CURRENT MONTH (April 2019)

Bankruptcy Law

Termination Of Contract Held Not To Be A Transfer

By Michael Enright

Trustees and Debtors often consider whether to challenge the prepetition termination of a contract as a constructively fraudulent transfer under Section 548 of the Bankruptcy Code, or applicable state fraudulent transfer law. The support for this lies in the notion that the termination is a parting by the Debtor with an interest in its property. On the other hand, some courts have reasoned that the only rights the Debtor had under the contract included the termination rights, to which it was already subject, and concluded that such a termination was not a transfer for fraudulent transfer purposes. We can now add In re Pazzo Pazzo, Inc., Case No. 18-13516 (Bankr. D.N.J., April 24, 2019) to the mix. There, the court had to decide whether the prepetition termination of a purchase option connected with the Debtor’s lease of its premises could be avoided as a fraudulent transfer. In concluding that the termination of the option could not be attacked under Section 548, the court cited to cases holding that termination in accordance with contractual terms was not a transfer at all, because the Debtor had not lost any rights other than its contract rights that were dependent upon compliance with contractual terms. The court also relied on the policy of protecting parties’ expectations in real estate contracts and avoiding unnecessary uncertainty in the marketplace. The court noted that the presence of collusion might lead to a different outcome. The decision merits consideration in any controversy concerning the review of prepetition terminations of contracts with the Debtor.    


Missing UCC Attachments in Pennsylvania

By Darrell Pierce and Paul Hodnefield

The Pennsylvania Department of State Bureau of Corporations and Charitable Organizations (“Bureau”) recently began notifying parties who submitted UCC records by mail or across the counter during the period of March 1 through April 3, 2019 that the Bureau mistakenly separated and discarded attachments to such records. The attachments, therefore, may not have been scanned and made a part of the filed record. 

The Bureau has asked those who submitted written records during the above-mentioned time period (“Affected Filers”) to review their records and notify the Bureau of any UCC records that do not contain submitted attachments.  The Affected Filers should then send to the Bureau full copies of any such UCC records in PDF format.  Presumably, the Bureau will accept the copies and update the filed records using a filing officer statement. Affected Filers will want to maintain a record of what they submitted to the Bureau, in case there is ever a challenge to the Bureau’s correction process.

Those who search the UCC records must also take care when reviewing search results.  Searchers should assume that all written records filed during the relevant time frame may have omitted attachments and investigate accordingly.  Particularly in cases where an attachment is referenced but does not appear, the searcher should assume the worst; e.g., the missing attachment contained a blanket lien collateral description.  Remember, the risk of filing office errors falls on those who search the UCC records.   

As a final note, the situation indicates why the use of attachments should be carefully considered and avoided when possible. It also demonstrates the importance of a post-filing search to verify what the filing office actually filed.




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