuit analyzed maliciousness in terms of harm…Harm is the “existence of loss or detriment in fact of any kind to a person resulting from any case.” Restatement (Second) of Torts § 7(2). In this case, the debtor’s actions were malicious because he intended to harm the appellees. The debtor did not obtain a public performance license yet he continued to play music covered by the license. The district court for the Eastern District of Missouri found the debtor to be in violation of Federal copyright law and entered judgment against him. The Eighth Circuit has held that the bankruptcy court may consider a violation of a statute as evidence of malicious intent. In re Fors, 259 B.R. at 139. And, one court has held that the debtor’s intentional violation of a Federal copyright law was an aggravating feature which evinces a voluntary willingness to inflict injury. Knight Kitchen Music v. Pineau (In re Pineau), 149 B.R. 239 (D. Me. 1993).

The debtor admitted he had a general knowledge of federal copyright law.  When all was said and done, the court plainly could see that the debtor knew he needed to obtain a license, and deliberately avoided doing so because then he would have to pay royalties.  Thus, he intended the financial harm which was the logical consequence of his actions.  Thus, the B.A.P. had no trouble in upholding the ruling of the lower bankruptcy court on making the debt nondischargeable. Presumably, what irked the court most was the repeated and deliberate evasions of the plaintiff creditor’s communications.  At some point, willfulness can be inferred from this sort of extrinsic evidence.

Read More:  Bankruptcy Adversary Proceedings Under Section 523

With Guarantor, Separate Classification Of Unsecured Claim In Chapter 11 Plan Allowed

A Ninth Circuit B.A.P. case from 2012 addressed an issue in a Chapter 11 “single asset” real estate case where the debtor sought to confirm its plan over the objection of an undersecured lender.  The case was In Re Loop 76 v. Wells Fargo Bank, na (465 B.R. 525 (9th Cir. B.A.P. 2012)).  The key issue in the case was whether the bankruptcy court could consider a “third party” source of payment (in this case, a guarantor), when deciding whether unsecured claims are substantially similar under 11 U.S.C. §1122(a).  Basically, the debtor wanted a large unsecured claim (a guarantor claim on a secured debt) to be classified separately from other unsecured creditors, so that the anticipated “no” vote on confirmation would not taint the acceptance of the plan by the other unsecured creditor class.

Often in real estate cases there are very large unsecured claims, possibly arising out of deficiency claims.  If such a deficiency claim were placed in the same class as the other general unsecured creditors, it might negate the acceptance of that class.  However, if such a debt were placed in a separate class, it might give the debtor more flexibility in confirming a plan over the objection of the creditor.

Loop 76 was a commercial real estate developer which had obtained a commercial loan of about $23 million from Wells Fargo Bank.  The loan was secured against an office complex.  There were also personal guarantees for the loan, signed by the principals of Loop 76.  Loop 76 eventually defaulted on the loan, due to the collapse of the real estate market in 2008-2010.  A Chapter 11 petition was eventually filed by Loop 76.  Since the property in question was only worth about $17 million, there was a large deficiency claim held by Wells Fargo.  The proposed plan attempted to classify the deficiency claim separately from the other unsecured creditors.

Wells Fargo objected to this treatment, believing that they should be lumped in with all the other unsecured creditors.  They were, according to Wells Fargo, “substantially similar” to the other unsecured creditors such that separate classification was not justified.  The attempt to create a separate class was, argued the creditor, nothing more than an attempt to “gerrymander” acceptance of the plan by needlessly creating a separate class of creditor.  Wells Fargo also continued to pursue the guarantors of the real estate loan in state court.

The bankruptcy court, weighing the issues, ruled against Wells Fargo.  Examining the history and intent of Section 1122(a) and Section 1129(a)(10), the court found that Wells Fargo had an alternate source of repayment, what it called a “third party” repayment source.  Such a creditor is different from a creditor who has no such alternate source of repayment.  Wells Fargo could provide no evidence that the guarantors themselves were insolvent or that they were no longer pursuing the guarantors.  Thus, the court found that there was a legitimate basis for putting Wells’s deficiency claim in its own class.

Wells Fargo appealed the decision to the 9th Circuit B.A.P.  The B.A.P. affirmed, noting that Wells had a third-party repayment source, unlike any of the other general unsecured creditors.  Thus, there was a compelling reason to put it in its own class.  Having a guarantor was a situation that no other unsecured creditor had.  A court can consider third party sources of repayment, the B.A.P. held, when trying to decide if unsecured claims are substantially similar under Section 1122(a).

Furthermore, it caught the B.A.P.’s attention that, if Wells’s claim were placed in the same class as all the other unsecured creditors, it would have dwarfed all the other unsecured claims, since it was such a large dollar amount.  It would have controlled the class and have been able to veto the acceptance of the proposed plan.  In the interests of fairness, it made sense to put Wells’s claim in its own class, segregated from the other unsecured claims. The Bankruptcy Code permits the creation of separate voting classes of creditors, provided that there is a rational basis for it and the claims are not “substantially similar.”  Not surprisingly, this issue can become a litigated one, if voting on plan confirmation turns on the acceptance or rejection of such a class.

Read More:  Classification Of Claims And Interests In Chapter 11 Bankruptcy 

Doctor, Physician, And Dentist Bankruptcy Cases In Kansas City

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The past few years have seen an increase in the number of bankruptcy cases filed for dentists and doctors.  The reasons are not difficult to comprehend.  As average household incomes decline in the economic environment currently existing, expenditures on health tend to decline as well.  All but the most necessary procedures are postponed or forgotten.  A concurrent rise in operating costs (insurance especially, but also in medication) contributes to the stress of operation.  Changing regulations, the confusion sown by new laws, and reduced payments from Medicare and Medicaid reimbursements have not helped matters.

In the United States, medical and dental care providers are essentially run as for-profit businesses.  Doctors, dentists, labs, hospitals, and clinics are also run as businesses in most situations.  Yet, like many professionals (accountants, attorneys, architects, engineers, etc.), physicians and dentists usually are not trained in school how to run or market a business.  At Phillips & Thomas, we have also represented physicians and dentists who have experienced very serious and unexpected events that have contributed to their business troubles.

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Like all situations where small businesses are in distress, the most important thing is to take action quickly to address problem areas.  We have found, from our experience in representing professionals, that moving quickly to address debt and reorganization issues is absolutely critical.  Doctors and dentists face special issues that are not seen in other types of small business debtors.  A Chapter 11 filing can do the following:

  1. Stop certain actions of regulatory agencies that may be seeking to investigate or close down a practice
  2. Enable the debtor to break out of leases, contracts, or agreements that are weighing on the business
  3. Stop all creditor calls, harassment, or collection activity
  4. Enable a greatly-needed “breathing space” for the filing of a plan of reorganization
  5. Stop the actions of creditors who may be trying to repossess medical equipment or dental equipment
  6. Stop the actions of tax authorities who may be trying to file tax liens or garnishments for the alleged non-payment of sales tax, withholding tax, or income tax

The key thing is that the filing of a Chapter 11 reorganization will enable a dentist or doctor to continue to do what he or she loves, and also provide a way to continue to operate the business as a going concern.  In a Chapter 11 case, the debtor is a “debtor-in-possession” which means that he or she remains in charge of the operation of the business.  No one will step into your shoes and try to interfere with how you run your practice.  In a debtor-in-possession scenario, no trustee is appointed.  You, the owner of the business, retain the rights, duties, and obligations of a “trustee” in dealing with your property and operating the business.

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Essentially, you become your own “trustee.” You can obtain new loans and new credit while you are in a bankruptcy.  You have the option of assuming, rejecting, or assigning leases or executory contracts that may exist.  Our list of articles on this website dealing with Chapter 11 is very detailed and wide-ranging, and can be found by clicking on the tab on the right side of the home page of this site, under “Chapter 11 Bankruptcy In Kansas City.”

From our experience, these are the typical issues that affect physicians and dentists:

  • Physical damage or problems with physical premises (fire, accident, etc.);
  • Student loan debts are generally much larger than the average debtor.  Interest rates can be changed, monthly payments can be changed, and if certain conditions are met, actions can be taken to seek the complete discharge of these debts.
  • Data loss from computer network crashes or file management issues that cause a drop in revenue;
  • Divorce or dissolution proceedings;
  • Increased operating costs (medications or supplies) that affect the bottom line;
  • Equipment issues (problems with dental equipment or physician equipment or action by a lienholder);
  • Dealing with the large and often collateralized (with business equipment) loans that are typically found in doctors’ or dentists’ offices;
  • With dentists or physicians, there can be ethical or professional conduct issues that can relate to client files and ethical obligations for ongoing patients;
  • Dealing with the state regulatory agencies or state licensing authorities.  State regulatory agencies and licensing bureaus typically do not have a sophisticated knowledge of bankruptcy reorganizations and a debtor’s rights under it.  In some cases, these regulatory agencies overreach or fail to understand a debtor’s rights.  It is important to have an attorney who knows how to deal with these agencies.  At Phillips & Thomas, we have experience in this area.

Bankruptcy reorganizations for doctors, medical clinics, health care providers, and dentists have special issues that are not found in other types of cases.  Depending on the goals and situation of the business or individual, it may be necessary to consider all of the relevant chapters of the Bankruptcy Code to see which chapter is appropriate for the situation (Chapter 7, 13, or 11).  Again, we can’t stress enough the importance of getting guidance and advice at the earliest stages of difficulty.

Read More:  About Phillips & Thomas LLC

Restaurant Bankruptcy and Food Supplier Bankruptcy In Kansas City

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Restaurants and associated food service businesses are a big part of the local economy in the metropolitan Kansas City area.  With the downturn in the economy, more restaurants, food service businesses, and commodity suppliers and vendors (especially produce) are finding themselves with thin profit margins. We have found from our experience that business owners should know all of their legal options well before financial troubles begin to press upon them.  Running a restaurant is not easy even in the best of times, and we understand that.  Phillips & Thomas LLC has worked with restaurant and food services businesses for many years, and is very familiar with the issues and challenges facing them.

Circumstances can change very quickly in the restaurant and food service business.  The traffic of customers can evaporate or be diverted, suppliers can default on their obligations, tax issues can arise, employee problems can surface, ownership or managerial disputes can develop, or physical issues with the premises (fire, theft, damages) can happen.  All of these changes require a rational, realistic response that takes into account the goals of the business and the economic management of the problem.

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We have stated this principle before in other articles on this blog, and we will repeat it again:  identifying and dealing with a problem quickly is vastly preferable to delay.  In most situations, one’s options are widest at the beginning of a problem; those options can get narrower the longer the issue is delayed.  Stated another way:  in the food service business, get help quickly as soon as bad things happen.  Communication is critical.

There are different types of bankruptcy options available to restaurants or food services businesses:  Chapter 7, Chapter 13, or Chapter 11.  Each of these options has its own merits, and is useful in different circumstances.  Chapter 7 cases are liquidation cases, in the sense that a business would be “wound up” under the control of a Chapter 7 trustee.  On the filing of a Chapter 7 case, the business premises would come under the control of the Trustee, who would then decide how to handle the inventory, equipment, and other issues.  The operation of a business by a Chapter 7 trustee is complicated and involves many “moving parts”:  dealing with landlords and leases, dealing with employees, dealing with customers or clients, and dealing with inventory and assets.  It is important to consult with an attorney to go through all of these issues.  Do not assume that you, the business owner, can diagnose or evaluate these issues yourself.

Chapter 13 cases can only be filed by individuals, but they are often filed in a business context where the individual is a sole proprietor, or has signed personally for the business’s debts and needs some way to reorganize those.  It also often happens that a business owner is saddled with payroll or withholding taxes from the operation of a business, and needs some way to deal with those as well.  Again, it is important to consult with an attorney to understand all the nuances and options available.

Chapter 11 cases can be filed by individuals or businesses for a variety of reasons.  Under Chapter 11, the affairs of the business can be reorganized (or liquidated, in some situations) in such a way as to allow the business to get back to a position of profitability.  We have a large number of articles on Chapter 11 cases here; if you go to the right side of your screen, you can click on the tab that says “Chapter 11 Bankruptcy”, and find numerous topics of relevance to Chapter 11 cases.

The Perishable Agricultural Commodities Act (PACA).

We do need to spend some time here talking about PACA.  Restaurant owners, food sellers, produce suppliers, commodity suppliers, and other vendors should be aware of the existence and implications of this federal law.  We have dealt PACA litigation in a variety of food service contexts, and can say that it is one of the most underappreciated and misunderstood issues that can arise in the context of restaurant and food service supplier bankruptcy cases.  What is PACA?  Over seventy years ago, Congress decided that sellers of farm products were at risk from buyers.  Buyers had the right to reject shipment of produce from sellers, and in declining price markets, often these rejections were done to get out of inconvenient contracts.  Sellers often had to spend a lot of money and travel great distances to try to sell their produce.  Since agricultural commodities are perishable and easily spoil, this was seriously hurting sellers.

In order to regulate this type of interstate commerce, then, Congress in 1930 passed the Perishable Agricultural Commodities Act (PACA).  The purpose of the law, as stated above, was to protect sellers from unscrupulous buyers.  The US Department of Agriculture had the right to intervene when a buyer failed to honor a promise to pay for commodities.  It also prevented brokers from making fraudulent charges, shippers from reneging on agreements, and a few other things.  PACA was amended in 1984 in a significant way.

The 1984 amendment to PACA provided for the creation of a “trust” for the “benefit of all unpaid suppliers or sellers of such commodities until full payment of the sums owning in connection with such transactions has been received…”  What happened, in effect, was that Congress created a new statutory remedy for the seller of perishable agricultural commodities to a possible debtor in bankruptcy.  Basically, a seller now became something much more than an ordinary unsecured creditor.  A trust was created by operation of law, and savvy sellers could now use this fact to argue for the creation of a “superpriority trust” within a bankruptcy case.

PACA litigation is complex.  At issue are often the following questions:

  • Does PACA even apply to the transaction in question?
  • What is the definition of a “perishable agricultural commodity”?
  • Is my restaurant covered under PACA?
  • Will I be held responsible for the creation and maintenance of a “trust”?
  • What is in a PACA trust?  That is, what constitutes its “res”?

The bottom line is that restaurant owners, food suppliers, vendors, and other parties in the commodity chain are often unaware of PACA and its implications.  The possible existence of a trust has important implications in a bankruptcy case, since the holder of an alleged trust may seek to file an adversary proceeding under 11 U.S.C. Sect. 523(a)(4) to have the debt declared non-dischargeable.  Alternatively, such a creditor may seek to claim super-priority status in any reorganization plan under Chapter 11 or 13.  If you are a restaurant owner or a dealer or handler of commodities in any way, please feel free to consult with us to discuss these issues.

Read More:  Real Estate Bankruptcy Cases In Kansas and Missouri

International Insolvency: Chapter 15 Cross-Border Bankruptcy Cases

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With the increasing interdependence of international trade, it is reasonable to expect that cross-border insolvency proceedings will become more common. It is not too difficult to imagine a time in the future when cases that span at least one international border become routine. According to federal law, a “foreign proceeding” means “judicial or administrative proceedings in a foreign country…under a law relating to insolvency or adjustment of a debt in which proceeding the [debtor’s assets and business] are subject to control or supervision by a foreign court for the purpose of reorganization or liquidation.” 11 U.S.C. §101(23). Obviously, such proceedings present many complex issues involving choice of law, locating of property, equal treatment of creditors, and various other issues.

The road in this area of the law has been a rocky one.  Some countries (e.g., Finland, Ireland, The Netherlands) historically have not recognized foreign bankruptcy proceedings at all. Other nations take a different approach, assuming that their own proceedings should have universal applicability while denying such treatment to other nations. In the United States, Chapter 15 of the Bankruptcy Code deals with foreign bankruptcy proceedings. Chapter 15 was only recently added to the Bankruptcy Code (in 2005) with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of that year. Chapter 15 allows proceedings for a foreign debtor to access U.S. Bankruptcy Courts. It was intended to modernize and harmonize the law of cross-border bankruptcy proceedings. Chapter 15 cases have been filed for various purposes:

  • To protect the assets of a foreign creditor that may be located in the United States from actions by creditors;
  • To establish orderly procedures for U.S. creditors to follow in the filing of claims actions against foreign creditors;
  • To bind creditors to the terms of a restructuring plan that may have been created in a foreign jurisdiction;
  • To facilitate asset sales or liquidations that may have originally arisen in a foreign proceeding;
  • To permit a foreign debtor to use the cash collateral of its big creditors in the U.S.;
  • To permit discovery of parties subject to U.S. Bankruptcy Court jurisdiction

Chapter 15 cases are rather unique. Debtors under Chapter 15 have a great deal of power. The filing of proofs of claims is fundamentally different from the other chapters of the Bankruptcy Code. The foreign debtor’s representative in the U.S. has many powers similar to those of a debtor in possession under Chapter 11. They may examine witnesses, sell assets, and operate the business affairs. However, they typically are restricted in undertaking avoidance actions, such as fraudulent conveyances. In addition, it is well to note that relief under Chapter 15 is limited under Section 1506 of the Bankruptcy Code. Under this section, a U.S. bankruptcy court may decide against taking action that would be “manifestly contrary to the public policy of this country.”

The trend is this area of the law is clearly towards greater internationalization and universality. A recent case from the Southern District of New York is illustrative. The case is In Re Rede Energia, S.A (14-10078, SCC). The company, Rede Energia, SA, was a Brazilian business that had a plan of reorganization that had been filed and confirmed in Brazil. At issue was the question of how (and to what extent) would Rede Energia’s reorganization plan would be recognized in the United States. Rede Energia (the debtor) was a major power company in Brazil. Its foreign administrator in the US commenced a Chapter 15 proceeding in New York. The debtor’s plan had been “crammed down” in Brazil over the objections of some creditors. The debtor sought an order from the New York bankruptcy court that would give “full faith and credit” to the Brazilian confirmed plan of reorganization.

Some of Rede’s unhappy creditors in New York argued that, under Section 1506 of the U.S. Bankruptcy Code, the Brazilian plan of reorganization was clearly violative of U.S. public policy. (Specifically, the creditors complained that the plan had three classes of unsecured creditors, which were being treated differently). But the New York bankruptcy court ruled otherwise, in a decision that will be an important precedent as these types of cases become more and more common. Under Chapter 15, the court stated, there is no requirement that the laws of a foreign nation (e.g., Brazil) be identical to those of the U.S. Rather, the issue was whether the creditors received a reasonable degree of due process and fairness in the original proceeding.

Looking at the issue this way, the New York court found that the objecting creditors in New York did in fact receive a full and fair hearing on all of their issues during the legal proceedings in Brazil. They could not now reopen these issues. Furthermore, the court held, it would not be appropriate for a U.S. court to “superimpose” its own law over those of a foreign country. Finality, and a sort of “cross-border res judicata”, were key factors in the decision. The New York court was similarly unpersuaded by the creditors’ argument that treating differently the three classes of unsecured creditors was a big problem.

On the contrary, the court noted that it does sometimes happen in bankruptcy reorganizations that similarly situated creditors are treated differently. This is so despite the fact that the Bankruptcy Code aspires to similar treatment of similarly situated creditors. Every plan of reorganization is different. Taken as a whole the Rede Energia case stands for the idea that the principles of res judicata, due process, and fairness are universal and will be given international application in Chapter 15 cross-border insolvency cases.

Phillips & Thomas is one of the few firms in the metro area that has been involved in a Chapter 15 international insolvency proceeding.  Our managing partner George Thomas speaks Portuguese and travels to Brazil frequently.

Read More:  Bankruptcy Appeals And The Appellate Process

Real Estate Chapter 11 Bankruptcy Cases In Kansas And Missouri

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Within the Chapter 11 world, a common and powerful type of Chapter 11 reorganization case is the “real estate reorganization” Chapter 11 case. These types of cases are filed by real estate management companies, by individuals who own residential or commercial real estate, by holders of “single asset” real estate projects or properties, or by entities or persons who have ownership interests in real estate.

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