Editors

§ 1.1.1. Supreme Court

Bartenwerfer v. Buckley, 598 U.S. 69, 143665 (2023). In this case the Court was confronted with the Bankruptcy Code’s exception to discharge for any debt obtained by fraud (contained in Section 523(a)(2)(A)). While this provision clearly applies to the active fraudster, the Court noted that sometimes a debtor may be liable for fraud that she did not personally commit. “For example, deceit practiced by a partner or an agent.” The question for the Court was whether the bar extends to this latter situation.

In 2005, Kate and David jointly purchased a house in San Francisco. Acting as business partners, they decided to remodel the house and sell it at a profit. David took charge of the project. Kate was largely uninvolved. Kate and David ultimately married and sold the house to Kieran Buckley. In connection with the sale, Kate and David attested that they had disclosed all material facts relating to the property. After closing, Buckley discovered several undisclosed defects. Buckley sued Kate and David and obtained a judgment in his favor. Kate and David were unable to pay Buckley and sought Chapter 7 bankruptcy protection. Buckley filed an adversary complaint alleging that the money owed on the state-court judgment fell within Section 523(a)(2)(A)’s exception to discharge for any debt for money obtained by fraud. The bankruptcy court ruled in Buckley’s favor holding that David’s fraudulent intent would be imputed to Kate because they had formed a legal partnership to execute the renovation and resale project. The Ninth Circuit bankruptcy appellate panel agreed as to David’s fraudulent intent but did not agree as to Kate. The panel concluded that the Code only barred her from receiving a discharge if she knew or had reason to know of David’s fraud. The Ninth Circuit reversed, holding that a debtor who is liable for her partner’s fraud cannot discharge that debt in bankruptcy, regardless of her own culpability. The Supreme Court granted certiorari to resolve confusion in the lower courts.

The Court began its analysis with the text of the Code. Justice Barrett wrote that “this text precludes Kate Bartenwerfer from discharging her liability for the state-court judgment.” There was no dispute that Kate was an individual debtor nor that the judgment was a debt. The focus of the Court’s analysis, and the arguments of the parties, revolved around whether the debt arose from money obtained by false pretenses, a false representation, or actual fraud. Kate disputed this last premise. She admitted that the statute was written in the passive voice, which does not specify a fraudulent actor. But she argued that the statute should be most naturally read to bar discharge of debts for money obtained by the debtor’s fraud. In other words, she argued that the passive voice hides the relevant actor in plain sight. The Court disagreed finding that the passive voice simply removes the actor from the equation.

By framing the statute to focus on an event without reference to the specific actor, the statute does not depend on the actor’s intent or culpability. The Court noted that this was consistent with the common law of fraud, which “has long maintained that fraud liability is not limited to the wrongdoer.” Both precedent and Congress’s response eliminated any doubt as to the propriety of the Court’s textual analysis. The Court had long ago held that the discharge exception was not limited to fraud by the debtor herself. Justice Barrett wrote that the Court must assume that Congress meant to incorporate the interpretations adopted by precedent when it reenacted the bankruptcy laws (without addressing the issue). In this case, the Congress went even further. Thirteen years after the Court’s decision Congress overhauled bankruptcy law and deleted “the strongest textual hook counseling against the outcome” reached by the Court. The Court concluded by noting that “innocent people are sometimes held liable for fraud they did not personally commit and, if they declare a bankruptcy, §523(a)(2)(A) bars discharge of that debt.” Justices Sotomayor and Jackson concurred noting that the Court did “not confront a situation involving fraud by a person bearing no agency or partnership relationship to the debtor.”

Lac Du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin, 599 U.S. 382, 143 S. Ct. 1689 (2023). This case concerned whether the express abrogation of sovereign immunity found in Section 106(a) of the Bankruptcy Code extended to federally recognized Indian tribes. The Lac Du Flambeau Band of Lake Superior Chippewa Indians is a federally recognized Indian tribe, with several wholly owned businesses. One of those businesses loaned money to Brian Coughlin. Coughlin sought Chapter 13 bankruptcy protection before repaying the loan. Notwithstanding the automatic stay imposed by Section 362(a) of the Bankruptcy Code, the tribe’s lending entity, Lendgreen, continued its collection efforts notwithstanding. Ultimately, Coughlin filed a motion with the Bankruptcy court to enforce the automatic stay and sought damages for emotional distress along with costs and attorney’s fees. Lendgreen moved to dismiss arguing that the bankruptcy court lacked subject-matter jurisdiction as both the Tribe and its subsidiaries enjoyed tribal sovereign immunity. The bankruptcy court agreed with the Tribe and dismissed the case on sovereign immunity grounds. The First Circuit reversed, holding that the Bankruptcy Code “unequivocally strips tribes of their immunity.” The Supreme Court granted certiorari to resolve a circuit split (the Ninth Circuit had held that the Bankruptcy Code abrogates Tribal sovereign immunity, while the Sixth Circuit reached the opposite conclusion).

In her opinion for the Court, Justice Jackson began by noting that two provisions of the Bankruptcy Code apply. First, Section 106(a) abrogates the sovereign immunity of “governmental unit[s].” And Section 101(27) defines “governmental units” to mean a number of specified governmental entities and then concludes with a catchall: “or other foreign or domestic government.” In order to abrogate sovereign immunity, the Court had previously held that Congress must make its intent “unmistakably clear.” Because Indian tribes possess the “common-law immunity from suit traditionally enjoyed by sovereign powers,” this well-settled rule applies with equal force to federally recognized Tribes. Thus, if there is a plausible interpretation of the statute that preserves sovereign immunity, the Court will conclude that Congress has not unambiguously made its intent to abrogate clear. But the rule does not require magic words.

Given this rule, the majority concluded “that the Bankruptcy Code unequivocally abrogates the sovereign immunity of any and every government that possess the power to assert such immunity.” And this includes federally recognized tribes. The Court’s analysis began with the proposition that the term “governmental unit” was defined in such a way to exude comprehensiveness from beginning to end. Furthermore, the catchall phrase quoted above was notable. “Few phrases in the English language express all-inclusiveness more than the pairing of two extremes.” The pairing of foreign with domestic was such a construction. Thus, by coupling foreign and domestic together and placing that pair at the end of an extensive list, “Congress unmistakably intended to cover all governments in §101(27)’s definition, whatever their location, nature or type.” Carving out any government from the definition of “governmental unit” would have required the Court to upend the policy choice embodied in the Code. Because the Code unequivocally abrogates sovereign immunity of all governments and Tribes are undisputedly governments, §106(a) unmistakably abrogates Tribal sovereign immunity.

Justice Thomas concurred in the judgment but reiterated his longstanding position that “to the extent that Tribes possess sovereign immunity at all, that immunity does not extend to “suits arising out of a Tribe’s commercial activities conducted beyond its territory.” Justice Gorsuch dissented. He began by noting that there had not been a single example in all of history where the Court had found that Congress intended to abrogate Tribal sovereign immunity without an express mention that Indian Tribes in the statute. Moreover, Justice Gorsuch found that the phrase “other foreign or domestic governments” could mean what the Court concluded, but there was a plausible other meaning. That is, it could mean every other foreign government and every other domestic government, but Indian Tribes are neither. In his view, the Tribes enjoy unique status that requires specific mention.

MOAC Mall Holdings LLC v. Transform Holdco LLC, 598 U.S. 288, 143 S. Ct. 927 (2023). “[T]he Bankruptcy Code permits a debtor (or a trustee) to sell or lease the bankruptcy estate’s property outside of the ordinary course of the bankruptcy entity’s business … Interested parties may file an objection to such a sale or lease, and may appeal if the Court authorizes the sale or lease of the estate’s property over their objection. But §363(m) restricts the effect of such an appeal if successful.” Namely, it provides that “[t]he reversal or modification on appeal of an authorization … of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization of such sale or lease was stayed pending appeal.” Thus, “sometimes, a successful appeal of a judicial authorization to sell or lease estate property will not impugn the validity of a sale or lease made under that authorization.” In this case, the Supreme Court was asked to decide whether the statutory mootness of Section 363(m) was jurisdictional.

In 2018, Sears filed for Chapter 11 bankruptcy protection. In 2019, Sears sought to sell most of its assets to the respondent subject to bankruptcy court approval. As part of the sale, the respondent was given the right to designate to whom a lease between Sears and certain landlords would be assigned. The agreement did not designate an assignee; it simply meant that if the respondent designated one, Sears would be compelled to assign the lease to the designee. One of the leases in question was a lease with the petitioner MOAC, the owner of the Minnesota Mall of America.

Section 365 of the Code prohibits assignment of an unexpired lease absent adequate assurance of future performance by the assignee, generally. And it contains specific rules regarding adequate assurance applicable to shopping centers. Respondent designated the Mall of America lease for assignment to a wholly owned subsidiary. MOAC objected on the grounds that the respondents had not provided the requisite adequate assurance of future performance. The bankruptcy court disagreed and approved the assignment. MOAC sought a stay of that order. The bankruptcy court denied the request, reasoning that an appeal of the assignment order did not fall within the scope of Section 363(m). Thus, a stay was not necessary. The bankruptcy court further noted that the respondent had explicitly represented that it would not invoke Section 363(m) against MOAC. No stay was granted, the order became effective, and Sears assigned the lease. MOAC successfully appealed the order to the district court, which concluded that the respondent did not satisfy the requirements of adequate assurance. The district court, therefore, vacated the order. The respondent then sought rehearing and, for the first time, backed away from its previous commitments and argued that Section 363(m) deprived the district court of jurisdiction. While the district court was appalled by the gambit, it was bound by Second Circuit precedent holding that Section 363(m) is jurisdictional and not subject to waiver or judicial estoppel. The Second Circuit affirmed. The Supreme Court granted the Mall’s petition for certiorari to resolve a circuit split.

Before turning to the jurisdictional arguments, the Court first addressed the respondent’s argument that the case was moot because the lease had been transferred out of the estate via the assignment. The Court noted that “a case is only moot when it is impossible for the court to grant any effective relief.” The respondent argued that the only way for the Court to grant relief would be to avoid the transfer pursuant to Section 549 of the Code. As Section 549 could only be asserted by the debtor and the debtor had expressly waived any right to bring such an action, the transfer of the lease could not be undone.

The Court noted that its precedents disfavor these kinds of mootness arguments. MOAC simply sought typical appellate relief: the reversal of the lower courts’ decisions. In that regard, the Court would not conclude that the parties did not have a concrete interest in the relief sought. And the Supreme Court declined to act as the court of “first view” with regard to the respondent’s contention that no actual relief remains legally available.

The Court then turned to the question of jurisdiction. Whether Section 363(m) is jurisdictional is “significant because it carries with it unique and sometimes severe consequences.” Not only does a jurisdictional condition deprive the Court of the power to hear a case, but it is also impervious to excuses like waiver or forfeiture. If the statute is jurisdictional even the egregious conduct of the respondent would not permit application of judicial estoppel. Given these extreme consequences, the Court has previously held “that jurisdictional rules pertain to ‘“‘the power of the court rather than to the rights or obligations of the parties.’”’ And a provision will only be held to be jurisdictional if Congress clearly states its intent that it be applied in that fashion. But magic words are not required.

The Court found nothing in Section 363(m) that purported to govern the Court’s ability to adjudicate a dispute. To the contrary, Section 363(m) clearly anticipates that courts will exercise jurisdiction over a covered authorization, and it is, thus, permissible to read the text as merely cloaking certain good-faith purchasers with protection, even when jurisdiction exists. Moreover, Congress separated Section 363(m) from other provisions that actually limit a court’s jurisdiction, and Section 363(m) does not contain any clear connection to those plainly jurisdictional provisions. The Court further rejected the respondent’s argument that the transfer of a res to a good-faith purchaser removes it from the bankruptcy estate and from the court’s in rem jurisdiction. It found this argument to be a red herring. The important issue is the text of the statute where Congress did not clearly limit judicial power as opposed to merely restricting the effects of a valid exercise of that power. The Supreme Court vacated the Second Circuit’s judgment and remanded the case for further proceedings.

§ 1.1.2. First Circuit

Botelho v. Buscone (In re Buscone), 61 F.4th 10 (1st Cir. 2023). Although the Fifth, Sixth, Tenth, and Eleventh Circuits have all found an exception to judicial estoppel in circumstances where the failure to disclose a legal claim in bankruptcy was inadvertent, the First Circuit Court of Appeals seemingly indicated, in dicta, that it would not permit such an exception.

Neighbors Mary and Ann went into business together. When their business failed in 2014, Ann commenced chapter 7 proceedings that same year. In her bankruptcy schedules, Ann neglected to include any claims against Mary. Ann subsequently received a discharge. Approximately three years later, in 2018, Ann sued Mary in Massachusetts state court and secured a default judgment of $91,673.45 when Mary failed to respond to the suit. Shortly thereafter, Mary commenced her own chapter 7 proceeding in which she listed in her schedules Ann’s claim against her in the default judgment amount. Ann commenced an adversary proceeding in Mary’s bankruptcy, seeking a determination that her default judgment against Mary was non-dischargeable under sections 523(a)(2)(A) and 523(a)(4) of the Bankruptcy Code. Section 523(a) provides that:

A discharge under section 727 . . . does not discharge an individual debtor from any debt—

. . .

(2) for money, property, [or] services . . . to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud . . . ; [or]

. . .

(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. . . .

11 U.S.C. § 523(a). Mary sought to dismiss Ann’s adversary complaint on the basis that Ann was foreclosed from asserting that her claim was non-dischargeable by reason of judicial estoppel because Ann failed to list in her bankruptcy schedules. After the bankruptcy court converted Mary’s motion to one for summary judgment, the parties proceeded to discovery. However, after Mary failed to comply with multiple discovery orders, the bankruptcy court ultimately granted Ann’s motion for sanctions, including an order finding default judgment in Ann’s favor. On Mary’s motion to reconsider both the sanctions order and Mary’s motion for summary judgment, the bankruptcy court re-affirmed its decisions. After the Bankruptcy Appellate Panel largely reiterated the bankruptcy court’s findings, Mary appealed (i) the bankruptcy court’s denial of her motion for summary judgment, (ii) the default judgment entered against her as a discovery sanction, and (iii) the bankruptcy court’s denial of her motion to reconsider to the First Circuit.

Turning to the question of Mary’s motion for summary judgment, the First Circuit took under consideration whether Ann should have been judicially estopped from pursuing the state court judgment. The court began with an overview of the judicially-created doctrine, noting its purpose “‘to protect the integrity of the judicial process,’ by ‘prohibiting parties from deliberately changing positions according to the exigencies of the moment.’” Id. at 21 (quoting New Hampshire v. Maine, 532 U.S. 742, 749–50 (2001)). The court highlighted “two baseline factors,” which—when met—afford a court the discretion to estop a party from asserting a legal position: (1) a party’s position must be “clearly inconsistent” with an earlier position; and (2) the party must have “succeeded in persuading a court to accept [their] earlier position.” Id. (quoting New Hampshire v. Maine, 532 U.S. 742, 750 (2001)) (emphasis original). But in the bankruptcy context, where judicial estoppel is often applied to prevent a debtor, who previously obtained a discharge on the representation that no claims exist, from resurrecting those claims, the First Circuit acknowledged that certain of its sister circuits had found an exception to judicial estoppel where the failure to disclose a legal claim in bankruptcy was inadvertent. Although the question before it was whether the bankruptcy court abused its discretion in denying Mary’s motion for summary judgment, the First Circuit seemingly indicated it would split from its sister circuits, reiterating from prior precedent that “a party is not automatically excused from judicial estoppel if the earlier statement was made in good faith.” Id. at 28 (quoting Thore v. Howe, 466 F.3d 173, 184 n.5 (1st Cir. 2006)); see also id. at 23 (“[w]e have never recognized such an exception and have noted that deliberate dishonesty is not a prerequisite to application of judicial estoppel.”) (quoting Guay v. Burack, 677 F.3d 10, 20 n.7 (1st Cir. 2012)). The court then affirmed the bankruptcy court’s denial of summary judgment, finding no error in its conclusion that a further factual record was required to determine if judicial estoppel foreclosed Ann’s non-dischargeability action.

The First Circuit went on to affirm the bankruptcy court on the latter two issues as well, finding that it was squarely within the bankruptcy court’s discretion to award default judgment as a discovery sanction in the face of Mary’s repeated failures to comply with the court’s prior orders and to deny Mary’s motion for reconsideration when she had primarily regurgitated her prior arguments.

Rodgers, Powers & Schwartz, LLP v. Minkina (In re Minkina), 79 F.4th 142 (1st Cir. 2023). In this case, the First Circuit examined whether the Butner principle created a conflict with the Bankruptcy Code in the context of a valuation dispute under section 522(f) of the Bankruptcy Code. Overturning the Bankruptcy Appellate Panel’s (the “BAP”) longstanding Snyder v. Rockland Tr. Co. (In re Snyder), 249 B.R. 40 (1st Cir. B.A.P. 2000) decision, the First Circuit concluded that a debtor’s interest in property held as a tenant by the entirety must be determined by the fair market value of such interest, notwithstanding that Massachusetts law defines a tenancy by the entirety as a “unitary title.”

At the time of Nataly Minkina’s chapter 13 bankruptcy filing in 2018, Minkina and her husband owned their Brookline, Massachusetts home as tenants by the entirety. The property was subject to (1) two mortgages totaling $177, 741, and (2) a judicial lien, solely on Minkina’s interest in the property, in favor of law firm Rodgers, Powers & Schwartz, LLP (“RPS”) for $250,094, resulting from a state court judgment ordering Minkina to reimburse RPS for the expenses incurred in defending against Minkina’s frivolous malpractice suit. Minkina was also entitled to a $500,000 homestead exemption. In 2019, Minkina moved to avoid the RPS judicial lien on the grounds that the lien impaired her homestead exemption pursuant to section 522(f). For the purposes of the lien avoidance, the parties agreed to value the property as a whole at $1.05 million. But the question then arose as to how the parties should value Minkina’s interest in the property as a tenant by the entirety. While RPS argued that the bankruptcy court was bound to follow the Snyder decision, in which the BAP ruled that a Massachusetts debtor’s interest in a tenancy by the entirety is equal to 100% of the value of the property for purposes of the section 522(f) formula, Minkina argued that her interest in the property should be appraised based on either an actuarial approach or a simple 50% interest in the value of the property. Following a preliminary ruling, in which the bankruptcy court indicated that it would not follow Snyder, the parties stipulated to a valuation of Minkina’s interest in the property, subject to her husband’s right of survivorship, of $525,000, while also preserving RPS’s right to pursue a valuation of Minkina’s interest at 100% of the property value. As previewed, the bankruptcy court granted Minkina’s motion to avoid RPS’s lien, rejecting Snyder. RPS petitioned for, and was granted, direct appeal to the First Circuit.

On appeal, RPS argued primarily that the Massachusetts Supreme Judicial Court’s decision in Coraccio v. Lowell Five Cents Sav. Bank, 415 Mass. 145 (1993), which determined that a tenancy by the entirety constitutes a “unitary title” under Massachusetts law, compels the conclusion that Minkina’s interest in the property should be valued at the full market value of the property. The First Circuit dispatched this argument easily, finding that Coraccio did not concern valuation, and therefore had no bearing on the requirement established under Snyder to value Minkina’s interest in the property as the full property value.

The First Circuit then examined whether the bankruptcy court erred in declining to follow Snyder’s approach to valuing a tenancy by the entirety at the full property value. Holding that the bankruptcy court had not erred when it accepted the stipulated 50% valuation, the First Circuit instead found that Snyder impermissibly deviated from the plain text of the Bankruptcy Code. The Bankruptcy Code defines the term “value,” as used in section 522(f), as “fair market value as of the date of the filing of the petition.” 11 U.S.C. § 522(a)(2). Snyder’s valuation of a tenancy by the entirety at 100% of the property value assumes that an interest in a tenancy by the entirety is equally as marketable as an interest in the property in fee simple, without accounting for the limitations of a tenancy by the entirety (i.e., the right of survivorship). By failing to establish a fair market value for an interest in a tenancy by the entirety, the First Circuit held, the BAP in Snyder failed to abide by the plain text of section 522.

§ 1.1.3. Second Circuit

ESL Invs., Inc. v. Sears Holdings Corp. (In re Sears Holdings Corp.), 51 F.4th 53 (2d Cir. 2022). In the context of a section 507(b) super-priority claim litigation, the Second Circuit was asked to determine how to value the assets of Sears Holding Corporation and its debtor-affiliates (collectively, “Sears”). Although the Second Circuit relied on the reasoning underlying the Supreme Court’s decision in Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997), it nonetheless found that the net orderly liquidation value (“NOLV”) was the appropriate measure for Sears’ assets, rather replacement value, as used by the Supreme Court.

Before the bankruptcy court, certain holders of Sears’ second-lien debt (the “second-lien claimholders”) asserted that they were entitled super-priority claims pursuant to section 507(b) of the Bankruptcy Code, for the diminution in value of their collateral during the course of Sears bankruptcy proceeding. The bankruptcy court was therefore required to determine whether the second-lien claimholders’ collateral had decreased in value after the October 15, 2018, commencement of the Sears bankruptcy proceeding (the “Petition Date”). The second-lien claimholders would only be able to assert their section 507(b) claim to the extent that the value of the collateral as of the Petition Date, less the obligations owed to the first-lien lenders, exceeded the $433.5 million credit bid that the second-lien claimholders had used to purchase Sears’ assets during the bankruptcy.

After hearing the evidence, including expert testimony, the bankruptcy court determined that the value of the second-lien claimholders’ collateral as of the Petition Date was $2.147 billion, based on the NOLV approach. Included in that determination was a zero-dollar valuation for a subset of inventory (the “NBB Inventory”) and a face-value valuation for $395 million in letters of credit Sears purchased, since—as the bankruptcy court held—the second-lien claimholders had not offered a reasonable valuation method for either category of asset. Because the bankruptcy court found that the first-lien lenders were owed $1.96 billion, the second-lien claimholders were therefore only secured to the extent of $187 million, which was less than the value they received via their $433.5 million credit bid. Accordingly, the bankruptcy court determined that the second-lien claimholders were not entitled to a super-priority claim under section 507(b). The district court affirmed.

On appeal to the Second Circuit, the second-lien claimholders argued that the bankruptcy court had erred in (1) valuing the inventory at its NOLV, rather than replacement value or retail value, (2) assigning zero value to the NBB Inventory, and (3) valuing the letters of credit at their full face value. First addressing the inventory valuation methodology argument, the Second Circuit began by examining the Supreme Court’s decision in Rash. The Rash Court was asked to determine the present value of collateral in accordance with section 506(a)(1) of the Bankruptcy Code, which provides that the value of collateral “shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property.” 11 U.S.C. § 506(a)(1). There, because the collateral was being used to continue the debtor’s business, the Supreme Court held that the proper value of the collateral was its replacement value. Although the second-lien claimholders argued that Rash required the bankruptcy court to apply the replacement value, the Second Circuit rejected this argument, instead interpreting Rash to stand for the proposition that, “when valuing collateral pursuant to section 506(a), the value of the property should be calculated ‘in light of the disposition or use in fact proposed, not the various dispositions or uses that might have been proposed.’” Id. at 63 (quoting Rash, 520 U.S. at 964). Because the only realistic outcomes contemplated—a going-concern sale or a forced liquidation—the Second Circuit concluded that the bankruptcy court had reasonably decided to assess the collateral according to the NOLV.

Turning next to the second-lien claimholders’ argument that the bankruptcy court should not have valued the NBB inventory at zero, the Second Circuit found that the second-lien claimholders had waived their argument that they did not have the burden of proving the value of the collateral. Accordingly, the bankruptcy court was entitled, in the absence of an acceptable valuation methodology establishing any other value, to value the NBB Inventory at zero. Similarly, because the second-lien claimholders failed to propose a valuation methodology that adequately addressed the contingent nature of the letters of credit, the bankruptcy court was entitled to apply face value.

TLA Claimholders Grp. v. LATAM Airlines Grp. S.A. (In re LATAM Airlines Grp. S.A.), 55 F.4th 377 (2d Cir. 2022). The Second Circuit joined the Third, Fifth, and Ninth Circuits in holding that an unsecured claim may be treated as unimpaired under a plan of reorganization even if the plan does not provide for the payment of postpetition interest, despite the debtor’s solvency.

Certain unsecured creditors of Tam Linhas Aéreas S.A. (“TLA”), an affiliate of LATAM Airlines Group S.A. (collectively, “LATAM”), opposed confirmation of the LATAM chapter 11 plan. The TLA creditors objected to the plan’s classification of their claims as “unimpaired” when, although the claims were being paid in full, the plan did not provide for payment of postpetition interest on their claims. The TLA creditors further argued that because TLA was solvent, based on both a waterfall analysis and a discounted cash flow analysis, they were entitled to interest payments on their claims during the pendency of the bankruptcy pursuant to the “solvent-debtor” exception to the general rule of bankruptcy that interest stops accruing upon a bankruptcy filing. However, the bankruptcy court disagreed with both arguments, confirming the plan over the TLA creditors’ objection. The bankruptcy court found that the definition of impairment contained in section 1124(1) did not supersede the limitation in section 502(b)(2) of the Bankruptcy Code prohibiting allowance of claims for unmatured interest. The bankruptcy court further found that TLA was insolvent, relying on the liquidation analysis and the balance sheet test put forward by LATAM, such that the solvent-debtor exception was inapplicable. After the district court confirmed the bankruptcy court’s findings, the TLA creditors appealed to the Second Circuit.

On appeal, the Second Circuit first addressed whether the TLA creditors’ claims were impaired under section 1124(1) of the Bankruptcy Code. Relying heavily on the precedents established in the Third, Fifth, and Ninth Circuits, the Second Circuit looked to the statutory language of section 1124(1), which provides that a class of claims or interests is impaired under a plan, unless the plan does not alter the legal, equitable, and contractual rights to which the claim holder is entitled. See 11 U.S.C. § 1124(1). Although the TLA creditors had a contractual right to collect interest on their claims outside of bankruptcy, section 502(b)(2) of the Bankruptcy Code cut off the TLA creditors’ claim to interest. And because the creditors’ rights were altered by operation of the Bankruptcy Code, rather than the chapter 11 plan itself, the Second Circuit held that the TLA creditors’ claims were unimpaired.

The Second Circuit then considered whether the bankruptcy court erred in determining that TLA was insolvent. The TLA creditors argued first that the solvent-debtor exception is derived from the absolute priority rule, and thus the solvent-debtor exception is triggered if a chapter 11 plan proposes to pay equity holders. The Second Circuit dismissed this argument, reasoning that, because the plan proposed to pay the TLA creditors the allowed amount of their claims, see 11 U.S.C. § 1129(b)(2)(B)(i), the TLA creditors could not invoke the absolutely priority rule as a measure of TLA’s solvency. Turning to the TLA creditors’ argument that the bankruptcy court should have applied the discounted cash flow analysis based on the precedent established in Consolidated Rock Products Company v. DuBois, 312 U.S. 510 (1941), the Second Circuit found that the Supreme Court’s holding in that case was limited to the common-law absolute priority rule such that it could not be “imported” to the absolute priority rule as codified in the current Bankruptcy Code. Accordingly, the Second Circuit found no error in the bankruptcy court’s ruling that TLA was insolvent and that the solvent-debtor exception was inapplicable.

Tutor Perini Building Corp. v. NYC Regional Cntr. George Washington Bridge Bus Station & Infrastructure Dev. Fund, LLC (In re George Washington Bridge Bus Station Dev. Venture, LLC, 65 F.4th 43 (2d Cir. 2023). The Second Circuit Court of Appeals narrowly construed who may assert a cure claim under section 365(b)(1)(A) of the Bankruptcy Code, holding that a party “must have some right to pursue a breach of contract claim under the executory contract or unexpired lease a debtor assumes under § 365(a)” to receive a right to payment to payment in full. Id. at 51.

In 2011, the debtor, a redevelopment company, entered into a lease agreement (the “Lease”) with the Port Authority of New York and New Jersey (“Port Authority”). The Lease provided that the debtor would renovate the George Washington Bridge Bus Station in Manhattan and receive a 99-year lease to operate a retail mall to be built on the property. The Lease further required the debtor to pay all claims against it by its contractors, subcontractors, material-men, and workmen in full. The debtor subsequently entered into a contract (the “Construction Contract”) to engage Tutor Perini Building Corp. (“Tutor Perini”) as the general contractor for the project. In 2015, the relationship between the debtor and Tutor Perini soured when Tutor Perini commenced arbitration proceedings against the debtor, claiming that it was owed approximately $113 million in damages for the debtor’s failure to pay amounts due under the Construction Contract.

When the debtor filed chapter 11 proceedings in 2019, it sought to sell substantially all of its assets, including its rights under the Lease. Tutor Perini opposed the sale, arguing that the debtor was obligated to pay Tutor Perini’s $113 million claim under the Construction Contract in full to cure the default of the Lease provision requiring the debtor to pay its contractors and subcontractors. Both the bankruptcy court and the district court rejected Tutor Perini’s two main arguments in support of its cure claim: (1) that section 365(b)(1)(A) does not limit who may assert a cure claim; and (2) that, if section 365(b)(1)(A) did limit who may assert a cure claim, Tutor Perini was entitled to assert a cure claim as a third-party beneficiary to the Lease.

The Second Circuit affirmed on both arguments. First, the court held that administrative priority under section 365(b)(1)(A) should be limited to those whose claims arise from the contract to be assumed under section 365(a). The purpose of section 365, the court reasoned, is to preserve the benefit of the bargain struck between the parties to fairly compensate the non-debtor contracting party who is obligated, under the Bankruptcy Code, to continue performing under the contract to be assumed. Where no bargain had been struck as between the debtor and Tutor Perini, the court was unwilling to alter the narrowly-construed statutory priorities established under the Bankruptcy Code. Furthermore, the court found unpersuasive Tutor Perini’s argument that the text of section 365(b)(1)(A) did not explicitly limit cure claims to those with rights under the subject contract. Looking to both sections 365(b)(1)(B) and 365(g), the Second Circuit concluded that “Congress clearly contemplated the rules of priority for creditors with claims actually arising under contracts, and not just for any party who claims some tangential interest in a contract short of a legal right to sue under it.” Id. at 53. In addition, the court posited that section 365(g), which entitles parties to rejected executory contracts to treatment as general unsecured creditors, would be rendered meaningless if Tutor Perini’s $113 million claim, arising under the rejected Construction Contract, somehow became entitled to payment in full on the basis of a tenuous relationship to the assumed Lease.

The Second Circuit then easily dispatched Tutor Perini’s second argument by holding that Tutor Perini was not a third-party beneficiary of the Lease. Accordingly, the court was not required to address whether a third-party beneficiary is entitled to seek administrative priority pursuant to section 365(b). However, in dicta, the court noted that, because “a third-party beneficiary is one who has a ‘right to performance’ under a contract because ‘the intention of the parties’ to that contract was to afford the third party such right, … protecting the non-debtor contracting party’s bargain reasonably includes allowing the intended third-party beneficiary to be made whole as well.” Id. at 54 n.6 (quoting Restatement (Second) of Contracts § 302 (1981)).

§ 1.1.4. Third Circuit

In re Delloso, 72 F.4th 532 (3d Cir. 2022). In a precedential opinion, the Third Circuit affirmed the ruling of the Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) denying a motion of Strategic Funding Source, Inc. d/b/a Kapitus (“Kapitus”), a creditor of Louis N. Delloso (the “Debtor”), to reopen the bankruptcy case because (i) Kapitus’s request for relief was time-barred, and (ii) Kapitus had an alternative forum in which to seek relief.

In 2011, several years prior to the Debtor’s bankruptcy filing, Kapitus and Greenville Concrete, a company partially owned by the Debtor, entered into an agreement whereby Kapitus would purchase receivables from Greenville Concrete, and Greenville Concrete would deposit the receivables into an account on behalf of Kapitus. On March 6, 2013, Greenville Concrete failed to deposit certain receivables, and Kapitus issued a notice of default.

After out-of-court resolution efforts stalled, Kapitus sued Greenville Concrete in New York state court alleging breach of contract. This suit ended in a settlement under which Greenville Concrete was to make weekly payments until it had reached an agreed-upon amount. The settlement agreement provided that if Greenville Concrete failed to make such payments, Kapitus could enter a default judgment against Greenville Concrete. Greenville Concrete later defaulted, and Kapitus received a judgment against the Debtor and Greenville Concrete in the amount of $776,600.25.

On March 31, 2016 (the “Petition Date”), the Debtor filed a case under chapter 7 of title 11 of the U.S. Code (the “Bankruptcy Code”). The Debtor listed the debt owed to Kapitus in his schedules and disclosed that his sole employer for the three years prior to the Petition Date was “Bari Concrete Construction” (“Bari Concrete”). Following the filing of the bankruptcy case, the Bankruptcy Court notified creditors that the final day to oppose the Debtor’s discharge or the dischargeability of certain debts was July 5, 2016. Having received no responses, on July 6, 2016, the Bankruptcy Court granted a discharge of the Debtor’s debts and on August 5, 2016, the case was closed.

On November 15, 2021, over five years after the case was closed, Kapitus moved to reopen the case, asserting that Bari Concrete appeared to operate as a mere continuation of Greenville Concrete. Kapitus separately sued Bari Concrete in state court seeking satisfaction of its debt against Greenville Concrete, among other causes of action. In the Bankruptcy Court, Kapitus requested that the case be reopened (i) so that it could seek a determination of non-dischargeability of its scheduled claim of $776,600.25; or (ii) so that a chapter 7 trustee could administer a purported ownership interest of the Debtor in Bari Concrete, an asset which was not disclosed at the time of the bankruptcy filing. In the alternative, Kapitus asked that the Court revoke the Debtor’s discharge because the discharge was obtained through fraud, and Kapitus did not know of the fraud until after the discharge.

Following oral argument, the Bankruptcy Court declined to reopen the case. The Bankruptcy Court based its decision on two of the factors listed in the case of In re New Century TRS Holdings, Inc., No. 07-10416 (BLS), 2021 WL 4767924, at *6–7 (Bankr. D. Del. Oct. 12, 2021): (i) Kapitus would not be able to obtain the relief it sought even if the case were reopened, as Kapitus’s claims were time-barred, and the Bankruptcy Court was precluded from modifying the applicable time period by, among other things, Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) 4007(c) and 9006(b) and Supreme Court precedent in Nutraceutical Corp. v. Lambert, 139 S. Ct. 710 (2019) (providing guidance on the application of rules regarding time limitations); and (ii) Kapitus could obtain the relief it sought in the state court action it had previously commenced against Bari Concrete. Following the Bankruptcy Court’s decision, Kapitus requested an immediate appeal to the Third Circuit, which the Third Circuit granted.

On appeal, Kapitus argued that (i) the case should be reopened to allow for pursuit of “potentially viable theories of relief,” Delloso, 72 F.4th at 536, and that (ii) the presence of its state court action against Bari Concrete should not preclude reopening the bankruptcy case for purposes of administering a previously undisclosed asset.

Kapitus argued that Bankruptcy Rules 4007(c) and 9006(b), which set the time periods during which Kapitus was required to file its claims, are each subject to doctrines such as equitable tolling, as well as Bankruptcy Code section 105(a). Kapitus further argued that the Bankruptcy Court’s application of Supreme Court precedent was in error. The application of these doctrines, according to Kapitus, would allow it to pursue its claims in the reopened bankruptcy case.

The Third Circuit disagreed, noting that the cited Supreme Court precedent applied to the Bankruptcy Court’s analysis, and adopting the reasoning of the Bankruptcy Court that Bankruptcy Rule 4007(c) precludes equitable tolling, explaining that, among other reasons, Bankruptcy Rule 9006 “singles out Rule 4007(c) for inflexible treatment.” Delloso, 72 F.4th at 540 (internal quotations omitted). Therefore, the Third Circuit concluded, the Bankruptcy Court properly reasoned that Kapitus’s claims were time-barred.

Kapitus also argued that the existence of its state court action against Bari Concrete should not preclude reopening of the bankruptcy case. The Third Circuit was unconvinced by this argument, explaining that the Bankruptcy Court had considered this fact and weighed reopening the case to administer the previously undisclosed asset against the cost of reopening a case that had been closed for over five years. The Bankruptcy Court concluded that state court remedies would provide adequate value if any remedy was warranted. The Third Circuit decided that this was not an abuse of the Bankruptcy Court’s discretion.

Because Kapitus’s claims were time-barred, Kapitus had an adequate remedy in the form of its state court action against Bari Concrete, and the Bankruptcy Court did not abuse its discretion in deciding so, the Third Circuit affirmed the order of the Bankruptcy Court denying Kapitus’s motion to reopen the bankruptcy case.

In re National Medical Imaging, LLC, No. 22-1727 (3rd Cir. 2023). In this non-precedential opinion, the Third Circuit vacated and remanded the Bankruptcy Court for the Eastern District of Pennsylvania’s decision to disallow U.S. Bank’s right to setoff under 11 U.S.C. § 553(a).

This case arises from years of litigation between National Medical Imaging (“NMI”) and U.S. Bank. In 2008, U.S. Bank and others filed an involuntary bankruptcy petition against NMI. The bankruptcy court later dismissed the involuntary petition. The dismissals caused NMI to sue U.S. Bank for costs and attorneys’ fees under 11 U.S.C. § 303(i)(1) as well as proximate and punitive damages under section 303(i)(2) for an alleged bad-faith involuntary petition. The bankruptcy court stayed that case, on and off, until 2021.

In the interim, U.S. Bank obtained a judgment against NMI for $12 million plus post-judgment interest. U.S. Bank sought to execute on those judgments by moving a Florida state court to force NMI to sell its section 303(i)(2) causes of action. Presumably, U.S. Bank would then credit bid and acquire the claims against itself to nix them. The Florida court granted U.S. Bank’s motion.

Shortly thereafter, NMI voluntarily filed for bankruptcy, declaring its section 303(i) claims to be its only significant assets. NMI then sought two declaratory judgments in an adversary proceeding against U.S. Bank. First, it requested a declaration that U.S. Bank may not set off its money judgment against NMI’s section 303(i) award. Second, NMI asked the bankruptcy court to declare that “U.S. Bank is prohibited from taking any action to interfere with the Debtors’ prosecution of their claims under Section 303(i)” other than defending against those claims.

The bankruptcy court entered judgment in favor of NMI as to the setoff request, reasoning that, “as a matter of public policy,” section 303(i)(1) remedies are not subject to setoff. As to NMI’s second request, the bankruptcy court initially dismissed the claim as unripe because the automatic stay “precludes any action U.S. Bank might wish to take…that might impair or extinguish [NMI’s] § 303(i) claims,” but later sua sponte reversed and entered judgment for NMI. U.S. Bank timely appealed.

The Third Circuit rejected the bankruptcy court’s ruling that U.S. Bank may not set off its judgments against its section 303(i)(1) liability “as a matter of public policy.” The Third Circuit held that public policy cannot displace a statute that is directly on point, as is the case with section 553(a), which governs a creditor’s ability to set off debt owing to reorganizing debtors. Section 553(a) provides:

[T]his title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case.

Section 553 does not create a right of setoff; rather, it preserves whatever setoff rights that may exist outside of bankruptcy. Accordingly, for a creditor to assert a right to setoff under section 553(a), the creditor must demonstrate (i) a right to setoff exists under applicable state law, (ii) the debts are “mutual,” and (iii) that the debts “arose before the commencement of the case.”

In the case at hand, under governing Pennsylvania law, setoff “is an inherent power of the courts, regulated by equitable principles.” The Third Circuit found that the bankruptcy court did not assume the posture of a court sitting in equity, nor did it reference Pennsylvania law in analyzing the circumstances of NMI’s case. The Third Circuit held that the bankruptcy court should have considered whether a right to setoff existed under Pennsylvania law (the threshold question in a section 553 analysis) instead of prematurely barring setoff on public policy grounds. The Court then found that the debts at issue were mutual and arose prior to the petition date, satisfying the statutory requirements of section 553(a). The Court concluded that U.S. Bank is not barred from setting off its section 303(i)(1) liability as a matter of law and remanded to the bankruptcy court to decide whether setoff was available under Pennsylvania law.

In re TE Holdcorp, LLC, No. 22-1807 (3d Cir. 2023). In this opinion, the Third Circuit held that the Bankruptcy Court had jurisdiction to interpret its own orders and properly held that its orders did not preserve any claims by a disgruntled contract counter-party, Spitfire Energy Group, LLC (“Spitfire”) of the debtor TE Holdcorp LLC (“Templar”) against the successful purchaser, Presidio Petroleum LLC (“Presidio”).

Templar filed for Chapter 11 in June of 2020 and also sought to sell substantially all of its assets under section 363 of the Bankruptcy Code and pursue a plan of liquidation. Spitfire raised several objections to Templar’s proposed plan, which Templar resolved by entering into a stipulation that preserved Spitfire’s claims resulting from any rejection of its contract with Templar. As part of the stipulation, Spitfire opted out of the plan’s third-party releases, of which included releases of the successful purchaser.

Presidio was the successful purchaser of Templar’s assets, and the Bankruptcy Court entered an order approving the sale free and clear of all liens, claims, and encumbrances, including contracts not designated for assumption. Spitfire’s contract was not assumed through the sale and Spitfire did not object to the sale. The sale also provided for the deemed consent of any interest-holder who did not object to the Sale.

The Bankruptcy Court entered the confirmation order, which included Spitfire’s opt-out as well as a representation that Spitfire would not file any additional documents or appeal the Chapter 11 cases beyond filing general unsecured claims. Thereafter, Spitfire sued Presidio in state court over the contract Presidio decided not to assume. Believing that the Sale Order and Confirmation Order foreclosed Spitfire’s suit, Presidio moved the Bankruptcy Court to enforce both, which the Bankruptcy Court did, and the District Court affirmed.

On appeal, Spitfire contested two issues: (1) the Bankruptcy Court’s jurisdiction over the enforcement proceedings, and (2) the Bankruptcy Court’s interpretation of its Sale and Confirmation Orders.

The Court noted that the Bankruptcy Court had core jurisdiction over the enforcement motion because it had jurisdiction to interpret and enforce those prior orders, notwithstanding that the Bankruptcy Court’s jurisdiction wanes post-confirmation. In particular, sale and confirmation orders are core bankruptcy proceedings.

With respect to the interpretation of the provisions themselves, the sale order unambiguously provided that any interest holder who fails to object to the “free and clear” sale is deemed to consent. Spitfire participated in the sale hearing, but did not object, so it was deemed to consent to Templar’s asset sale free and clear of any Spitfire’s contractual obligations to Presidio. Likewise, the opt-out provision in the confirmation order did not represent a separate agreement between Spitfire and Presidio, and the stipulation Spitfire entered into with Templar could not be enforced against Presidio. Accordingly, the Third Circuit agreed with the lower courts in enforcing the sale order and confirmation order against Spitfire.

§ 1.1.5. Fourth Circuit

Kiviti v. Bhatt, 80 F.4th 520 (4th Cir. 2023). The Fourth Circuit Court of Appeals sent a strongly worded reminder to bankruptcy litigants that a final bankruptcy order cannot be manufactured for purposes of an appeal. In so doing, the Fourth Circuit differentiated bankruptcy courts’ jurisdiction from that of Article III courts, finding that bankruptcy courts can adjudicate matters that would be found “moot” if put before an Article III court.

A husband and wife (the “Kivitis”) hired a contractor to renovate their Washington, D.C. home. However, the contractor was not properly licensed. D.C. law therefore entitled the Kivitis to recover what they had paid the contractor. However, the Kivitis could prevail in their suit to recover their money, the contractor commenced chapter 7 proceedings. To continue pursuing their claims, the Kivitis filed a proof of claim for their damages, but also commenced an adversary proceeding seeking both a determination that they were entitled to repayment (“Count I”) as well as a determination that their right to repayment was non-dischargeable (“Count II”). When the bankruptcy court dismissed Count II without resolving Count I, finding that the claim—if it existed—was dischargeable, both parties agreed to voluntarily dismiss Count I (without prejudice) so that the bankruptcy court’s dismissal order resolved all of the Kivitis’ claims against the contractor. The Kivitis then appealed the bankruptcy court’s dismissal to the district court, which affirmed without addressing the “finality” of the bankruptcy court’s order.

On appeal, the Fourth Circuit refused to address the underlying substance of the dismissal, instead finding that the district court lacked jurisdiction over the appeal under 28 U.S.C. § 158(a). 28 U.S.C. § 158(a)(1) grants district courts jurisdiction to hear appeals “from final judgments, orders, and decrees” of bankruptcy courts. Focusing on the fact that the parties had voluntarily dismissed Count I to engineer their desired outcome, the Fourth Circuit held that the bankruptcy court’s dismissal of Count II was not a final order when it was entered, because it did not dispose of all claims against the contractor. See Fed. R. Bankr. P. 7054(a) (incorporating Fed. R. Civ. P. 54(a)-(c) into adversary proceeding); Fed. R. Civ. P. 54(b) (“any order or other decision, however designated, that adjudicates fewer than all the claims . . . does not end the action”). Accordingly, the district court did not have jurisdiction to hear the appeal.

In response, the Kivitis argued that Affinity Living Group, LLC v. StarStone Specialty Insurance Co.,959 F.3d 634 (4th Cir. 2020) establishes an exception wherein a partial dismissal may be considered final and appealable after the parties dismiss the remaining claims. They argued that, because the surviving Count I was essentially the same as their proof of claim, the bankruptcy court’s dismissal order had mooted the adversary proceeding. The Fourth Circuit rejected this argument, finding that mootness, which arises from Article III’s “case-or-controversy” requirement, does not constrain bankruptcy courts’ authority to act. Accordingly, because the bankruptcy court was capable of adjudicating a constitutionally moot matter, such as the remaining Count I, the dismissal of Count II did not give rise to a final order.

§ 1.1.6. Fifth Circuit

RDNJ Trowbridge v. Chesapeake Energy Corp. (In re Chesapeake Energy Corp.), 70 F.4th 273 (5th Cir. 2023). After it emerged from Chapter 11, Chesapeake Energy Corporation tested the limits of post-confirmation jurisdiction by asking the bankruptcy court to approve settlements of certain purported class actions that had been filed before the bankruptcy case. The problem was that no proof of claim was filed by most of the class members. And certain features of the settlement conflicted with the plan and disclosure statement. The Fifth Circuit concluded that attempting to handle these cases within the bankruptcy court exceeded post-confirmation jurisdiction and remanded with instructions to dismiss.

The underlying lawsuits were two federal class actions filed in Pennsylvania and a third state-court proceeding brought by the Pennsylvania Attorney General. All three lawsuits involved the underpayment of royalties. In the case of one class action, the district court preliminarily approved a settlement, but a large number of putative class members opted out. In the other class action, a preliminary settlement was reached but preliminary approval had not been granted. The state-court litigation was pending before the Supreme Court of Pennsylvania at the time Chesapeake filed for bankruptcy. The bankruptcy filing stayed all three of these aforementioned non-bankruptcy cases.

Following the filing of the bankruptcy case, the Bankruptcy court set a claims bar date of October 30, 2020. None of the named plaintiffs in federal the class actions filed proofs of claim nor did the vast majority of landowners within the putative classes. The Attorney General did file a timely proof of claim as did the individual lease holders within the two putative classes. Ultimately, the bankruptcy court confirmed Chesapeake’s plan of reorganization and approved its disclosure statement. The disclosure statement provided that the landowners’ claims for nonpayment of royalties would be included in the class of general unsecured claims. And holders of allowed claims within this class were estimated to receive 0.1% of the amount owed. The plan, and the disclosure statement, assured Chesapeake’s creditors that the mineral leases in question would remain in full force and effect and that no royalty interest would be compromised or discharged by the plaintiff. But prepetition rights to royalty payments would be treated as a claim under the plan and subject to discharge. The plan further stated that late-filed proofs of claim would be deemed disallowed and expunged, absent an order of the court deeming the claim timely filed. The plan further rejected the pending, pre-petition class settlement agreements. While the plan did authorize certain late filing of proofs of claim, none were filed by any of the class plaintiffs. Thus, only the Attorney General and the 161 individual leaseholders were eligible to vote or receive any distribution of account of their damage plans. The leases rode through the bankruptcy unimpaired.

On the effective date, the Attorney General’s claims were settled. But a month after the effective date, Chesapeake reached new settlement agreements with the two class action plaintiffs, which purportedly resolved all of Chesapeake’s remaining Pennsylvania royalty-related litigation disputes. The two settlements called for Chesapeake to pay a combined $6.25 million dollars and resolved the claims of approximately 23,000 Pennsylvania landowners. Chesapeake sought preliminary approval of the settlements from the bankruptcy court. The lessors who had filed proofs of claim opposed the motion. The bankruptcy court concluded that it had “core” jurisdiction over the settlements pursuant to 28 U.S.C. §1334(a). Ultimately, the Court overruled the objections and preliminarily approved the settlements, preliminarily certified the settlement classes, and approved the form and manner of notice. The Bankruptcy court further concluded that an Article III court would need to make the final determination regarding class certification and settlement approval. On appeal, the district court affirmed the bankruptcy court’s preliminary approval. The district court disagreed with the bankruptcy court’s determination of core jurisdiction. While core jurisdiction was lacking, the district court nonetheless found jurisdiction existed to adjudicate the settlements because they related to the confirmed Chapter 11 plan.

These decisions were ultimately appealed to the Fifth Circuit. Finding that the jurisdictional issue was determinative, the appellate court limited its review to that issue. The court initially rejected the contention that there was core bankruptcy jurisdiction. The settlements were not within the ordinary claims adjudication process. Thousands of leaseholders who were potential class members never filed proofs of claim, nor did Chesapeake file a proof of claim of any sort referencing Pennsylvania royalty claims. The plan emphatically provides that late filed proofs of claim would be deemed disallowed and expunged. And because no proofs of claim were ever filed, they cannot now be deemed timely filed. Moreover, neither court below had held that the claims were timely filed.

Treating the class actions as if they had been the subject of timely filed proofs of claim would simply disregard the reorganization process. The requirement of filing a proof of claim is more than a technicality. “Proofs of claim are the touchstone for plan approval and proper distribution of the debtor’s assets allotted to each creditor class.” Notwithstanding the fact that these claims were classified as general unsecured claims to be paid only 0.1% of their pre-petition amount, the settlements would result in the leaseholders obtaining well over 20% of the amount they negotiated in their pre-petition settlement agreements. The Court found this to be an enormous windfall when compared with the treatment of other general unsecured creditors. This approach “thwarted the transparency of the reorganization process.” And the 161 leaseholders who did file timely proofs of claim could not be the basis for class settlements to fall within core jurisdiction. The Fifth Circuit found this to be an “audacious attempt to bootstrap a few objectors’ preserved rights into a basis for ‘fundamental reset’ between the debtor and nearly 23,000 other Pennsylvania lessors who did not preserve their rights.”

The court then turned to the question of “related-to jurisdiction.” The Court acknowledged that this sort of jurisdiction presented a closer question. In the post-confirmation context, the question is whether the dispute concerns the effectuation of the plan.” In that context, the Court has identified three factors that constitute a “useful heuristic”:

• First, do the claims at issue principally deal with post-confirmation relations between the parties?
• Second, was there an antagonism or a claim pending between the parties as of the date of the reorganization?
• Third, are there any facts or laws deriving from the reorganization of the plan necessary to the claim?

The Court addressed each of these factors in turn.

Because the settlements in question predated the bankruptcy, they do not principally deal with post-confirmation business. The vast majority of the class action claimants would have no recourse in bankruptcy court for their pre-petition monetary claims as the debts owed to them were discharged and expunged. The class action plaintiffs cannot resurrect those claims, use them to invoke bankruptcy jurisdiction, and then lay them to rest via class settlements. Moreover, the settlement agreements purported to modify the terms of the lease going forward for all the class members, even those who originally opted out of the settlements. This is contrary to the plan which stated that the leases would ride through unaffected. Accordingly, the Fifth Circuit found that this first factor weighed against jurisdiction.

In regard to whether there was antagonism pending at the date of reorganization, the Court agreed that that antagonism predated confirmation. But the class action against Chesapeake did not survive confirmation. Post-confirmation, the class members could not pursue their discharged claims and the plan did not adversely affect or modify their pre-petition royalty provisions. Thus, this factor did not warrant the exercise of related-to jurisdiction.

The third factor also worked against the class plaintiffs. Nothing in the plan is necessary to the disposition of the claims or the settlement agreements. Those agreements have nothing to do with any obligation created by the plan nor did Chesapeake contend that modifying the leases going forward would affect its distribution to creditors under the plan. To the contrary, the settlements contradict the plan. Thus, far from merely enforcing the plan, the settlement effects a fundamental reset of the relationship. The effect of this reset concerns the future, not the consummated reorganization. Thus, the approval of the settlements did not pertain to the implementation or execution of the plan. Because these were voluntary arrangements paying off claims that were already discharged, it would make little sense to hold that post-confirmation jurisdiction extended to them. Thus, the bankruptcy and district courts lacked jurisdiction, the judgments were vacated, and the proceedings were remanded with instructions to dismiss for lack of jurisdiction.

§ 1.1.7. Sixth Circuit

Hall v. Meisner, 51 F.4th 185 (6th Cir. 2022). The Sixth Circuit Court of Appeals held that a Michigan law permitting the county to take absolute title to real property for failure to pay certain property taxes violated the Takings Clause of the Fifth Amendment, overturning the district court’s dismissal of the claim. In so holding, the Sixth Circuit conducted a deep historical analysis of longstanding principles affording property owners equitable title in their property and disfavoring strict foreclosure.

The Michigan General Property Tax Act afforded either the county or the state to foreclose on real property in the event that property taxes remained unpaid for more than twelve months. Under the law, upon foreclosure, “absolute title” would vest in the governmental unit exercising its foreclosure right. The statute then afforded first the state, and then the city or town the right to buy the property from the foreclosing governmental unit for the amount of the tax delinquency. At that point, the property could then be sold at public auction. However, the statute did not afford the former property owner the right to receive any surplus from the auction.

Plaintiffs in the case at hand owed tax liabilities of $22,642, $30,547, and $43,350, respectively. Oakland County foreclosed under the General Property Tax Act and subsequently transferred the properties to the City of Southfield for the amount of the tax deficiencies. Southfield, in turn, sold the properties to the Southfield Neighborhood Revitalization Initiative, a for-profit entity, for $1. The Initiative then sold the first two properties for $308,000 and $155,000, respectively; the third property had not yet been sold at the time of the Sixth Circuit’s decision. The plaintiffs brought suit against the County, Southfield, the Initiative, and certain officers of each under 42 U.S.C. § 1983, alleging, among other things, that the County impermissibly deprived them of the equity in their homes without just compensation, in violation of the Takings Clause of the Fifth Amendment. The district court, however, dismissed the claim, finding that there was no surplus from the County’s disposition of the properties. The plaintiffs appealed the dismissal to the Sixth Circuit.

The Sixth Circuit disagreed with the district court’s approach, finding that the district court’s scope of review—which focused only on the question of whether there was a surplus, and therefore equity available to the property owners—was too limited. Looking instead to the mechanics of the Michigan General Property Tax Act, the Sixth Circuit considered whether Michigan had, ipse dixit, effected a taking “merely by defining [the property owners’ equity in their homes] away,” contravening longstanding principles of traditional property interests. Id. at 190. After a lengthy survey of a mortgagor’s equitable interests in property, covering 12^th century English case law through 19^th century American case law, the Sixth Circuit established that both English and American courts have consistently held strict foreclosure—whereby a property owner’s equitable interest in their property is entirely extinguished and given to the foreclosing in fee simple—to be an “unconscionable” and impermissible abrogation of debtor-property-owner’s rights. Both the English and American legal systems recognized that, although a creditor has a right to his security, that right only exists to the extent of the debts he is owed. The debtor has an equitable right to any value realized above the value of the debt. Because the Michigan General Property Tax Act did not contain a mechanism to afford property owners of their equitable right to any amounts above the tax deficiency amount, the Sixth Circuit held that the law effected an unconstitutional taking, reversing the district court.

§1.1.8. Seventh Circuit

Mann v. LSQ Funding Group, LLC, 71 F.4th 640 (7th Cir. 2023). The Seventh Circuit Court of Appeals had occasion to evaluate the Bankruptcy Code’s requirement for there to be a transfer of “an interest of the debtor in property” in connection with a voidable preferential or fraudulent transfer. See 11 U.S.C. §§ 547(b), 548(a)(1). The Seventh Circuit’s decision—that a transfer sought to be avoided under either sections 547 or 548 of the Bankruptcy Code must, at least, have had some diminutive effect on the debtor’s estate—aligns with decisions from other circuits that have held or suggested that the presence of a fraud is not sufficient to render a transaction voidable under the Bankruptcy Code. See id. at 648 (collecting cases).

Prior to its bankruptcy filing, Engstrom, Inc. engaged in a factoring agreement with LSQ Funding Group, L.C. (“LSQ”), pursuant to which LSQ agreed to provide upfront payments to Engstrom on the basis of its future receivables. Pursuant to the arrangement, LSQ took a security interest in Engstrom’s receivables. However, when LSQ discovered that the receivables were fictitious, it terminated the arrangement, creating a $10.3 million payable for Engstrom. Engstrom’s CEO then allegedly hatched a plan whereby she arranged for a new lender, Millennium Funding (“Millennium”), to buy Engstrom’s $10.3 million payable from LSQ, replacing LSQ as creditor. In connection with the transfer, LSQ transferred its interest in the Engstrom’s receivables to Millennium. After Engstrom commenced chapter 7 proceedings, however, the trustee sought to avoid the transfer between LSQ and Millennium as a payoff of Engstrom’s debt. The bankruptcy court disagreed and awarded summary judgment to LSQ based on the doctrine of “earmarking,” pursuant to which one creditor may provide a debtor “earmarked” funds to pay off a specific debt in full, thereby assuming the original creditor’s position, without being subject to a preference action. Accordingly, the bankruptcy court found that Millennium’s payment to LSQ was not a transfer of an “interest of the debtor in property.” The district court affirmed.

On appeal, the Seventh Circuit disposed of any analysis of the earmarking doctrine, instead relying only on an analysis of whether the transfer between LSQ and Millennium constituted a transfer of “an interest of the debtor in property.” In so doing, the Seventh Circuit considered both “(1) whether the debtor c[ould] exercise control over the funds transferred; and (2) whether the transfer diminishe[d] the property of the estate.” Id. at 645 (citing Matter of Smith, 966 F.2d 1527, 1535 (7th Cir. 1992)). Looking first to the question of Engstrom’s control, the Seventh Circuit found insufficient evidence to conclude that Engstrom had, in fact, controlled the payoff between LSQ and Millennium. But regardless of the infirmities in the factual record in connection with the first question, the panel found that, because there was no diminution to the estate resulting from the transaction, there was definitively no transfer of “an interest of the debtor in property” for both purposes of section 547 and section 548. As such, the issue of fraud remained solely between LSQ and Millennium.

Warsco v. Creditmax Collection Agency, Inc. (In re Harris), 56 F.4th 1134 (7th Cir. 2023). The Seventh Circuit heard and decided a direct appeal in a preference action in order to overturn its own precedent established in In re Coppie, 728 F.2d 951 (7th Cir. 1984). The Seventh Circuit panel determined that Coppie was in direct conflict with the Supreme Court’s decision in Barnhill v. Johnson, 503 U.S. 393 (1992).

A chapter 7 trustee commenced an adversary seeking to avoid approximately $3,700 in payments made by the debtor to creditor Creditmax in the ninety days prior to the debtor’s bankruptcy proceeding. The payments were made pursuant to a garnishment order that Creditmax had obtained from an Indiana state court more than ninety days before the bankruptcy proceeding commenced. In defense of the payments, Creditmax argued that Coppie, which held that (1) the definition of a “transfer” for purposes of section 547 of the Bankruptcy Code depended on state law, and (2) that, under Indiana law, the date of a transfer with respect to a garnishment occurs when the garnishment order is entered, required dismissal of the trustee’s claims. The bankruptcy court agreed, nevertheless noting that it thought Coppie was wrongly decided, but stating that only the Seventh Circuit could overrule its decision.

After accepting the case on direct appeal, the Seventh Circuit reversed the bankruptcy court to find that the garnished payments were voidable preferential transfers. In so holding, the panel acknowledged that the Supreme Court’s decision in Barnhill abrogated Coppie. Barnhill held that the meaning of “transfer,” for the purpose of section 547, was defined by federal—rather than state—law. Furthermore, the Court in Barnhill determined that, for purposes of a preference claim, the transfer is made as of the date money passes to the creditor. Although the instrument at issue in Barnhill was a check, rather than a garnishment, the Seventh Circuit applied the same reasoning in its holding that the garnished payments arose within the ninety-day preference window, and therefore remanded the case back to the bankruptcy court for further proceedings on the merits of the trustee’s claim.

§1.1.9. Eighth Circuit

Pitman Farms v. ARKK Food Co., LLC (In re Simply Essentials, LLC), 78 F.4th 1006 (8th Cir. 2023). The Eighth Circuit definitively held that avoidance actions can be sold as property of the estate under section 541(a).

The debtor operated a chicken production and processing facility in Iowa. It was forced into an involuntary chapter 7 proceeding by disgruntled creditors. Upon his appointment, the chapter 7 trustee determined that the estate did not have sufficient funds to pursue certain avoidance actions it had against creditor Pitman Farms (“Pitman”). After soliciting bids, the trustee selected another creditor, AARK Food Company (“AARK”), as the winning bidder, over Pitman’s competing bid. The bankruptcy court then approved the trustee’s sale to AARK over Pitman’s objection. Pitman appealed.

On appeal, Pitman argued that avoidance actions are not property of the estate and instead belong to the trustee or other creditors. Looking first to the plain language of section 541(a) of the Bankruptcy Code, the Eighth Circuit disagreed, finding that avoidance actions fit within the broad ambit of “property of the estate.” Not only does a debtor have an interest in avoidance actions that becomes property of the estate pursuant to section 541(a)(7), but the Eighth Circuit also found that, prior to the commencement of a bankruptcy proceeding, a debtor has an inchoate interest in avoidance actions that becomes property of the estate under section 541(a)(1). The Eighth Circuit was also not convinced by Pitman’s argument that including avoidance actions as property of the estate would render language in section 541(a)(3) and (4) redundant to section 541(a)(6). Noting that the “canon against surplusage is not an absolute rule,” the panel determined that the “the possibility of our interpretation creating surplusage does not alter our conclusion that avoidance actions are part of the estate under the plain language of § 541(a).” Id. at 1009–10. Finally, the Eighth Circuit found persuasive the consensus among other circuits—namely, the First, Fifth, and Seventh Circuits—that avoidance actions constitute property of the estate. Although the Third Circuit had held that avoidance actions were not “assets” of the estate, In re Cybergenics Corp., 226 F.3d 227 (3d Cir. 2000), the opinion distinguished “property of the estate” from “assets,” and so would not deter the Eighth Circuit from its holding. Accordingly, the Eighth Circuit affirmed the bankruptcy court’s ruling that the avoidance actions were property of the estate that the trustee could sell.

§ 1.1.10. Ninth Circuit

A&D Prop. Consultants, LLC v. A&S Lending, LLC (In re Groves), 652 B.R. 104 (9th Cir. BAP 2023). In affirming the bankruptcy court’s ruling, the Ninth Circuit Bankruptcy Appellate Panel (the “BAP”) held that section 363(f) of the Bankruptcy Code does not allow for the sale of property free and clear of a lien that encumbers a non-debtor co-owner’s interest in the property. This provides much needed clarity on the interplay between sections 363(f) and 363(h), which is an area where there is little caselaw.

As tenants in common, a debtor and her wholly owned limited liability company (the “LLC”) jointly owned two parcels of real property: one was the debtor’s residence (the “Residence”), while the other was an investment property (the “Investment Property”). The debtor and the LLC subsequently took out a loan secured by a deed of trust covering both properties. However, due to a clerical error, the deed of trust only encumbered the debtor’s interest in the Residence and the LLC’s interest in the Investment Property (such that the debtor’s interest in the Investment Property and the LLC’s interest in the residence were unencumbered). After filing a chapter 13 petition, the debtor initiated an adversary proceeding against the current holder of the promissory note and deed of trust (the “Secured Creditor”), seeking a declaratory judgment that the deed of trust only encumbered the debtor’s interest in the Residence and the LLC’s interest in the Investment Property. In its amended answer, the Secured Creditor asserted a counterclaim against the debtor and the LLC for reformation of the deed of trust to reflect that it encumbered the interests of the debtor and the LLC in both properties. After a two-day trial, the bankruptcy court ruled in favor of the debtor and the LLC, dismissing the Secured Creditor’s reformation claim.

After the conclusion of the adversary proceeding, the debtor moved to sell the Investment Property under section 363(h) of the Bankruptcy Code, which allows the sale of property that is co-owned by a debtor. The debtor also sought to sell the Investment Property free and clear of all liens, including the Secured Creditor’s lien on the non-debtor LLC’s interest in the Investment Property, under section 363(f)(4). The Secured Creditor objected to the sale, arguing that it still maintained a lien on the LLC’s interest in the Investment Property. The debtor argued that the Secured Creditor had waived its lien by failing to assert the lien as a compulsory counterclaim in the adversary proceeding. The bankruptcy court ultimately approved the sale free and clear of any liens on the debtor’s interest in the Investment Property, but upheld the Secured Creditor’s lien on the LLC’s interest in the property, and required that any net proceeds from the LLC’s interest in the property to be paid to the Secured Creditor in partial satisfaction of its lien. The LLC appealed as to the bankruptcy court’s ruling that the Secured Creditor maintained its lien on the LLC’s interest in the Investment Property.

In its decision, the BAP addressed the following question, among others: did the bankruptcy court err when it determined that the debtor and the LLC could not sell the Investment Property free and clear of the Secured Creditor’s lien on the LLC’s interest in the property? To answer this question, the BAP examined two cases addressing the intersection of sections 363(f) and 363(h): the first, Hull v. Bishop (In re Bishop), 554 B.R. 558 (Bankr. D. Me. 2016), permitted a sale free and clear of a lien on the non-debtor’s interest in the property, while the second, in re Marko, No. 11-31287, 2014 WL 948492 (Bankr. W.D.N.C. Mar. 11, 2014), held that it would risk overextending the Bankruptcy Code to enable a non-debtor to obtain relief from its liens under section 363(f). The BAP found the reasoning in Marko more persuasive, noting in addition that sections 363(b) and 363(f) are limited to sales of estate property. Because the LLC’s interest in the Investment Property was not part of the bankruptcy estate, it could not be sold free and clear.

Clifton Capital Group, LLC v. Sharp (In re East Coast Foods, Inc.), 66 F.4th 1214 (9th Cir. 2023). Unlike the Fourth Circuit in Kiviti v. Bhatt, 80 F.4th 520 (4th Cir. 2023), above, the Ninth Circuit “returned emphasis” to the requirement that a party must have Article III standing, in addition to “person aggrieved” standing, to appeal a bankruptcy court order. See id. at 906.

In 2016, East Coast Foods, Inc. (“ECF”), manager of four locations of Roscoe’s House of Chicken & Waffles, filed for chapter 11 bankruptcy. An official committee of unsecured creditors (the “Committee”) was appointed. In addition, the bankruptcy court determined it was necessary to appoint a chapter 11 trustee to make business decisions for ECF. Later, the Committee and ECF’s founder, Herb Hudson, put forward a plan that guaranteed creditors payment in full, plus interest. Payments under the plan were secured by a “collateral package,” which included up to a $10 million contribution from Hudson. The plan also provided a set hourly rate of $450, plus expenses, for the chapter 11 trustee.

After the plan was confirmed and became effective, the chapter 11 trustee sought final compensation in the amount of $1,155,844.71, representing the maximum allowable under the fee cap in 11 U.S.C. § 326(a). The amount represented the lodestar (i.e., 1,692.2 hours at a rate of $450 per hour) plus a roughly 65% enhancement for “exceptional services.” A creditor, Clifton Capital Group, LLC (“Clifton”), objected to the fee application, arguing that the case did not merit an enhancement beyond the lodestar. When the bankruptcy court approved the fees, Clifton appealed to the district court. On appeal to the district court, the trustee argued that Clifton lacked standing to appeal because it was not a “party aggrieved.” Finding that Clifton was adversely affected by the fee order because it further subordinated its claim, and therefore “aggrieved,” the district court then agreed with Clifton on the merits, remanding the matter to the bankruptcy court with instructions either to reduce the fees to the lodestar or make detailed findings justifying the enhancement. On remand, the bankruptcy court again approved the trustee’s full fees, including the enhancement. This time, when Clifton appealed, the district court affirmed the bankruptcy court’s order approving the fees.

On appeal before the Ninth Circuit, the panel reconsidered whether Clifton had sufficiently established an actual and imminent injury for purposes of Article III standing. Reviewing the district court’s decision, the Ninth Circuit found that the district court had relied on precedent wherein the existence of a finite pool of assets to pay claims had previously conferred appellate standing on a party whose share of the asset pool was under threat. In this particular case, however, the Ninth Circuit found that ECF’s plan did not establish such a limited fund, but rather provided for the payment in full from the reorganized debtor’s future income, guaranteed by the “collateral package” and Hudson’s $10 million contribution. In light of these circumstances, the Ninth Circuit determined that the district court had erroneously concluded that payment of the chapter 11 trustee’s fees put Clifton at risk for non-payment. The Ninth Circuit also rejected Clifton’s argument that it was harmed because payment of the trustee’s fees would prolong payment of its subordinated claim. The Ninth Circuit found that delayed payment was too conjectural to sustain an injury for the purpose of Article III standing because the plan explicitly stated that the timing of creditor distributions was uncertain. In addition, Clifton was not harmed by any delay in distribution because the plan entitled it to postpetition interest. Accordingly, Clifton had failed to establish an actual injury, and thus did not have standing under Article III to appeal the bankruptcy court’s fee order.

Sony Music Publishing (US) LLC v. Priddis (In re Priddis), No. 22-15457, 2023 WL 2203562 (9th Cir. Feb. 24, 2023). In a split decision, the Ninth Circuit held that an involuntary filing by fourteen creditors, who each had a right to a portion of a $3 million judgment, satisfied the numerosity requirement under section 303(b)(1) of the Bankruptcy Code. Reversing the bankruptcy court’s dismissal and the district court’s affirmation, the majority held that each creditor had an individual claim, notwithstanding that the debt arose from a single judgment.

In 2016, twenty-one publishers sued the debtor for copyright infringement. The debtor entered into a settlement agreement with the publishers, under which the debtor was obligated to make payments to the publishers, who could seek a judgment of $3 million if the debtor failed to make any payments. After the debtor stopped making the settlement payments, fourteen of those publishers sued the debtor and ultimately obtained a stipulated judgment in their favor in the amount of $3 million. These publishers then filed an involuntary bankruptcy against the debtor. The debtor contested the involuntary filing, and the bankruptcy court dismissed it on summary judgement holding that the petitioning creditors failed to satisfy section 303(b)(1)’s numerosity requirement as the stipulated judgment constituted a single, joint claim. On appeal, the district court affirmed, and the debtor appealed to the Ninth Circuit.

On appeal, the Ninth Circuit held that the petitioning creditors did in fact satisfy section 303(b)(1)’s numerosity requirement. The court reasoned that the judgement was easily divisible because the petitioning creditors had stipulated to statutory damages in the underlying suit and, under the Copyright Act, the petitioning creditors would receive damages strictly according to their ownership interests. The court concluded that because each petitioning creditor had an enforceable right to payment in the judgment, they also necessarily each held an individual claim.

The dissent rejected the majority’s finding that the numerosity requirement of section 303(b)(1) had been met for two primary reasons. First, the dissent agreed with the district court that the stipulated judgment merged the petitioning creditors’ claims together. Second, the dissent was troubled by the judgment’s lack of specificity as to how the $3 million figure should be allocated among the publishers. Because the publishers could have reserved their individual rights to payment, but failed to do so, it found that the numerosity requirement of section 303(b)(1) had not been met.

§ 1.1.11. Tenth Circuit

Byrnes v. Byrnes (In re Byrnes), No. 22-2049, 2022 WL 19693003 (10th Cir. Dec. 21, 2022). In an unpublished decision, the Tenth Circuit held that it lacked appellate jurisdiction over the denial of a motion to withdraw the refence of an adversary proceeding to the bankruptcy court. The Tenth Circuit panel held that such a denial is interlocutory, and accordingly that the court did not have appellate jurisdiction.

Shortly after the debtor commenced her chapter 7 proceedings, the debtor’s former spouse, Mr. Byrnes, filed two adversary proceedings against her, which were eventually consolidated. Mr. Byrnes demanded a jury trial and did not consent to the bankruptcy court’s entry of a final order on his claims. While the adversary proceeding was pending, Mr. Byrnes moved to withdraw the reference to the bankruptcy court. The district court then referred the motion to a magistrate, who recommended denial of Mr. Byrnes’ motion to withdraw the reference. Over Mr. Byrnes’ objections, the district court adopted the magistrate’s recommendation. While Mr. Byrnes sought reconsideration of the denial of the motion to withdraw the reference, the bankruptcy court entered a final order dismissing the adversary proceeding. The district court then denied Mr. Byrnes’ motion for reconsideration as moot.

The district court referred the Motion to a magistrate judge, who subsequently issued proposed findings and a recommended disposition denying the Motion (the “PFRD”). In overruling Mr. Byrnes’ objection to the PFRD, the district court denied the Motion and “dismissed the case without prejudice, and entered judgment by separate order.” Id. Mr. Byrnes then moved for reconsideration of the district court’s decision, but the bankruptcy court dismissed the underlying adversary proceeding before the district court reached a decision on the motion for reconsideration, which Mr. Byrnes appealed. The district court then denied the motion for reconsideration “as moot and, alternatively, as lacking a basis in fact or law.” Id.

Because an order to withdraw the reference is an interlocutory matter, which does not dispose of the matter, but merely determines which forum shall hear the matter, the Tenth Circuit dismissed the appeal for lack of appellate jurisdiction.

Miller v. United States, 71 F.4th 1247 (10th Cir. 2023). The Tenth Circuit joins the majority in a circuit split, holding that the waiver of sovereign immunity in section 106(a) of the Bankruptcy Code permits a bankruptcy trustee to pursue avoidance actions against the government under section 544(b)(1), notwithstanding the fact that an actual creditor could not have maintained a suit against the government outside of bankruptcy. In so holding, the Tenth Circuit sided with Ninth and Fourth Circuits against the Seventh Circuit as to how to address the interplay between sections 106(a) and 544(b)(1) of the Code. Compare In re Equip. Acquisition Res., Inc., 742 F.3d 743 (7th Cir. 2014) (holding that section 106(a)’s waiver did not extend to an Illinois state law cause of action under section 544(b)(1)), with In re DBSI, Inc., 869 F.3d 1004 (9th Cir. 2017) (holding that section 106(a)’s waiver extended to an Idaho state law cause of action under section 544(b)(1)), and In re Yahweh Ctr., Inc., 27 F.4th 960 (4th Cir. 2022) (holding in the alterative that section 106(a)’s waiver extended to a North Carolina state law cause of action under section 544(b)(1)).

In 2014, All Resorts Group, Inc. (“All Resorts”) paid the Internal Revenue Service (the “IRS”) $145,138.78 to satisfy the personal tax debts of two of its principals. When All Resorts filed for bankruptcy in 2017, the chapter 7 trustee who was ultimately appointed commenced an adversary proceeding, pursuant to Utah’s Uniform Voidable Transactions Act and section 544(b)(1) of the Bankruptcy Code, against the IRS to recover the payments. In opposition, the government argued not that the transfers did not occur, but instead that the trustee could not meet the requirement, under section 544(b)(1), for there to be an “actual creditor” who could bring suit under state law. In response, the trustee pointed to section 106(a) of the Bankruptcy Code, which abrogates sovereign immunity as to a governmental unit for several purposes, including with respect to section 544 of the Bankruptcy Code. Although no creditor could bring an avoidance action under Utah law in the absence of bankruptcy, the trustee argued that the bankruptcy filing made section 106(a)’s abrogation of sovereign immunity applicable to the underlying Utah state law. The bankruptcy court agreed with the trustee, holding that section 106(a) “unequivocally waives the federal government’s sovereign immunity with respect to the underlying state law cause of action incorporated through [section] 544(b).” Id. at 1251 (quoting In re All Resorts Grp., Inc., 617 B.R. 375, 394 (Bankr. D. Utah 2020)). The district court adopted the bankruptcy court’s decision and affirmed its judgment, and an appeal to the Tenth Circuit followed.

The Tenth Circuit affirmed, finding that section 106(a)’s abrogation of sovereign immunity reached the underlying state law cause of action through section 544(b)(1)’s authority. First looking to the language of section 106(a), the Tenth Circuit held that, in accordance with Supreme Court precedent, the phrase “with respect to” must be construed broadly and “clearly expresses Congress’s intent to abolish the [IRS’s] sovereign immunity in an avoidance proceeding arising under § 544(b)(1), regardless of the context in which the defense arises.” Id. at 1253. The Tenth Circuit then noted that the broad language of section 106(a)(2), authorizing bankruptcy courts “to hear and determine any issue with respect to the application” of section 544, among others, presumes that bankruptcy courts have subject matter jurisdiction, which would not be the case if the government were immune from suit.

§ 1.1.12. Eleventh Circuit

Braun v. America-CV Station Grp., Inc. (In re America-CV Station Grp. Inc.), 56 F.4th 1302 (11th Cir. 2023). The Eleventh Circuit required that a debtor provide a new disclosure statement and opportunity to vote whenever a Chapter 11 plan’s amendment causes a class of creditors to be materially and adversely affected.

The case arose out of an amendment to chapter 11 reorganization plans for Caribevision Holdings, Inc. and Caribevision TV Network, LLC. The initial plans provided that equity in the reorganized debtor would be split among those creditors providing new equity in the reorganized company in proportion to the amount of capital each shareholder contributed. Effectively, equity in the reorganized debtor would be split up among four shareholders. The same day as the deadline for voting on the plan, the debtor informed three out of the four shareholders (the “Pegaso Equity Holders”) that any financing that they would be providing was needed in the next ten days. The Pegaso Equity Holders missed the new deadline, at which point the remaining of shareholder (“Vasallo”) seized the opportunity to fund the entire equity contribution, resulting in Vasallo receiving all equity in the reorganized holding companies. The other creditors disputed the transaction, arguing that they were entitled to additional disclosure and voting.

The Eleventh Circuit explained that modifying a chapter 11 plan of reorganization is permissible under section 1127(a), provided that the plan remains in compliance with all ordinary substantive requirements necessary for any other chapter 11 plan. The Eleventh Circuit highlighted the requirement of section 1123(a)(4) of the Bankruptcy Code that a modified plan must “‘provide the same treatment for each claim or interest of a particular class,’” absent that class’s consent. 56 F.4th at 1308 (quoting 11 U.S.C. § 1123(a)(4)). The court stated that a modification requires the debtor to “provide a new disclosure statement and call for another round of voting” where the amended plan materially and adversely affects that class. Id. at 1309 (citing In re New Power Co., 438 F.3d 1113, 1117–18 (11th Cir. 2006)).

The Eleventh Circuit first found that the bankruptcy court improperly narrowed Bankruptcy Rule 3019(a) when it required new disclosure and voting only where a materially affected claimholder had previously voted to accept the plan. Bankruptcy Rule 3019(a) provides that if the court finds that “‘the proposed modification does not adversely change the treatment of the claim of any creditor. . . who has not accepted . . . the modification, it shall be deemed accepted by all . . . who have previously accepted the plan.’” Id. at 1311 (quoting Bankr. Rule 3019(a)). The circuit court read Bankruptcy Rule 3019(a) expansively, explaining that the use of the word “any” indicated the requirement that a class of creditors receive additional disclosure and voting, even if the class previously voted to reject the plan. Id.

The Eleventh Circuit then explained why the failure to provide additional disclosure was harmful to the Pegaso Equity Holders. The court explained that, because the only notice the appellants actually received was one day’s notice of a contemplated modification, they were denied the opportunity to vote and reject the modified plans and present their objections to the court. The court emphasized the actual notice arrived too close to the confirmation hearing and provided insufficient detail surrounding the terms of the modification.

Esteva v. UBS Fin. Servs. Inc. (In re Esteva), 60 F.4th 664 (11th Cir. 2023). In this case, the Eleventh Circuit further shed light on the ability of parties to convert an interlocutory order into a final order by holding that a stipulation of dismissal under rule 41(a)(1)(A) of the Federal Rules of Civil Procedure (“Rule 41(a)(1)(A)”) with respect to the last remaining claim of an action cannot transform an order granting partial summary judgment into an appealable final order.

A debtor in a converted chapter 11 individual bankruptcy case and his spouse (the “Plaintiffs”) commenced an adversary proceeding against UBS Financial Services and UBS Credit Corp. (together, “UBS”) to recover funds from a frozen account at UBS jointly held by the Plaintiffs (the “Account”). Prior to the bankruptcy, the debtor provided financial services to UBS and, in connection with his recruitment, entered into several agreements with UBS that provided for a $2 million loan to the debtor (the “Promissory Notes”). UBS eventually terminated the debtor on suspicions of fraudulent activity, thereby triggering a provision under the Promissory Notes making any outstanding principal immediately due and payable with interest. To secure repayment of the Promissory Notes, UBS restricted and froze the Account pursuant to a client relationship agreement that governed the Account. Subsequently, the debtor filed for chapter 7 bankruptcy and later converted his case to a proceeding under chapter 11 of the Bankruptcy Code.

During the bankruptcy case, the Plaintiffs filed a complaint against UBS seeking (1) a determination that the debtor’s tenancy-by-the-entirety renders the account exempt, (2) a determination that UBS does not have an enforceable security interest in the Account, (3) the turnover of funds in the account, and (4) restitution based on UBS’ unjust enrichment from the retention of the debtor’s book of business following his termination. UBS then filed counterclaims and the Plaintiffs moved for summary judgment on all claims except for their unjust enrichment claim. After the bankruptcy court entered an order for partial summary judgment but before trial on the remaining claim, UBS appealed the bankruptcy court’s decision without a grant of certification for immediate appeal under Bankruptcy Rule 7054, which incorporates rule 54 of the Federal Rules of Civil Procedure. The district court affirmed the bankruptcy court’s ruling and dismissed the appeal with prejudice.

UBS then appealed to the Eleventh Circuit, which directed the parties to brief the issue of whether the court had jurisdiction as the unjust enrichment claim was still pending. Before oral argument, the parties entered into a stipulation of dismissal under Rule 41(a)(1)(A) with respect to the remaining claim. In its analysis, the court first addressed whether the parties’ argument that the partial summary judgment ruling can be considered a final order because it resolved the discrete dispute over the validity of UBS’ lien against the Account. The court rejected this argument as the court had previously held in Dzikowski v. Boomer’s Sports & Recreation Center, Inc. (In re Boca), 184 F.3d 1285 (11th Cir. 1999) that an order entered in an adversary proceeding must dismiss all claims against all parties to be considered final.

The court also examined whether there were any applicable exceptions to the finality of orders that would grant jurisdiction over the appeal. The court found that the collateral order doctrine, which allows an appeal of an interlocutory order of a separable claim that is collateral to the merits and too important to delay review, did not apply because the bankruptcy court’s partial summary judgement was not separate from the underlying adversary proceeding. Next, the court held that the marginal finality doctrine did not apply because this doctrine only applies to issues of national significance and the bankruptcy suit did not rise to such a level of importance. The court also considered the applicability of the practical finality doctrine, which permits review of an interlocutory order deciding the transfer of property if delaying the appeal would cause irreparable harm. As any harm suffered by UBS here could be remedied with money damages and the debtor did not lack an ability to repay, the court found that UBS would not be subjected to irreparable harm and therefore held this exception did not apply.

Finally, the court addressed whether the stipulation of dismissal cured the court’s lack of jurisdiction under the doctrine of cumulative finality. Under this doctrine, appellate review of an interlocutory order is permitted if the appeal is filed from an order dismissing a claim and followed by a subsequent final judgment without the filing of a new notice of appeal. In analyzing voluntary dismissal pursuant to Rule 41(a)(1)(A), the court found that, pursuant to its previous holding in Perry v. Schumacher Group of Louisiana (In re Perry), 891 F.3d 954 (11th Cir. 2018), voluntary dismissal must be with respect to the entire action and not to individual claims. The stipulation of dismissal between the parties was therefore invalid because it applied to a single claim, and thus the bankruptcy court still had jurisdiction over the action. The court also briefly noted that there were alternative paths available that the parties could have taken to establish appellate jurisdiction, such as certification under Bankruptcy Rule 54(b) or moving to amend under Bankruptcy Rule 15(a), which incorporates rule 15(a) of the Federal Rules of Civil Procedure.

§ 1.1.13. D.C. Circuit

FTC v. Endo Pharms. Inc., 82 F.4th 1196 (D.C. Cir. 2023). The D.C. Circuit ultimately affirmed the district court’s decision dismissing the Federal Trade Commission’s (“FTC”) lawsuit for injunctive and other equitable relief under the Sherman Act and the Federal Trade Commission Act. In doing so, the D.C. Circuit ruled that the lawsuit fell under an exception to the automatic stay as a governmental unit’s regulatory power.

The appellee (“Endo”), a pharmaceutical company, began selling an extended-release oxymorphone, which it held several patents to, under the brand name Opana ER. A third-party (“Impax”) later began to market its own generic version of the drug. In response, Endo filed a patent infringement action in 2008, and the parties settled their dispute in 2010 (the “2010 Agreement”). Under the 2010 Agreement: (1) Impax would not sell its generic version of Opana ER until 2013; (2) Endo would convey a license to Impax to cover all of Endo’s patents regarding Opana ER; and (3) the parties would “negotiate in good faith an amendment to the terms of the License to any patents which issue[d] from any Pending Applications.” Id. at 1201 (internal citations omitted).

In 2012, acquired additional patents related to Opana ER. Pursuant to the 2010 Agreement, Impax began selling its generic version of Opana ER in 2013. Two years later in 2015, Endo asked Impax to pay an eighty-five percent royalty on the license for the additional Opana ER patents, which Impax refused, leading to Endo suing Impax for breach of the 2010 Agreement. The parties reached another settlement (the “2017 Agreement”), through which: (1) Impax was granted a license to all of Endo’s Opana ER patents for payment and royalties from Impax’s Opana ER profits; and (2) Impax’s obligation to pay royalties would terminate if Endo used its own patents to enter the market. As a result of the 2017 Agreement, Endo exited the oxymorphone market, which led to an increase in price of the drug.

The Federal Trade Commission determined that the 2017 Agreement was anticompetitive and filed a complaint for injunctive and other equitable relief against Endo. The FTC alleged that: “(1) [Endo’s] 2017 Agreement violated § 1 of the Sherman Act and it constituted an unfair method of competition in violation of § 5(a) of the FTC Act; and that (2) Amneal [the parent company of Impax] exercised monopoly power in violation of § 2 of the Sherman Act and § 5(a) of the FTC Act.” Id. at 1201–02 (internal citations omitted). Endo moved to dismiss the FTC’s complaint for failure to state a claim and lack of personal jurisdiction. The district court dismissed the action and the FTC appealed. While the appeal was pending, Endo filed for bankruptcy in 2022.

The D.C. Circuit first had to determine whether it had jurisdiction over the FTC’s action against Endo because a “party’s filing for bankruptcy generally triggers an automatic stay of any commencement or continuation of a judicial proceeding against the debtor.” Id. at 1202 (quoting 11 U.S.C. § 362(a)(1)) (internal quotation marks and alterations omitted). If the automatic stay applied, it would “strip[] [the D.C. Circuit] of jurisdiction.” Id. (citing In re Kupperstein, 994 F.3d 673, 677 (1st Cir. 2021)). The D.C. Circuit would have jurisdiction only if the case fell under one of the exceptions to the automatic stay.

One exception includes “actions by a governmental unit intended to enforce such governmental unit’s police and regulatory power.” Id. (quoting Wallaesa v. FAA, 824 F.3d 1071, 1076 n.3 (D.C. Cir. 2016)) (internal quotation marks and alterations omitted). The governmental action will be excepted from the automatic stay if it is “designed primarily to protect the public safety and welfare [and not] for a pecuniary purpose, that is, [recovering] property from the estate.” Id. (quoting In re Kupperstein, 994 F.3d at 677) (internal quotation marks omitted). Here, the FTC commenced the action “to prevent unfair methods of competition, which it is authorized to do if the competition is against public policy.” Id. (internal citations omitted). Thus the D.C. Circuit ruled that the regulatory power exception to the automatic stay applied, and the case could be adjudicated.

As to whether the district court erred in dismissing the FTC’s claims, the D.C. Circuit ruled that it did not, citing to cases that established that “a single patentee may set conditions in granting a single licensee the right to use its valid patents,” which is what the 2017 Agreement did. Id. at 1204 (citing FTC v. Actavis, Inc., 570 U.S. 136, 150 (2013)). Additionally, the “Patent Act expressly authorizes behavior that closely resembles the 2017 Agreement.” Id. The FTC argued that the 2017 Agreement was actually an agreement not to compete because the “2010 Agreement had already given Impax a license to Endo’s present and future patents.” Id. at 1205. However, the D.C. Circuit stated that the FTC “fail[ed] to explain how the 2017 Agreement . . . meaningfully differ[ed] from a standard exclusive license [and that the FTC] admitted that its challenge to the 2017 Agreement would remain the same even if the . . . 2010 Agreement never existed.” Id. The D.C. Circuit also found that there was no basis for Sherman Act liability, and so the district court’s decision to dismiss the case was affirmed.

Letter of Credit Basics

A letter of credit (LC) is an independent undertaking, typically of a bank and issued at the bank’s customer’s request, to pay another against the timely presentation of documents conforming to the LC’s terms. When a seller, lessor, or lender is uncomfortable extending credit to the other party, the buyer, lessee, or borrower may apply to a bank for an LC. With an LC, the issuer’s credit is on the line in addition to the applicant’s, and there are few defenses to payment on an LC. LCs can be divided into two categories: commercial LCs, which are payment mechanisms for the sale of goods, and standby LCs, which support financial obligations.

LC transactions consist of three relationships: (1) the underlying transaction between a buyer and seller of goods, borrower and lender, lessor and lessee, etc.; (2) the reimbursement agreement between the buyer/borrower (applicant) and the bank (issuer); and (3) the LC issued for the benefit of the seller/lessor (beneficiary).

LCs are “independent,” meaning the issuer’s undertaking is not subject to suretyship defenses, and “documentary,” meaning payment is based on documents, not performance or default on the underlying transaction.

Uniform Commercial Code (UCC) Article 5 is the source of LC law in the United States. LCs are also subject to practice rules published by the International Chamber of Commerce (ICC): UCP600 – Uniform Customs and Practice for Documentary Credits, 2007 revision, ICC Pub. No. 600, and ISP98 – International Standby Practices 1998, ICC Pub. No. 590.

LCs fit uneasily with the US Bankruptcy Code; the Bankruptcy Code does not have special rules for LCs, and UCP600 and ISP98 do not address bankruptcy. Additionally, issuing bank insolvency, governed by the National Bank Act and bank regulatory rules, can raise LC issues.

Applicant Bankruptcy

Automatic Stay

LC draw proceeds are the issuing bank’s funds and not the bankrupt applicant’s, so they are not subject to the automatic stay. However, relief from the stay may be required if the beneficiary must notify the applicant of a default, declare a default, terminate a lease, etc., before drawing. Still, such notices may be informational only or not relevant to whether the LC draw should be honored.

Ipso Facto Clause

The Bankruptcy Code prohibits enforcement of ipso facto clauses in executory contracts and unexpired leases. However, notwithstanding such a clause, even when payments are made timely on the underlying agreement, a beneficiary may still be able to draw on an LC posted by its bankrupt debtor based on the wording of the LC and the underlying agreement.

LC Proceeds as Preference

If the drawing triggers an “indirect” preference, the amount of the drawing may have to be returned to the bankrupt’s estate. A preference is not created if an LC is issued at the same time as the debt it supports is incurred, or if the LC is issued to secure an antecedent debt before the preference period commences.

Avoiding Preferences

If the debtor’s reimbursement obligation is fully secured, the beneficiary can argue that by receiving payment outside the LC, the debtor’s collateral is, in effect, released. If the reimbursement obligation is unsecured at the time of the debtor’s bankruptcy, the beneficiary received payments in the preference period directly from the debtor instead of from the LC, and no other exception to preference applies, the debtor’s estate may recover those payments as a preference.

Expiring LCs

A bankruptcy court may determine that the automatic stay prevents the beneficiary from enforcing a pre-bankruptcy covenant against the bankrupt applicant-debtor, requiring the debtor or its trustee to extend the LC.

Issuing Bank’s Reimbursement

If the reimbursement obligation is fully secured and perfected contemporaneously with the LC’s issuance, the issuing bank’s liens should not be subject to a preference action. If the LC is drawn after bankruptcy, the lender needs relief from the automatic stay to realize on its collateral or seek adequate protection of it.

Consequences of Section 363 Sale

If an asset purchase agreement and the bankruptcy court order approving it do not ensure the LC is replaced or fully collateralized, the issuer may lose its collateral.

Beneficiary Bankruptcy

Drawing on Bankrupt Beneficiary’s Nontransferable LC

The beneficiary’s rights under an LC are transferable by operation of law. A trustee in bankruptcy or court-appointed receiver is a transferee by operation of law.

Beneficiary’s Insolvency Being Used Against It

If the applicant can file an action to enjoin the draw, it must show not only material fraud but also the procedural requirements for injunctive relief.

Perfected Security Interest

A creditor’s security interest in the beneficiary’s LC rights is effective if it timely (i) perfects a security interest in the account, chattel paper, instrument, or general intangible the LC supports; or (ii) obtains an assignment of proceeds from the beneficiary that the LC issuer acknowledges.

Assignment of Proceeds as Preferential

If the assignment of proceeds is perfected before the preference period or contemporaneously with the applicant-debtor creating the debt to the assignee, the assignment should not be considered preferential.

Transferee Beneficiary

In some cases, the secured party may become the transferee beneficiary or even direct beneficiary of the LC issued for its debtor’s benefit.

Issuer Insolvency

Traditional LC Issuers

Banks and other depository institutions issue most LCs.

FDIC’s Role and Authority as to LCs Issued by Insolvent Banks

The Federal Deposit Insurance Act gives the Federal Deposit Insurance Corporation (FDIC) broad authority over failed banks, including broad authority to repudiate contracts, including LCs, that the FDIC deems burdensome, at its sole discretion. This is similar to, but broader than, the power of a debtor-in-possession or trustee appointed by the bankruptcy court to reject unwanted executory contracts. The FDIC can repudiate the contract by sending a letter to the counterparty without court approval and without prior notice.

FDIC Approach to LCs Issued by Insolvent Banks

The FDIC traditionally repudiated most LCs issued by failed banks. However, recently, the FDIC established “bridge” banks in the failures of Silicon Valley Bank and Signature Bank, indicating in a financial institution letter (FIL-10-2023) that each “bridge bank is performing under all failed bank contracts and expects all counterparties to similarly fulfill their contractual obligations.” It further indicated that “[a]ll obligations of the bridge [banks] are backed by the FDIC and the Deposit Insurance Fund.”

Going Forward

The FDIC responded to the SVB and Signature failures by putting the banks put into receivership under the Dodd-Frank Act’s systemic risk exception. These seem to be unique cases of the FDIC stepping in and establishing bridge banks to take over all the bank’s assets and liabilities to stem a more systemic risk to the financial system, which has not typically occurred. It is unclear to what extent the FDIC will retreat to its prior practice in handling LCs issued by banks that enter receivership or stand behind the contracts (or some subset of them) in future bank receiverships.

This article is related to a CLE program titled “Disaster Preparedness: Letters of Credit and Bankruptcy” that was presented during the ABA Business Law Section’s 2023 Fall Meeting. To learn more about this topic, listen to a recording of the program and read its in-depth materials, free for members.

What is a spurned seller’s recourse when a buyer walks away from a deal in breach of the purchase agreement? In private M&A, the answer is reasonably straightforward: sue the buyer to close the deal or to recover damages. In public M&A, however, the answer is murky at best.

The problem arises from the manner in which public deals are typically structured. When negotiating with a potential acquirer, the board of a public target company functions effectively as the bargaining agent for its numerous and dispersed shareholders, who cannot feasibly participate in the negotiations or sign the purchase agreement. As a consequence, the target (not its shareholders) is party to the purchase agreement and is, absent any special provisions to the contrary, the only party that can sue the buyer for a breach. Where specific performance (usually the preferred remedy) is unavailable to the target, it must seek redress against the buyer through a damages claim.

If a buyer walks away from a deal, however, the target’s damages would not be expected to include the premium that was otherwise payable to its shareholders since only the shareholders (not the target) were entitled to receive the deal proceeds. In fact, until the Ontario Superior Court’s surprising ruling in Cineplex. v Cineworld (December 12, 2021) that a target company may recover lost-synergy damages from a failed deal, in Canada, most buyers facing such a lawsuit could have credibly argued that the only damages recoverable by a target would be the target’s out-of-pocket costs for the failed transaction. As a consequence, a target may rightly be concerned that the merger agreement it inked with the buyer is nothing more than an option for the latter to walk away from the agreement, where the monetary cost for doing so is a potential damages award of a magnitude far less than that of the premium the buyer avoided paying.

To respond to this low-price “option problem,” a target may insist that the purchase agreement require the buyer to be liable for lost shareholder premium if the buyer wrongly exits the deal—a so-called Con Ed provision, named after the 2005 decision of the US Court of Appeals for the Second Circuit in Consolidated Edison, Inc. v Northeast Utilities. The enforceability of such a provision, however, is unclear. Cineplex hinted at an endorsement of a form of Con Ed provision, but the Ontario Superior Court ultimately held back from issuing firm guidance. More recently, in a first for Delaware, the Court of Chancery addressed the enforceability of a Con Ed provision head-on in Crispo, a case that may prove instructive for Canadian boards seeking to solve the option problem.

Crispo v. Musk

Background

Crispo was a side story to the Twitter–Elon Musk merger saga in which Musk’s holding companies agreed to acquire Twitter, Inc., and then refused to close the deal. In proceedings brought by Twitter shareholder Luigi Crispo seeking specific performance or damages in the alternative, the Court held that Crispo lacked standing to seek specific performance but left open the possibility that Crispo had standing to sue Musk for lost-premium damages on the basis of the lost-premium provision contained in the merger agreement (described below). The Court permitted supplemental briefings on the lost-premium point and held Crispo’s damages claim in abeyance.

Subsequently, Musk agreed to close the merger, rendering Crispo’s lost-premium claim irrelevant. Crispo then filed a “mootness fee” petition in which he argued that his stockholder litigation to recover the lost premium helped sway Musk to ultimately close the deal. On a petition for a mootness fee, the plaintiff must demonstrate that its claim was “meritorious when filed.” In Crispo, the Court of Chancery was asked to consider whether Crispo, a non-party to the merger agreement, asserted a valid claim for lost-premium damages.

Lost-premium provisions are unenforceable by a target under Delaware law

The Musk-Twitter merger agreement included a relatively common formulation of a Con Ed lost-premium provision, providing that if the agreement was terminated because of the buyer’s intentional breach, the target’s damages “would include the benefits of the transactions contemplated by this Agreement lost by the Company’s stockholders . . . (taking into consideration all relevant matters, including lost stockholder premium, other combination opportunities and the time value of money).”

Notwithstanding the clear language entitling the target to lost-premium damages, the Court held that Twitter had no right or expectation to receive the merger consideration—the merger agreement contemplated that the deal consideration would be payable at closing directly to Twitter stockholders (“no stock or cash passes to or through the target”). Where a target has no entitlement to the premium on consummation of the deal, the Court continued, it “has no entitlement to lost-premium damages in the event of a busted deal.” Accordingly, a lost-premium provision that defines a buyer’s damages to include lost premium cannot be enforced by the target. However, the Court noted, such a provision could be enforceable if the parties intended to convey third-party beneficiary status to stockholders for purposes of seeking lost-premium damages.

A lost-premium provision may (or may not) confer third-party rights on stockholders

The Twitter merger agreement expressly excluded third-party rights in favor of shareholders except in limited circumstances not relevant to the analysis. For the Court, this suggested that the parties did not intend to confer third-party beneficiary rights on shareholders for the purpose of recovering lost shareholder premium. However, the Court also noted that another “objectively reasonable interpretation[]” of the agreement was that, by expressly referring to lost-premium damages in the contract, the parties did intend to confer third-party beneficiary rights on shareholders for such damages. However, even if they did, under the merger agreement a claim for lost-premium damages would not “vest” until Twitter’s right to seek specific performance was unavailable.

Ultimately, the Court did not have to conclude which of these two interpretations was correct because it needed to determine only whether Crispo’s claim for lost premium was meritorious when filed. Either Crispo “did not have third-party beneficiary status or his third-party beneficiary rights had not yet vested”—either way his claim lacked merit.

The Law in Canada

Cineplex remains the law in Canada. When Cineworld Group plc wrongfully terminated its agreement to acquire Cineplex Inc., Cineplex argued that it was entitled to seek as compensatory damages the value of the premium that would have been paid to its shareholders had the deal closed. The Ontario Superior Court rejected this claim on the basis of the expectancy principle: “Quite simply, the losses that Cineplex seeks to recover are those of the shareholders, not Cineplex.” The parties’ arrangement agreement did not contain a clause that resembled a lost-premium provision purporting to provide for damages equivalent to lost shareholder value or any other form of Con Ed provision.

The Court also considered whether Cineplex’s shareholders were granted third-party beneficiary status under the arrangement agreement. The agreement had a third-party beneficiaries clause similar to the one at issue in Crispo, which disclaimed the Cineplex shareholders as third-party beneficiaries under the agreement except for the purpose of receiving the deal consideration on closing. On a plain reading of the third-party beneficiary provision, the Court held that the contracting parties had not intended to confer third-party rights on Cineplex’s shareholders for the purpose of enforcing payment of lost shareholder premium.

Lost-Synergy Damages as an Alternative to Lost-Premium Damages?

Although the Court in Cineplex did not award lost-premium damages, it did find that Cineplex was entitled to damages as compensation for loss of synergies that Cineworld projected to be realized in Cineplex following the acquisition. The Court found that, unlike lost premium, Cineplex was entitled to expect such synergies and could therefore use them as a basis for compensatory damages. The Court awarded Cineplex $1.2366 billion in lost-synergy damages as a present-value calculation of Cineworld’s projected annual synergies, an amount that was notably close to the quantum of Cineplex’s lost-premium claim. An appeal of the decision was expected; however, Cineworld subsequently commenced Chapter 11 proceedings, putting an end to the litigation and Cineplex’s damages award. Whether lost-synergy damages will be readily available to a spurned target remains an open question.

Takeaways for Con Ed Provisions in Canadian Public M&A Agreements

1. An Ontario court might enforce a contractual claim for lost premium (a Con Ed provision)

The Cineplex decision hints at a possible means by which a target could contract for a right to recover lost-premium damages: “There is nothing in the agreement that entitled Cineplex, as the contracting party, to recover the loss of the consideration to shareholders if the Transaction was not completed” (emphasis added). This statement suggests that an Ontario court might take a different view from Crispo and give effect to a provision entitling a target to recover damages based on lost shareholder premium. However, given that both Cineplex and Crispo are rooted in the same principle that a target cannot claim in damages an award for lost consideration that it was never entitled to receive under the transaction, it is also possible that a Canadian court could find that a lost-premium provision, without the conferral of third-party rights on shareholders, is unenforceable by a target.

2. A target might consider appointing itself shareholders’ agent or trustee to enforce rights

In Cineplex, the Court noted that the target was named as the agent of its shareholders for the purpose of enforcing their right to receive the deal consideration on closing. Cineplex, however, “was not appointed as agent for the purpose of enforcing their rights against Cineworld if it failed to close” (emphasis added). The contrast was significant for the Court: “If the parties had wanted to appoint Cineplex as the shareholders’ agent to enforce their rights on Cineworld’s failure to close, they could have done so.” In contrast, the Court in Crispo suggested that such an arrangement rests on “shaky ground” because “there is no legal basis for allowing one contracting party to unilaterally and irrevocably appoint itself as an agent for a non-party for the purpose of controlling that party’s rights.” In the Canadian context, possible workarounds to potential agency issues might be to formally appoint the target as shareholder agent by way of the court-approved interim order (if the transaction is structured as an arrangement) or to establish a trust relationship between the target (as trustee) and its shareholders (as beneficiaries).

Whichever way a target company obtains control over lost-premium litigation, certain features of the relationship between the target and its shareholders should be addressed in the agreement. Should the target retain discretion to proceed with the lost-premium litigation? Should the target retain discretion to determine whether settlement or litigation proceeds should be retained by the company or distributed to shareholders? If the proceeds are to be distributed to shareholders, should the right to receive the proceeds trade with the shares or be fixed in advance? Ironing out these details in the agreement and ensuring adequate proxy disclosure will be critical to insulate the target from potential shareholder claims based on the exercise of its discretion. Examples of these arrangements can be found in some US and Canadian public acquisition agreements.

3. Consider other means of recourse against a buyer if Con Ed damages are resisted, such as a reverse-termination fee

Con Ed provisions are often resisted by buyers in Canadian public M&A and are accordingly rarely seen in Canada (reportedly only 2 percent of all public deals in a recent American Bar Association study of Canadian transactions [available to ABA Business Law Section members] included such a provision). In the absence of a Con Ed provision and a viable means to a specific-performance remedy, a reverse-termination fee of sufficient magnitude might be a suitable, negotiable alternative. A reverse-termination fee should be appropriately estimated to align with the principles of compensatory damages to minimize the risk that it is rejected as an unenforceable punitive damages claim. Tying the fee to lost-opportunity cost or a similar measure may prove a reasonable basis to set the amount. While a reverse-termination fee may reduce the agreement to an option on the target, Cineplex suggests that a Canadian court is unlikely to grant an award for lost premium in the absence of a properly constructed Con Ed provision. Put simply, a termination fee may be better than nothing.

This information and comments herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstances. For particular applications of the law to specific situations the reader should seek professional advice.

Tornetta v. Musk, C.A. No. 2018-0408-KSJM, 2024 WL 343699 (Del. Ch. Jan. 30, 2024). ^[1]

In both 2009 and 2012, Tesla, Inc. and its founder and Chief Executive Officer Elon Musk agreed to compensation plans with significant stock option grants that would vest in tranches if Tesla achieved certain operational and financial milestones. Although the 2012 grant had a ten-year term, by 2017, Tesla already was nearing completion of those milestones. Tesla’s board of directors and its stockholders other than Musk then approved a new compensation plan with up to $55.8 billion in total value, comprised of twelve option tranches. Each tranche would vest in the event Tesla’s market capitalization grew by at least $50 billion and Tesla met either an adjusted EBITDA or revenue target in four consecutive fiscal quarters. As the Delaware Court of Chancery described, this was the largest compensation plan the parties could identify “in the history of public markets.” Indeed, it represented over thirty-three times the total value of the next closest plan, which was Musk’s and Tesla’s 2012 plan. In this post-trial decision, the Court examined Tesla’s decision to adopt the compensation plan and held that Musk and the other defendants failed to prove that decision was entirely fair to Tesla.

The stockholder-plaintiffs argued that Musk was Tesla’s controlling stockholder, and therefore that the adoption of the compensation plan should be subject to entire fairness review, rather than deferential review under the business judgment rule. The Court found that at a minimum Musk exercised control in connection with this specific transaction. The Court reasoned, inter alia, that Musk owned 21.9% of Tesla’s outstanding stock, and he was the paradigmatic “Superstar CEO” regarded as critical to a company’s management and its business operations. He also made the initial compensation plan proposal, and he dictated the timing of the process leading up to the transaction. Further, Musk was the impetus for the few changes to the plan that were made after he first proposed it.

Relatedly, the Court found that the compensation plan was not approved by a majority of independent directors, which similarly prevented deferential review under the business judgment rule. The Court pointed to Musk’s long-standing friendships and business relationships with Tesla’s outside directors, who attained great personal wealth due to their ownership of shares in Tesla or other Musk-backed ventures. The Court also found that the record supported that the outside directors in fact acted with a “controlled mindset.” They approached the process leading up to the plan’s adoption “as a form of collaboration” intended to reach a result that would seem fair to Musk—as opposed to an arm’s-length negotiation between parties with adverse interests. The Court emphasized the “absence of any evidence of adversarial negotiations” concerning the size of the plan or its other material terms. Indeed, Musk testified that a change to reduce the number of Tesla shares issuable to him was the result of “me negotiating against myself.”

The compensation plan was approved by an affirmative vote of a majority of disinterested stockholders (i.e., excluding Musk and his affiliates). The defendants argued that approval by Tesla’s stockholders supported that the transaction was fair. The Court disagreed, reasoning that the stockholder vote was not fully informed because Tesla’s proxy statement omitted material information. Tesla referred to its outside directors as “independent,” and it did not disclose the directors’ long-standing, lucrative relationships with Musk that gave rise to their potential conflicts of interest in considering his compensation. The Court further reasoned that the proxy statement should have disclosed Musk’s initial conversations with Tesla regarding the compensation plan, in which Musk proposed the material terms of the plan. The Court observed a description of that conversation was included in four drafts of the proxy statement, but it was omitted from the final version. The Court rejected the defendants’ argument that accurately disclosing the transaction’s economic terms was sufficient, particularly given that the omitted information was important to the accuracy of the proxy statement’s other disclosures concerning the transaction.

Regarding the substance of the plan, the defendants argued the plan was “all upside” for Tesla and its stockholders other than Musk. Specifically, for Musk to be able to acquire all of the shares under the twelve tranches, Tesla’s market capitalization had to increase to an amazing extent—from roughly $50 billion at the time of the plan to $650 billion—which it ultimately did. The Court reasoned, however, that in virtue of his 21.9% ownership, Musk already had “every incentive to push Tesla to levels of transformative growth.” The record evidence did not support that the plan was necessary to keep Musk as CEO. The plan did not require Musk to devote any particular amount of time to Tesla, as opposed to other projects. The Court also questioned whether the plan’s milestones were ambitious, because Tesla’s roughly contemporaneous projections supported that Tesla would probably meet most of the milestones if it successfully executed on its business plan.

The Court also rejected what it called a “hindsight defense”—that the fact Tesla had grown immensely and achieved the milestones supported that the plan worked. The Court stated the defendants “failed to prove that Musk’s less-than-full time efforts for Tesla were solely or directly responsible for Tesla’s recent growth, or that the [compensation plan] was solely or directly responsible for Musk’s efforts.” The Court reasoned this post hoc argument could not make up for the absence of contemporaneous evidence supporting the fairness of the compensation plan.

Because Musk’s compensation plan was not entirely fair to Tesla, the Court ordered that it be rescinded. The Court rejected Musk’s arguments that rescission would leave him uncompensated, because “Musk’s preexisting equity stake provided him tens of billions of dollars for his efforts.” The Court also reasoned that the defendants had not offered a viable alternative remedy short of leaving the entire compensation plan intact, and that any uncertainty as to the appropriate remedy could be resolved against them as the parties who breached fiduciary duties. The Court accordingly entered judgment in the plaintiff’s favor and directed the parties to confer on an order addressing the issue of attorneys’ fees payable to the plaintiff’s counsel.

1. Tyler O’Connell is a Partner at Morris James LLP in Wilmington, Delaware. Any views expressed herein are not necessarily those of the firm or any of its clients. ↑

On February 14, 2024, the British Columbia Civil Resolution Tribunal (the “Tribunal”) found Air Canada liable for misinformation given to a consumer through the use of artificial intelligence chatbots (“AI chatbot”).^[1]

The decision, Moffatt v. Air Canada, generated international headlines, with reports spanning from the Washington Post in the United States to the BBC in the United Kingdom.^[2] While AI comes with economical and functional benefits, companies clearly remain liable if inaccurate information is provided to consumers through use of an AI tool.

Background

AI chatbots are automated programs that use AI and other potential tools like natural language processing to simulate a conversation and provide information in response to a person’s prompts and input. Common virtual assistants such as Alexa and Siri are all examples of AI chatbots.^[3]

Increasingly, AI chatbots are used in commerce. According to a 2024 report from AI Multiple Research,^[4] AI chatbots have saved organizations around $0.70 USD per interaction. By 2025, the predicted revenue of the chatbot industry is estimated to reach around $1.3 billion USD. Today, around half of all large companies are considering investing in these tools. Air Canada’s AI chatbot is one example of their use in a commercial setting. However, as the Tribunal’s decision shows, they do not come without risks.

The Tribunal’s Decision in Moffatt

The Tribunal’s decision came after a complaint was made by Jake Moffatt. Moffatt wanted to purchase an Air Canada plane ticket to fly to Ontario, where his grandmother had recently passed away. On the airline’s website, Moffatt engaged with an AI chatbot, which responded that there is a discount if the buyer is traveling because of a death in the family and using reduced bereavement fares. Anyone seeking a reduced fare could allegedly submit their ticket within ninety days of issuance through an online form and receive the lower bereavement rate.^[5]

Unfortunately, the AI chatbot’s answer was incorrect. The reference to “bereavement fares” was hyperlinked to a separate Air Canada webpage titled “Bereavement travel” that contained additional information regarding Air Canada’s bereavement policy. The webpage indicated that the bereavement policy does not apply to requests for bereavement consideration after travel was completed. Accordingly, when Moffatt submitted his application to receive a partial refund of his fare, Air Canada refused. After a series of interactions, Air Canada admitted that the chatbot had provided “misleading words.” The representative pointed out the chatbot’s link to the bereavement travel webpage and said Air Canada had noted the issue so it could update the chatbot.

Moffatt then sued Air Canada for having relied on its chatbot, which the Tribunal determined was an allegation of negligent misrepresentation. Air Canada alleged that the correct information could have been found elsewhere on its website and argued that it could not be liable for the AI chatbot’s responses.^[6] Strangely, Air Canada endeavored to argue that the chatbot was a separate legal entity that is responsible for its own actions.

The Tribunal ultimately found in favor of Moffatt. While a chatbot has an interactive component, the Tribunal found that the program was just a part of Air Canada’s website and Air Canada still bore responsibility for all the information on its website, whether it came from a static page or a chatbot. As a service provider, Air Canada owed Moffatt a duty of care that was breached by the misrepresentation. Air Canada could not separate itself from the AI chatbot, which was integrated in its own website. Negligence existed as Air Canada did not take reasonable care to ensure that its chatbot provided accurate information. It did not matter if the correct information existed elsewhere. A consumer cannot be expected to double-check information it finds on one part of the website with another.^[7]

The Tribunal ultimately awarded Moffat approximately $650 CAD in damages, plus pre-judgement interest and filing fees with the Tribunal.

Takeaways

While admittedly this is not a court decision, the Tribunal’s decision in Moffatt serves as a helpful reminder that companies remain liable for the actions of their AI tools. Additionally, any company that intends to use AI tools should also ensure that they also put into place adequate internal policies that protect consumer privacy, warn consumers of any limitations, and train the AI system to deliver accurate results.

1. Moffatt v. Air Canada, 2024 BCCRT 149. ↑

2. Kyle Melnick, “Air Canada chatbot promised a discount. Now the airline has to pay it.,” Washington Post, February 18, 2024; Maria Yagoda, “Airline held liable for its chatbot giving passenger bad advice – what this means for travellers,” BBC, February 23, 2024. ↑

3. “What is a chatbot?,” IBM, accessed February 27, 2024. ↑

4. Cem Dilmegani, “90+ Chatbot/Conversational AI Statistics in 2024,” AIMultiple, last modified February 5, 2024. ↑

5. Moffatt, supra note 1, at paras. 13-16. ↑

6. Id. at paras. 18–25. ↑

7. Id. at paras. 26–32. ↑

The new year brings with it four new jurisdictions to watch regarding proposed true lender legislation and Depository Institutions Deregulation and Monetary Control Act (DIDMCA) opt-outs. The District of Columbia, Florida, Maryland, and Washington are the most recent jurisdictions to have introduced true lender legislation in 2024 and towards the tail end of 2023. Uniquely, the District introduced a bill that couples true lender legislation with a DIDMCA opt-out, taking a very hard stance on restricting interest rates imposed on loans made to residents of the District.

District of Columbia

On November 30, 2023, District of Columbia Councilmember Kenyan R. McDuffie introduced B 25-0609, entitled the Protecting Affordable Loans Amendment Act of 2023 (PALs Act), which proposes to opt the District out of sections 521–523 of the DIDMCA. The PALs Act is intended to strengthen consumer protection and limit the interest that out-of-state lenders can charge to the District’s 24 percent maximum usury amount. If the bill passes and the PALs Act is enacted, the District will join Iowa, Puerto Rico, and most recently, Colorado (effective July 1, 2024) in the list of jurisdictions that have opted out of DIDMCA.

Sections 521–523 of DIDMCA empower states by allowing state-chartered banks and credit unions insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration to contract for the interest rate permitted by the state where the bank is located and export that interest rate into other states pursuant to its home state’s interest-rate authority. Conversely, section 525 of DIDMCA permits states to opt out of sections 521–523 via legislation. Opting out would then require application of the state law where the loan is “made.”

If the PALs Act were to be enacted, out-of-state, state-chartered banks and credit unions would ostensibly be required to follow the District’s interest rate and fee restrictions on consumer loans to the District’s residents if the loans are deemed to be made in the District. However, the effectiveness of this legislation is unclear. Federal interpretations of DIDMCA Section 521 establish where a loan is made based on the parties’ contractual choice-of-law provision and the location where certain nonministerial lending functions are performed, such as where the credit decision is made, where the decision to grant credit is communicated from, and where the funds are disbursed. This guidance creates a question as to whether an opt-out actually impacts loans made in other states.

Additionally, the District legislation contains amended definitions of “lender” and other terms, including a predominant economic interest standard that would apply the provisions of the law to entities other than the immediate lender, including certain bank agents and servicers, and a totality of the circumstances test to determine the “true lender” of a “loan.” The proposed definition of “lender” includes any person that offers, makes, arranges, or facilitates a loan or acts as an agent for a third party in making or servicing a loan. This includes “any person engaged in a transaction that is in substance a disguised loan or a subterfuge for the purpose of avoiding this chapter, regardless of whether or not the entity or person is subject to licensing,” and that

1. holds “directly or indirectly, the whole, predominant, or partial economic interest, risk or reward” in a loan,
2. markets or brokers the loan and has a right to acquire an interest in the loan, or
3. based on the “totality of the circumstances” should be considered a lender.

The proposed definition of “loan” includes “money or credit provided to a consumer in exchange for the consumer’s agreement to a certain set of terms, including, but not limited to, any finance charges, interest, or other payments, closed-end and open-end credit, retail installment sales contracts, motor vehicle retail installment sales contracts, and any deferred deposit transactions.”

We note that B 25-0609 was introduced in the District of Columbia Council on November 30, 2023, and on December 5, 2023, the legislation was referred to the Council’s Committee on Business and Economic Development. A public hearing is scheduled for March 13, 2024.

Florida

On October 9, 2023, Florida State Senator Lori Berman introduced SB 146 to add a new section to the Florida Consumer Finance Act (FL-CFA), section 516.181. The new section is aimed at “bank model” lending programs, in which a nonbank partners with a bank to originate loans through it, that focus on making, offering, assisting, or arranging a consumer finance loan with a higher rate or amount than is authorized under Florida law or receiving interest, fees, charges, or other payments in excess of those authorized under Florida law, regardless of whether the payment purports to be voluntary. This could potentially capture “tips” lenders give consumers an option to provide and Earned Wage Access (EWA) products as well, since the definition of “consumer finance loan” includes both loans and extensions of credit.

SB 146 also introduces a “true lender” test with language similar to other recent legislation, including the predominant economic interest standard, the prohibition applicable to bank agents and servicers, and a totality of the circumstances test. SB 146 also provides that if a loan exceeds the consumer usury limit, a person is deemed to be a lender if any of the tests are met.

SB 146 was filed in the Florida Senate on October 9, 2023, referred to committees on October 17, 2023, and introduced to the Florida Senate on January 9, 2024.

Maryland

On January 10, 2024, Maryland legislators introduced two credit regulation bills, HB 254 and HB 246. Through HB 254, Maryland intends to create a new subtitle to the Maryland Commercial Law, the “True Lender Act,” that will impose a true lender test on extensions of credit made to Maryland residents. The law would apply to national bank associations, state-chartered banks, state-chartered credit unions, and any person that extends loans or credit to Maryland residents. As the subtitle is named, HB 254 incorporates true lender principles, including a predominant economic interest standard, a totality of circumstances test, a provision regarding marketing or facilitating the loan or extension of credit, and anti-evasion provisions. HB 254 would also seek to void any loan or extension of credit that violates its provisions.

HB 246, entitled Earned Wage Access and Credit Modernization, proposes to amend Title 12 of the Maryland Commercial Law to govern EWA products by adding a new subtitle. A person providing direct-to-consumer earned wage access will require a license, and employer-integrated earned wage access will require a registration with the Office of Financial Regulation through the Nationwide Mortgage Licensing System (NMLS). Further, HB 246 restricts the acceptance of “tips,” as defined by certain lenders, and tips are included in the definition of “interest.” A consumer loan lender that gives consumers an option to provide the lender a tip is required to set the default tip at zero. A consumer loan lender that receives a tip that would otherwise create a rate of interest above that allowed is not in violation of the law if the lender returns the exceeding amount within thirty calendar days after receiving the tip.

Hearings were held on January 23, 2024, for both HB 254 and 246.

Washington

On December 5, 2023, HB 1874 was pre-filed for introduction to amend the Washington Consumer Loan Act (WA-CLA). The Washington bill, like the Florida bill discussed above, is aimed at “bank model” lending programs that are making, offering, assisting, or arranging loans with rates that exceed those permitted by the WA-CLA, addressing such programs by codifying both a predominant economic interest test and a totality of the circumstances test.

HB 1874 proposes a new definition of “loan” as “money or credit provided to a borrower in exchange for the borrower’s agreement to a certain set of terms including, but not limited to, any finance charges, interest, or other charges, conditions, or considerations.” Also, the proposed law governs whether the lender has legal recourse against the borrower in the event of nonpayment and whether the transaction carries required charges or payments. HB 1874 amends the applicability of the WA-CLA from a “resident” of Washington to any loan made to a person “physically located in Washington.” Additionally, on January 2, 2024, SB 5930 was also pre-filed, following the same concepts.

On December 11, 2023, HB 1918 was pre-filed to propose amendments to the laws that govern small loans under payday loan lending laws and also include true lender principles for small loans. These are loans of $700 or 30 percent of the borrower’s gross monthly income, whichever lower. The legislation also proposes an annual percentage rate cap of 36 percent on such loans. On January 2, 2024, HB 2083 was pre-filed and contains the same proposed amendments as HB 1918 except for adding an emergency declaration and providing an immediate effective date if passed.

HB 1874 and HB 2083 are both in the House Committee on Consumer Protection & Business, and a public hearing was held on January 10, 2024. On January 8, 2024, HB 1918 was referred to the House Committee on Consumer Protection & Business, and SB 5930 was referred to the Senate Committee on Business, Financial Services, Gaming & Trade.

Takeaways

These early proposed bills, like the bill proposed in the District, indicate that we will see more jurisdictions explore whether to follow Colorado’s lead on opting out of DIDMCA, even though the law is nearing forty-four years old. Jurisdictions are also continuing to explore adopting true lender legislation that mirrors legislation in Illinois, Maine, Minnesota, and New Mexico. These legislative proposals appear to be gaining steam as bank partner programs have grown and expanded across the United States.

The District’s PALs Act is interesting, however, in that it seeks to adopt both a DIDMCA opt-out and a true lender test, whereas prior legislation elected one or the other. We would expect that other jurisdictions will continue these trends and explore similar legislation and that the regulatory scrutiny and the potential for enforcement and litigation would be greater where such legislation has been enacted or is in the pipeline.

While there is still some question about the effectiveness of the DIDMCA opt-outs, financial services companies should be aware of the changing landscape as products, services, and programs are developed and maintained.

Following the English High Court’s written reasons for sanctioning the Adler Group restructuring plan on April 21, 2023 (you can read our deep dive on this decision here), the English Court of Appeal overturned the High Court’s decision and sent a strong message regarding future Part 26A restructuring plans and, in particular, the cross-class cramdown regime. The Court of Appeal’s decision, which was handed down on January 23, 2024, represents the maiden voyage of Part 26A restructuring plans in the UK through the appellate process since the introduction of the device in 2020 (Bondco PLC v. Strategic Value Capital Solutions [2024] EWCA (Civ) 24).

Summary of the Adler Group Restructuring Plan

The Adler Group, a prominent German property group owning a rental property portfolio valued at approximately €8 billion, faced a myriad of liquidity challenges following the impact of ratings downgrades, regulatory/bondholder scrutiny, and short-selling pressure. The Adler Group had six series of unsecured notes maturing in 2024, 2025, 2026, 2027, 2028, and 2029 (“Notes”). The proposal (“Plan”), initially sanctioned by the High Court, included

• introducing €937 million of new senior secured debt to repay the Notes maturing on April 27, 2023, and the 2024 Notes, in exchange for a super-senior first-ranking lien and a 22.5 percent equity interest post-restructure;
• extending the maturity date of the 2024 Notes until July 31, 2025, in exchange for priority over other noteholders in terms of repayment (maturity of all other Notes to remain the same); and
• amending the remaining Notes to allow refinancing and receive a paid-in-kind (“PIK”) interest and a subordinated security interest.

An ad hoc group of 2029 noteholders (“AHG”) opposed the Plan, but the Plan was approved by five out of six classes of creditors (37.72 percent of the AHG voting against), and the High Court sanctioned the Plan, including a cross-class cramdown against the AHG. An appeal by the AHG was allowed on the basis of the following arguments:

• Pari passu principle. The first-instance judge failed to recognize the Plan’s departure from the pari passu principle that would apply in the relevant alternative.
• Rationality test. The rationality test used was derived from schemes of arrangement that did not require further investigations regarding improvements to the Plan.
• Incorrect weighting of factors. Too much weight was given to the “no worse off” test and the simple majority of the AHG approving the Plan.

Main Takeaways of the Court of Appeal’s Decision

Further Scrutiny of and Commentary on the Pari Passu Principle

The Court of Appeal’s finding that the restructuring plan violated the pari passu principle sends a loud message about the nonnegotiable nature of equitable creditor treatment and underscores the centrality of proportionate distributions. The Court of Appeal made clear that adherence to the pari passu principle is paramount to eliminate risks associated with sequential payments to creditors from an inadequate common fund of money, and that if the pari passu principle is applied in an alternative scenario to the restructuring plan, then it must also apply to the restructuring plan itself. Departure from this principle requires a robust justification, introducing a nuanced perspective on creditor treatment.

The Court of Appeal declared the Plan to be in violation of the pari passu principle, as it did not treat the AHG in the same way as the secured creditors and other noteholders. The Court of Appeal was not convinced that the reasons argued in favor of the Plan outweighed the inequality of the Plan. In particular, the Court of Appeal was concerned by the nature of the sequential payments under the Plan, which did not align with the essence of pari passu distribution.

This position by the Court of Appeal underscores the importance of equitable creditor treatment in the cross-class cramdown scenario and the importance of providing persuasive reasoning for any deviation from equal treatment.

The Horizontal Comparator Test over the Rationality Test

The Court of Appeal deviated from the “rationality test” used in schemes of arrangement and instead introduced the “horizontal comparator test,” while emphasizing the need for a more sophisticated comparison between dissenting and assenting classes of creditors in a restructuring context.

The horizontal comparator test demands a meticulous evaluation of how different classes should be treated relative to each other in the relevant alternative scenario. This shifts the focus from a broad rationality check, which entails a broad evaluation of creditors’ commercial judgment, to a more nuanced analysis focusing on the actual positioning of creditors. The Court of Appeal, in applying this test, considered whether a proposed plan is the “best” plan, evaluating whether a different formulation could be “fairer.” For instance, if a plan offers enhanced benefits to one class over another without a justifiable reason, it might be deemed inequitable.

The Court of Appeal’s move away from the rationality test shows that courts expect a much more thorough assessment of the treatment of each class of creditor to be undertaken, with the focus being on equality. This may, however, increase the scope for challenges on these grounds in future cases. This uncertainty may result in more secured creditors proposing solutions in a legal framework outside of the UK’s Part 26A regime in order to seek certainty and liquidity.

Other Takeaways

The Court of Appeal decision in the Adler Group case emphasizes the need for a fair court process, comprehensive evidence exchange, and sufficient time for valuation considerations. Genuine urgency is going to be accommodated, but the Court of Appeal decision underscores the need for a robust and transparent process nonetheless. As part of this, the Court of Appeal stressed the importance of comprehensive valuation evidence, signaling a potential move toward longer periods between convening and sanctions hearings.

The Court of Appeal also noted that a restructuring plan can impose a “haircut” on creditors, while also permitting shareholders to retain equity. The Court of Appeal clarified that, in an insolvency scenario, shareholders not being paid until creditors are paid in full is not necessarily a departure from the pari passu principle.

Conclusion

Beyond the specifics of the Adler Group case, this decision provides guidance that may be applied to other scenarios and across jurisdictions. What some readers may view as a useful framework for the approach to other complex restructuring proceedings, others may see as a treacherous shift away from what many commentators considered to be the more “commercial” and expedient position advocated for by the High Court in April 2023.

This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information.

On August 31, 2022, significant amendments to Part V of the Cayman Islands Companies Act (“Act”) took effect to revamp the Cayman Islands restructuring regime. These amendments introduced the new role of a court-appointed “Restructuring Officer” and a dedicated “Restructuring Petition.” The Cayman Islands restructuring officer regime (“RO Regime”) shares certain features with the Chapter 11 bankruptcy procedure in the US and Canada’s Companies’ Creditors Arrangement Act.

Now that the RO Regime is approaching its two-year anniversary, we take the opportunity to provide a brief overview of the RO Regime and an update on how it is working in practice based on the first decisions such as Re Oriente Group Limited, Re Aubit International, and Re Holt Fund SPC.^[1]

The RO Regime has been developed over a number of years with extensive consultation between the Cayman Islands government, the local judiciary, and a number of financial services industry participants (including attorneys and insolvency practitioners). The introduction of the RO Regime has been welcomed by the financial services industry as a useful tool for companies in distress (and their stakeholders) to assist with the protection of a distressed company’s value and a way to provide “breathing space” while a restructuring is carried out.

One benefit of the RO Regime is that there is now a clear distinction between winding-up processes and rescue or recovery paths. Before enactment of the RO Regime, a winding-up petition was required to be presented prior to any application to appoint officeholders (including for the purpose of promoting a restructuring). The filing of a winding-up petition was often the precise act that a distressed company (and/or its stakeholders) was trying to avoid, particularly where such a filing might trigger a corresponding public announcement on a stock exchange or an event of default on the company’s debts. Given the global reach of many Cayman Islands companies, it is understandable that stakeholders in other jurisdictions would often have an instinctive negative reaction to terms such as “winding-up petition” and “liquidator.”

It is now possible to initiate restructuring efforts using a bespoke method with the benefit of a statutory moratorium effective from the time of filing a restructuring petition that is similar to the US Chapter 11 stay (while avoiding the negative connotations associated with the winding-up petition process).

Key features

• A company may seek the appointment of restructuring officers on the grounds that (i) the company is or is likely to become unable to pay its debts; and (ii) intends to present a compromise or arrangement to its creditors.
• The petition seeking the appointment of a restructuring officer may be presented by the directors of a company: (i) without a shareholder resolution and/or an express power to present a petition in its articles of association; and (ii) without the need to present a winding-up petition. This addresses longstanding issues related to the rule in Re Emmadart Ltd [1979], which prevented directors of Cayman Islands companies from presenting a petition to wind up a company (in order to restructure or otherwise) unless expressly authorized by the articles of association.
• The moratorium will arise on presenting the petition seeking the appointment of restructuring officers, rather than from the date of the appointment of officeholders, and it will have extraterritorial effect as a matter of Cayman Islands law. This was aimed at tackling the uncertainty in the interim period where a winding-up petition had been filed with a view to restructuring, which might have triggered events of default, but a stay on claims only occurred after officeholders were appointed.
• The default position is that this will be an inter partes process with adequate notice to be given to all stakeholders.
• The powers of restructuring officers are flexible. The extent to which the directors will continue to manage the affairs of the relevant company will be defined by the order and will depend on the facts of the particular case.
• During the restructuring proceedings, the company will be able to seek sanction of a scheme of arrangement, a parallel process in a foreign jurisdiction, or a consensual compromise.
• Secured creditors with security over the whole or part of the assets of the company will still be entitled to enforce their security without the leave of the court and without reference to the restructuring officers. Unsecured creditors and other stakeholders must seek leave to initiate proceedings and circumvent the stay.

Re Oriente Group Limited, December 8, 2022 (FSD 231 of 2022) (IKJ)

Justice Kawaley handed down the first written judgment on the RO Regime. Re Oriente Group Limited provided a number of important clarifications on the law, including the following:

• Given that the RO Regime expanded the scope of the stay under the previous regime (discussed above), the Court commented that the statutory stay on proceedings under the RO Regime “might be said to turbo charge the degree of protection filing a restructuring petition affords to the petitioning company.” Accordingly, in Re Oriente, the Court found that following the presentation of a winding-up petition against a company, there is no prohibition on a company presenting a restructuring petition and such filing triggering the automatic stay under the RO Regime.
• The Court emphasized that the “jurisdiction to appoint restructuring officers is a broad discretionary jurisdiction” to be exercised where the Grand Court is satisfied that, among other things:
  • The statutory precondition of insolvency or likely insolvency of the company is met by credible evidence from the company or some other independent source;
  • the statutory precondition of an intention to present a restructuring proposal to creditors or any class thereof is met by credible evidence of a “rational proposal with reasonable prospects of success”; and
  • the proposal has or will potentially attract the support of a majority of creditors as a “more favourable commercial alternative to a winding up of the company.”
• The Court indicated that the previous body of case law on restructuring under the former rescue regime would continue to be applicable to the new RO Regime.

Re Aubit International, October 4, 2023 (FSD 240 of 2023) (DDJ)

In the second notable decision on the RO Regime, Justice Doyle reviewed the established jurisprudence and set out a nonexhaustive list of twenty-five factors to be considered in future restructuring applications under the RO Regime, such as the importance of demonstrating that the company was insolvent or likely to be insolvent, and whether a proposed restructuring will have a real prospect of being beneficial to creditors as a whole. Justice Doyle also emphasized that the Court will be wary to avoid abuse of the restructuring officer regime by companies with no intention of restructuring and permitting hopelessly insolvent companies to continue trading.

In this case, Justice Doyle found that the petitioning company did not meet the statutory requirements to appoint restructuring officers, as although it was unable to pay its debts (i.e., insolvent), it failed to meet the second requirement because there was “extremely limited information concerning the proposed ‘restructuring plan.’”

Justice Doyle indicated that although the Court did not go so far as to require that the petitioning company presently had a restructuring plan or that one would be implemented in short order, it was still incumbent on the Court to scrutinize whether there was, on the evidence before it, a genuine and realistic intention to present a credible restructuring plan.

Re Holt Fund SPC, January 26, 2024 (FSD 0309 OF 2023) (IKJ)

In a recent development, Justice Kawaley ordered the first appointment of restructuring officers over one or more portfolios of a segregated portfolio company (“SPC”). SPCs are different from typical Cayman companies in that the assets and liabilities of each segregated portfolio are segregated from each other during the life of the SPC and in liquidation, which is known as the segregation principle. Typically, where a particular portfolio has insufficient assets to meet claims of creditors, a receiver may be appointed for the purpose of an orderly closing down of the business of that portfolio.

Until this judgment, it was not clear that restructuring officers could be appointed in relation to specific portfolios given that each portfolio is not a separate legal entity.

This decision illustrates the flexibility of the SPC regime compared with both traditional companies and corresponding segregated portfolio regimes elsewhere. However, the application to appoint restructuring officers was unopposed in this case, so it will be interesting to see if such appointments are subject to challenge in future.

Takeaway

While not appropriate for all circumstances, the RO Regime will be a sensible and effective method by which large, multinational groups may seek to restructure their debt obligations and other affairs for the benefit of their stakeholders.

The Cayman Courts have provided helpful clarification on a number of aspects of the RO Regime, including the breadth of the automatic stay, the applicability of the RO Regime to SPCs, and the importance of a clear restructuring plan before asking the Court to engage its jurisdiction to appoint restructuring officers. It is clear that the Court is concerned with avoiding abuse of the new restructuring regime while also promoting consistency and certainty, albeit under a turbocharged framework.

This clarification will be especially important for foreign courts in considering whether to recognize and assist Cayman Islands restructuring officers in future. Foreign courts can take comfort in the fact that the Cayman Islands Court remains astute to guard against any abuse of the new regime by carefully analyzing whether the statutory preconditions for appointment are met in the circumstances of each case.

The key to a successful restructuring, through the Cayman RO Regime or otherwise, will always be timely action, with the right advisor team to guide the process.

This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information.

1. Restructuring officers were also appointed subsequently by Chief Justice Ramsay-Hale on February 14, 2023, in Re Rockley Photonics Holdings Limited (FSD 16 of 2023), albeit without a written judgment. ↑

Delaware is a contractarian state, which allows parties the freedom to contract as they see fit and leaves to the parties the ordering of their affairs. Even with the freedom to include (or exclude) terms in a contract, there is one term (a covenant, really) that need not be negotiated or expressly stated in the agreement—that is the implied covenant of good faith and fair dealing. The implied covenant has been described as a “cautious endeavor” that should rarely be invoked.^[1] This is because the covenant is used to protect the parties’ benefit of the bargain and not as a quasi-equitable rebalancing of rights. It cannot be invoked if the issue is already covered by the terms of the agreement. Rather, the job of the covenant is to imply those terms that the parties did not negotiate but that they would have included in their agreement if they had thought to do so. Thus, a party asserting the covenant must identify a gap in the contract for the covenant to fill. Parties may not use the covenant to obtain benefits or protections that they did not obtain at the negotiating table. It is not a free-floating duty unattached to the written contract, and it is not the court’s role to impose terms on the parties to which they did not agree.

No matter how thoroughly parties negotiate their agreement, there may be “nooks and crannies” in the contours of the agreement that are left unnegotiated.^[2] As such, there are some terms that are too obvious to be negotiated—and thus, a gap exists. For example, the implied covenant barred a general partner from seeking the benefit of a safe harbor provision in a limited partnership (LP) agreement where he had used deceptive and misleading tactics; had the parties thought to negotiate that obvious term, they would have provided that the general partner could not use such deceptive devices.^[3]

But a gap in the written agreement is not the only circumstance where the covenant may be applied. In the ordering of their affairs, parties may grant a party the authority to exercise its discretion in making decisions under the contract. While parties are free to set parameters on the exercise of discretion or include a standard by which the exercise of discretion is to be measured, when parties do not spell out the contours of the ability to exercise the discretion granted in the agreement, the implied covenant will imply that discretion must be exercised in good faith.

The covenant requires a contract counterparty to refrain from arbitrary or unreasonable conduct that has the effect of preventing the other party to the contract from receiving the fruits of the bargain.^[4] What is arbitrary or unreasonable is not, however, judged at the time of the alleged wrongful act. Rather, the court will look to the parties’ intent at the time they entered into the contract to determine the parties’ reasonable expectations.

The covenant is implied in every contract. Sometimes the covenant can be confused with contract terms providing for “good faith.” This is often seen in the limited liability company context. Limited liability companies are an attractive vehicle for a variety of investment opportunities, including private equity and hedge fund investments. LLCs (and limited partnerships) provide structural flexibility. It is the policy of the Delaware Limited Liability Company Act (the “Act”), for example, to give maximum effect to the principle of freedom of contract and to the enforceability of LLC agreements.^[5]

Thus, LLC agreements often confer very broad authority on the managers or directors and provide for a safe harbor for their decisions. Indeed, the Act permits the elimination of fiduciary duties.^[6] However, the LLC agreement may not eliminate the covenant of good faith and fair dealing.^[7]

So, what does “good faith” in the covenant mean in these various contexts? An LLC agreement may define “good faith” as being what the manager believes to be in the best interest of the LLC (a subjective standard), or what the manager reasonably believed to be in the best interest of the LLC (an objective standard), or provide that certain actions are conclusively presumed to constitute good faith. These concepts are not to be confused with “good faith” under the covenant, which entails faithfulness to the scope, purpose, and terms of the parties’ contract.^[8]

Understanding the implied covenant and how it differs from express contractual “good faith” standards is important in drafting contracts to obtain the intended objective, usually of limiting the right to challenge a decision or a liability-limiting provision for making self-interested decisions. It is also important to understand the distinction and how each operates in developing litigation strategies. These concepts should be fully explored at the outset of drafting or litigation.

This article is related to a CLE program titled “Good Faith and Fair Dealing: Can the Covenant Really Be Breached?” that was presented during the ABA Business Law Section’s 2023 Fall Meeting. To learn more about this topic, view the program as on-demand CLE, free for members.

1. Nemec v. Shrader, 991 A.2d 1120, 1125 (Del. 2010); MHS Capital LLC v. Goggin, 2018 WL 2149718, at *11 (Del. Ch. May 10, 2018) (cleaned up). ↑

2. Gerber v. Enter. Prods. Holdings, LLC, 67 A.3d 400, 418 (Del. 2013), overruled on other grounds by Winshall v. Viacom Int’l., Inc., 76 A.3d 808 (Del. 2013). ↑

3. Baldwin v. New Wood Resources LLC, 283 A.3d 1099, 1119 (Del. Ch. 2022). ↑

4. Brinckerhoff v. Enbridge Energy Co., Inc., 2016 WL 1757283, at *18 (Del. Ch. Apr. 29, 2016). ↑

5. 6 Del. C. § 18-1101(b); In re P3 Health Group, Hldgs., LLC, 2022 WL 16548567, at 33 (Del. Ch. Oct. 31, 2022) (“parties have broad discretion to use an LLC agreement to define the character of the company and the rights and obligations of its members.”). ↑

6. 6 Del. C. § 18-1101(c). ↑

7. Id. ↑

8. Miller v. HCP & Co., 2018 WL 656378, at *8 (Del. Ch. Feb. 1, 2018) aff’d sub nom. Miller v. HCP Trumpet Invs., LLC, 194 A.3d 908 (Del. 2018). ↑

Attorneys practicing in the field of commercial finance and special assets professionals should keep up with the latest strategies to resolve borrower defaults through negotiated forbearance agreements. As discussed herein, professionals seeking to maximize lender recoveries on distressed debt should consider strategies including, without limitation: (i) preliminary loan workout analysis, (ii) pre-negotiation agreements, and (iii) forbearance agreements, which may be utilized to address deficiencies in loan documentation, collateral, or covenants.

I. Defaults

Defaults under commercial loans may be monetary in nature, i.e., a borrower may fail to pay principal at maturity, interest installments when due, or other indebtedness such as insurance premiums and taxes (collectively, “monetary defaults”). As monetary defaults generally may be cured, lenders must work with their counsel to strategize about potential business plans to resolve such defaults that limit the lender’s risk. Other defaults—such as the unauthorized sale or transfer of collateral, the death of a guarantor, and the failure to comply with applicable laws (collectively, “nonmonetary defaults”)—may not be curable, a factor that lenders should keep in mind when evaluating potential enforcement strategies.

Lenders also should be aware that their remedies must be appropriate for the specific default. For example, courts will examine the fairness and equity of a lender’s choice to accelerate a loan in the context of the nature of the default at issue.^[1] In addition, lenders should review the loan documents to determine whether the borrower’s default is automatic or requires the lender to provide notice and a time period to cure.

Most often, the nature of the collateral will compel treatment of the defaults. For example, a lender may be more willing to work out a loan default for a construction loan where the building is nearly complete and only requires minimal costs to complete it, as compared to a lender’s willingness to work out a loan secured by collateral that may not have value in a sale (e.g., computer components or auto parts). In evaluating their options, lenders also should understand that not all default interest may be recoverable, particularly where interest is assessed pre-maturity on the entire loan amount.^[2] Depending on the jurisdiction, lenders and their counsel should watch for one-action (or “single action”) rules, which require that lenders exhaust their security before suing the borrower directly on the debt^[3] or employ a modified anti-deficiency approach to recoverability.^[4] While default remedies often apply the laws of the lender’s preferred jurisdiction, lenders should be aware of recent legal developments that impact the court’s application of contractual choice of law provisions.^[5]

II. Pre-Negotiation Agreements

Lenders should strategize about a potential pre-negotiation agreement (“PNA”) prior to entering into workout agreements with their borrower. A PNA sets the ground rules for any workout discussion and expressly reserves the lender’s rights and remedies. PNAs also acknowledge the voluntary nature of workout discussions, and they should confirm that either party can terminate negotiations at any time.

Lenders and their professionals should consider utilizing PNAs to maximize lender interests by, for example: (i) stating the existing defaults with clarity and acknowledging that the lender is free to exercise all rights and remedies as a result thereof, (ii) requiring borrower’s cooperation with pre-meeting inspections of collateral, and (iii) including a detailed release of claims in any way connected with the loan documents as of the date of execution of the PNA.

III. Forbearance Agreements

Forbearance agreements can be important tools in a lender’s arsenal for the informal resolution of defaults, as such agreements provide a clear roadmap for resolution and limit a lender’s credit risk while providing a borrower with sufficient time to resolve its financial difficulties and get back on track. Forbearance agreements also are helpful in reducing lender liability concerns, as any disputes by a borrower concerning the factual aspects of a loan and the existing defaults can be addressed in the agreement. A lender also can reduce the risk of its borrower alleging that the lender made oral promises by documenting the terms and conditions for its forbearance in the forbearance agreement.

Lenders should avoid waivers of existing defaults if at all possible. Where they cannot be avoided, waivers should be specific and short term, prepared by counsel, in writing, and clearly labeled as a waiver of existing default. Oral waivers should be avoided at all costs. Lenders also often are able to collect forbearance fees as consideration for their agreement to conditionally forbear from exercising their rights and remedies upon the borrower’s default, as well as releases. In addition, lenders may utilize forbearance agreements to clarify that attorneys’ fees, appraisal fees, litigation costs, and all other costs of collection are recoverable under the parties’ loan documents. Also, any forbearance agreement should clearly state the benchmarks, conditions, or milestones that a borrower must meet—including the timeframe for such compliance—in order for the forbearance to take and stay in effect. Finally, should lenders discover any insufficiency with their collateral, perfection, or documentation, they should strive to fix the deficiency in the forbearance agreement.

IV. Conclusion

Lenders should confer with their counsel to strategize over options to address defaults under their commercial loan documents. The nature of the borrower’s default, the type of collateral, and the lender’s business goals in resolving any default all should be considered when exploring whether a PNA and forbearance agreement may be the best option for a negotiated resolution in any given situation.

This article is based on a CLE program titled “Defaults and Forbearance Agreements” that took place during the ABA Business Law Section’s 2023 Fall Meeting. To learn more about this topic, listen to a recording of the program, free for members.

1. See, e.g., Brown v. AVEMCO Inv. Corp., 603 F.2d 1367 (9th Cir. 1979); Cal. Civ. Code §§ 3275, 3369. ↑

2. See Honchariw v. FJM Private Mortgage Fund, 83 Cal. App. 5th 893 (Sep. 29, 2022); Cal Civ. Code § 1671(b). ↑

3. See, e.g., Cal. Code Civ. Proc. § 726. ↑

4. See, e.g., Tenn. Code. Ann. § 35-5-117. ↑

5. See Carmel Financing, LLC v. Schoenmann, 2022 WL 3599561 (N.D. Cal. Aug. 23, 2022) (declining to apply contractual choice of law provisions when outweighed by public policy issues of concern to the forum state). ↑