Finance & Bankruptcy Blog

By Barbara Altimus Shreero

Judge Christopher M. Klein's decision to accept the City of Stockton's petition for bankruptcy on April 1, 2013 set the stage for a battle over whether public workers' pensions can be reduced through municipal reorganization.

Stockton's public revenues tumbled dramatically when the recession hit, leaving Stockton unable to meet its day-to-day obligations. Stockton slashed its police and fire departments, eliminated many city services, cut public employee benefits and suspended payments on municipal bonds it had used to finance various projects and close projected budget gaps. Stockton continues to pay its obligations to California Public Employees' Retirement System ("CalPERS") for its public workers' pensions. Pension obligations are particularly high because during the years prior to the recession, city workers could "spike" their pensions—by augmenting their final year of compensation with unlimited accrued vacation and sick leave—in order to receive pension payments that grossly exceeded their annual salaries.

By Danielle Kennedy

Round one of the fight between the City of Stockton, California and its creditors is finally over. On April 1, 2013, Bankruptcy Judge Christopher M. Klein held that Stockton satisfied the eligibility requirements for a Chapter 9 debtor.

Back on June 28, 2012, Stockton filed a petition seeking to adjust its debts under Chapter 9 of the United States Bankruptcy Code.

By Eugene Kim 

In a recent Fifth Circuit decision, Western Real Estate Equities, LLC v. Village at Camp Bowie I, L.P., No. 12-10271 (5th Cir. 2013), the court held that the acceptance vote from a minimally and “artificially impaired” class of claims meets the 11 U.S.C. § 1129(a)(10) requirement for the confirmation of a non-consensual “cramdown” chapter 11 plan.

By Blanka Wolfe 

In a recent decision, In re Castleton Plaza, LP, 2013 WL 537269 *1 (Feb. 14, 2013), the Seventh Circuit held that the absolute priority rule – which requires that creditors be paid in full before equity holders receive anything on account of their equity interests under a plan of reorganization – applies equally to the “insiders” of a debtor. In so holding, the Seventh Circuit is accused of extending the scope of the absolute priority rule to the point that it threatens the ability of debtors to reorganize. However, the Court’s holding merely requires that any non-consensual reorganization plan that leaves creditors unpaid and proposes to distribute equity to insiders be subject to competition, as mandated by the U.S. Supreme Court in Bank of American National Trust & Savings Ass’n v. 203 North LaSalle St. P’ship, 526 U.S. 434 (1999). This competition requirement preserves the Bankruptcy Code’s priority scheme to ensure that creditors are paid before equity holders, and protects creditors from creative efforts by equity holders to funnel value to insiders in the face of creditor dissent.

By Reed Mercado 

In a recent decision from the California Court of Appeals entitled Jolley v. Chase Home Finance, LLC, the Court severely curtailed lenders’ ability to dispose of lender liability claims on summary judgment, thereby adopting a marked departure from existing law. In so doing, the Court admonished lenders that the “world [has been] dramatically rocked in the past few years by lending practices colored by short-sighted self-interest.”

By Christine Swanick, Carren Shulman, Wilda Wahpepah, and Shawn Watts

On March 4, 2013, ‘SA’ NYU WA, Inc., a tribally-chartered corporation wholly owned by the Hualapai Indian Tribe, filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court, District of Arizona. This is a very important case for tribes and any party conducting business with tribes because the petition will raise a question of first impression for the Bankruptcy Court. The Bankruptcy Court will have to decide whether a tribal corporation is eligible to be a debtor under the Bankruptcy Code. Continue Reading Questions & comments

By Michael M. Lauter 

On May 29, 2012, the Supreme Court ruled 8-0 that a debtor could not confirm a plan over a secured creditor’s objection if the plan provided for the sale of the secured creditor’s collateral free and clear of liens, but did not provide the secured creditor with the option of credit-bidding at the sale. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, No. 11-166, 2012 U.S. LEXIS 3944 (U.S. May 29, 2012). Such a plan, the Supreme Court held, does not meet the statutory requirements for “fair and equitable” treatment of an objecting secured class in 11 U.S.C. § 1129(b)(2)(A).

The House Judiciary Committee recently held a hearing to consider an amendment to the venue provisions of the Bankruptcy Code proposed by the Committee’s Chairman that would require corporations to file voluntary chapter 11 petitions in the district where they maintain their principal place of business or have their principal assets. Under the current bankruptcy venue provisions of the U.S. Code, a debtor corporation can file its bankruptcy case in the state where it is incorporated, where it has its principal assets, or where it is headquartered. A corporation can also file a chapter 11 case in a venue where its corporate affiliate’s case is already pending. Utilizing these rules, many large chapter 11 cases are commenced in Delaware and New York, despite the fact that the corporate debtor has little ties to those states. For example, Enron – a Texas-based company – filed a bankruptcy for a small New York subsidiary in the Southern District of New York. Shortly thereafter, Enron commenced the bankruptcy case for the main company, and used the venue provisions to bootstrap this case with its New York case, which allowed it to heard along with the subsidiary's case in New York. A more recent example is the Fremont, CA-based Solyndra LLC, which filed a voluntary chapter 11 petition in Delaware, the state of its incorporation.

On Thursday, the Supreme Court in a 5-4 decision ruled in Stern v. Marshall[1] that the congressional grant of jurisdiction to bankruptcy courts to issue final judgments on counterclaims to proofs of claim was unconstitutional. For the litigants, this decision brought an end to an expensive and drawn out litigation between the estates of former Playboy model Anna Nicole Smith and the son of her late husband, Pierce Marshall, which Justice Roberts writing for the majority analogized to the fictional litigation in Charles Dickens’ Bleak House. For bankruptcy practitioners, it is yet another chapter in an even more epic saga – that of the back-and-forth between Congress and the Supreme Court over the jurisdictional limits of the nation’s bankruptcy courts. Instead of offering finality, the decision only raises more questions about how far the Court’s reasoning will extend, and what the implications will be for practice under the Bankruptcy Code.

In In re Young Broadcasting, Inc., et al., 430 B.R. 99 (Bankr. S.D.N.Y. 2010), a bankruptcy court strictly construed the change-in-control provisions of a pre-petition credit agreement and refused to confirm an unsecured creditors' committee's plan of reorganization, which had been premised on the reinstatement of the debtors' accelerated secured debt under Section 1124(2) of the Bankruptcy Code.

On February 11, 2011, the Hon. Alan Gold of the United States District Court for the Southern District of Florida issued a 113 page opinion and order quashing the bankruptcy court's order requiring the lenders involved in TOUSA, Inc.'s Transeastern joint venture to disgorge, as fraudulent transfers under Section 548 of the Bankruptcy Code, settlement monies that they had received on July 31, 2007 in repayment of their existing debt and to pay prejudgment interest on such monies, for a total disgorgement in excess of $480 million.

In a partial reversal of a decision from Bayou Group LLC's bankruptcy case, the U.S. District Court for the Southern District of New York reconsidered a controversial ruling that sent shivers down the spines of institutional investors in 2008.  See In re Bayou Group , LLC, No. 09 Civ. 02577 (S.D.N.Y. Sept. 17, 2010).  Specifically, the District Court found the Bankruptcy Court's legal reasoning faulty in deciding that, as a matter of law, all money paid out to redeeming investors within the reachback period could be avoided as a fraudulent conveyance, even though many of these investors had been defrauded themselves. The District Court's recent ruling may do little, however, to help clarify a murky area for institutional investors, leaving them confused as to how they can not only guard against investment risk in unforeseen fraudulent endeavors, but protect themselves from disgorgement of any return they may have innocently received therefrom once a bankruptcy is filed.

In a decision that may create a significant roadblock for companies saddled with environmental clean-up liability to continue as a going concern, the Seventh Circuit in U.S. v. Apex Oil Company, Inc., 579 F.3d 734 (7th Cir. 2009) affirmed a district court injunction requiring the clean-up of a contaminated site in Illinois under section 7003 of the Resource Conservation and Recovery Act (RCRA) despite the company's bankruptcy. On September 27, 2010, the Supreme Court is scheduled to discuss whether to grant review of the Apex decision.

To read this article on bankruptcies in the fashion industry published by American Lawyer, please click here, or visit the AmLaw Daily website.

In a decision made on August 11, 2009, the U.S. Bankruptcy Court for the Southern District of New York allowed solvent, special purpose entity subsidiaries of a bankrupt parent company, General Growth Properties, Inc., to maintain their Chapter 11 bankruptcy cases, raising several important issues related to the use of special purpose entities structured to be "bankruptcy-remote." 

The author is a member of the Firm's Government Contracts & Regulated Industries Practice Group. For additional articles and postings concerning this and related topics, please refer to Sheppard Mullin's Government Contracts Blog, which can be found at www.governmentcontractslawblog.com.

I.  INTRODUCTION

Without a doubt, the False Claims Act ("FCA") has been dramatically changed in the last few months. As will be discussed in more detail herein, it certainly appears that the FCA has been retooled so that the playing field is now stacked in favor of the government and qui tam plaintiffs. There is also every indication that lenders who have federally insured mortgages, redevelopment funding, or other financial support from the government, are at risk of being sued for false claims unless they take certain precautions to educate and protect themselves.

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Tax Act of 2009 ("ARRTA").  ARRTA contains significant potential Federal income tax relief for businesses.  Some of the more important provisions are summarized in the remainder of this article.

In a recent decision, the United States Supreme Court ruled that asset sales in bankruptcy that occur after plan confirmation will be exempt from certain and often potentially costly state taxes, whereas sales that occur before plan confirmation will not be so exempt. In so ruling, the Court resolved a circuit split regarding the meaning of the statutory phrase "under a plan confirmed under [Chapter 11] of the bankruptcy Code," as codified in 11 U.S.C. § 1146(a).

The case arose from the bankruptcy of Piccadilly Cafeterias, Inc.  At one time among the nation's most successful cafeteria chains, Piccadilly had fallen on hard financial times.  In 2003, Piccadilly filed for Chapter 11 bankruptcy protection in the Southern District of Florida.  As the centerpiece of its reorganization efforts, Piccadilly sought court authorization to sell virtually all of its assets in a § 363(b)(1) sale pursuant to a settlement agreement reached with creditors.  The bankruptcy court granted this authority.  In authorizing the sale, the bankruptcy court further ruled Piccadilly's transfer of assets would be "exempt from stamp taxes under § 1146(a)."  (Maj. Slip Op. at 2.)  Piccadilly closed its sale on March 16, 2004.

In a recently-issued Revenue Procedure (Rev. Proc. 2008-28), the IRS states that the modification of certain mortgage loans under foreclosure prevention programs involving, for example, interest rate reductions, principal forgiveness, extensions of maturity and alterations in the timing of changes in an interest rate generally will not cause the IRS either to challenge the tax status of certain securitization vehicles that hold the loans or to assert that those modifications create a liability for tax on a prohibited transaction. This relief is granted to real estate mortgage investment conduits (REMICs) and investment trusts where the mortgage loan meets all of the following conditions:

In the case of The HA2003 Liquidating Trust v. Credit Suisse Securities (USA) LLC, __ F.3d __ (7th Cir. 2008) ("HA2003"), HALO, an acquiring company, hired CSFB, an investment banker, to (i) renegotiate the economic terms of a stock acquisition of the dot-com target company, Starbelly.com, and (ii) issue a fairness opinion on behalf of HALO in connection with the acquisition.  Concluding that CSFB did not act grossly negligent in issuing the fairness opinion even though the fairness opinion was based on numbers known by HALO's management to be inaccurate, the Seventh Circuit refused to impose liability on CSFB for alleged damages suffered by HALO and its shareholders when HALO became insolvent and filed bankruptcy after the acquisition.

By Order, dated January 14, 2008, United States Bankruptcy Judge Martin Glenn for the United States Bankruptcy Court for the Southern District of New York, granted the motion (the "Motion") filed by a group of creditors seeking transfer of venue of the Dunmore Homes, Inc. (the "Debtor") bankruptcy case from the United States Bankruptcy Court for the Southern District of New York (the "Court") to the Eastern District of California, Sacramento Division.  A number of other creditors and the Official Unsecured Creditors Committee joined in the Motion.  The Motion was opposed by the Debtor, bondholders and two bank creditors.

On May 18, 2007, the Supreme Court for the State of Delaware (the "Court") held that a creditor of a corporation that is operating within the zone of insolvency may not bring a direct action against the corporation's directors for a breach of fiduciary duty under Delaware law.  The Court agreed with the lower court that (i) the creditors' existing protections, including negotiated agreements, security instruments, implied covenant of good faith and fair dealing, fraudulent conveyance law and bankruptcy law make an additional layer of protection in the form of a direct cause of action for breach of fiduciary duty unnecessary and (ii) allowing creditors a direct cause of action against the directors may undermine the corporation's ability to vigorously negotiate with its creditors at a time when the corporation may most need that ability.

The defendants were purchasers of certain copyrights and other assets of debtors Luke Records, Inc. and Luther Campbell under a confirmed chapter 11 plan.  Prior to the filing of the debtors' bankruptcy cases, plaintiff Jeffrey J. Thompkins had conveyed his copyrights in sound recordings and musical compositions to the debtors in exchange for the payment of royalties.  This conveyance was embodied in agreements (the "Agreements") that provided for the "exclusive, unlimited and perpetual rights throughout the world" to the copyrights in sound recordings and musical compositions created by Thompkins, along with "an undivided 50% of the publishing interest" in all such compositions, in exchange for Thompkins' right to be paid royalties and, in some cases, for one-time cash advances.

Since the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, there have been discussions about the impact of Bankruptcy Code Section 503(c) a/k/a the "KERP Killer." As long as there have been KERPs (or key employee retention plans), creditors, creditors' committees and United States Trustees have argued about executive excesses and abuses.  With the enactment of Section 503(c), Congress took on these perceived abuses by adopting a set of rules that makes traditional KERPs difficult, if not impossible, to approve. In response, counsel for debtors immediately began repackaging KERPs as incentive plans ("produce value for pay") rather than retention plans ("pay to stay"). The hope was that incentive plans would be evaluated through the business judgment lens of Bankruptcy Code Section 363, as opposed to the strict new standard of Section 503(c).

On May 1, 2006, the Supreme Court used an opportunity presented by the Anna Nicole Smith bankruptcy case to resolve some confusion among federal courts about the probate exception to federal court jurisdiction. In Marshall v. Marshall, 126 S. Ct. 1735 (2006), the Court clarified and reaffirmed its sixty-year old holding in Markham v. Allen, 326 U.S. 490 (1946) that limited the cases categorically barred from federal courts under this exception to those that interfered with a state court's possession of probate property. Marshall's interpretation of the exception overturned the Ninth Circuit's opinion, which held that not only were direct challenges to wills and trusts excluded, but so were claims involving questions routinely decided by probate courts in determining the validity of an estate planning instrument.

In In re World Health Alternatives, Inc., Case No. 06-10166 (July 7, 2006), the Bankruptcy Court for the District of Delaware held that—notwithstanding the Third Circuit’s recent opinion, In re Armstrong World Indus., Inc., 432 F.3d 507 (3d Cir. 2005)—a secured creditor "give-up" or "carve out" that inures solely to the benefit of general unsecured creditors does not violate the Bankruptcy Code.

On May 30, 2006, the Internal Revenue Service (IRS) published Internal Revenue Bulletin No. 2006-22, Revenue Procedure 2006-24.  This bulletin sets forth the steps for a bankruptcy trustee or debtor in possession to follow in order to obtain a prompt determination by the IRS of any unpaid tax liability of the estate incurred during the administration of the debtor's case. The bulletin can be found at: http://www.irs.gov/irb/2006-22_IRB/ar12.html.

On June 22, 2006, the First Circuit decided Baena v. KPMG, Case No. 05-2868, affirming the district court's holding that the in pari delicto defense barred a trustee from bringing an action against an accounting firm that failed to notify the Debtor's corporate directors of accounting irregularities because the wrongful actions of the corporate officers were imputed to the Debtor as a whole.

The National Association of Consumer Bankruptcy Attorneys (NACB) has issued a report that provides the first analysis of over 60,000 consumers who have filed for bankruptcy protection since the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act in October of 2006. The report, Bankruptcy Reform's Impact: Where Are All the Deadbeats, is available at: http://nacba.com. In its report, the NACB concludes that the changes put in place by Congress are not working as intended. Among other things, the report finds that of the 61,335 consumers seen so far by credit counseling firms nearly all are unable to repay any debts, and four out of five would-be filers were forced into dire financial straits by circumstances beyond their control, such as the loss of a job, catastrophic medical expenses or the death of a spouse.

The Second Circuit has long held that nondebtor releases are proper only in rare cases where the injunction plays an important part in the debtor’s reorganization plan. See SEC v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham Lambert Group, Inc.), 960 F.2d 285 (2d Cir. 1992). The Ninth and Tenth Circuits have gone still further, holding that nondebtor releases are prohibited by the Bankruptcy Code, except in the asbestos context. See Resorts Int’l, Inc. v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394, 1401-02, 1402 n.6 (9^th Cir. 1995); Landsing Diversified Props.-II v. First Nat’l Bank and Trust Co. of Tulsa (In re W. Real Estate Fund, Inc.), 92 F.2d 592, 600-02 (10^th Cir. 1990) (per curiam).

In In re Ruehle, 412 F.3d 679 (6th Cir. 2005), the Court of Appeals for the Sixth Circuit joined a growing number of courts in rejecting the practice of "discharge by declaration." The debtor in Ruehle had included provisions in her Chapter 13 plan purporting to discharge her student loan debt without an adversary proceeding and stating that excluding the loan from discharge would impose an undue hardship on her, a process known as "discharge by declaration." On appeal, the debtor argued that the need for finality trumps the creditor's due process rights, citing as support two cases from the Ninth and Tenth Circuits.

In August 2005, the Advisory Committee on Bankruptcy Rules approved Interim Bankruptcy Rules and Official Forms designed to implement and reflect the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. These Interim Bankruptcy Rules were amended on October 13, 2005. The interim rules are designed to implement the substantive and procedural changes mandated by BAPCPA and are intended to bridge the gap between the effective date of BAPCPA and the promulgation of rules by the Supreme Court. As of December 1, 2005, certain of these rules and forms officially took effect. The full text of the new rules and forms is available at http://www.uscourts.gov/rules/archive.htm#bk2005, under "Bankruptcy." Some of the additional proposed rules and forms remained subject to public comment until February 15, 2006, and therefore, have not yet become effective. The text of these rules can be accessed at http://www.uscourts.gov/rules/newrules6.html#bk0804. Additional information on all the Interim Rules and Official Forms, as well as related legislative developments, can be found at www.uscourts.gov/rules. All of the revised forms are available at http://www.uscourts.gov/rules/new_and_revised_official_forms.html.

The Eleventh Circuit Court of Appeals, in Justice Cometh, Ltd. v. Lambert, 426 F.3d 1342 (11th Cir. 2005), has held that federal district courts have subject matter jurisdiction to adjudicate claims relating to the willful violation of the Bankruptcy Code's automatic stay. The appellate court found no merit in the contention that the district court has only appellate jurisdiction over such matters and that, therefore, a stay violation claim must be brought in the bankruptcy court rather than in the district court. 28 U.S.C. §§ 1331 and 1334 grant federal district courts original jurisdiction over all civil actions arising under Title 11.

The Internal Revenue Service has released a fact sheet regarding responsibilities under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which requires debtors to comply with certain tax-filing responsibilities. In general, the new law requires that debtors comply with their tax-filing responsibilities, make available previously-filed tax returns, in many cases, and seek credit counseling services. The Fact Sheet (FS-2005-18) is available on the IRS's website.

In April 2002, Robert Clauss, Esq., agreed to represent Randall Church in connection with a divorce decree. Clauss ultimately withdrew as Church's attorney, turning over all of his files to Church and releasing his attorney's lien. In September 2003, Church filed for bankruptcy relief, scheduling an outstanding debt to Clauss of approximately $32,000. Clauss asserted that this debt was nondischargeable under Bankruptcy Code section 523(a)(2)(A), contending that Church had obtained the benefit of his legal services by falsely representing that—regardless of whether he filed a bankruptcy case—he would not discharge the debt to Clauss but would pay it in full.

Late-filed claims are not automatically disallowed under the Bankruptcy Code, and under Section 502(b)(9), such late-filed, general unsecured claims are not invalidated to the extent excess funds remain after payment of timely filed claims. As stated by the Bankruptcy Appellate Court for the Eighth Circuit Court of Appeals: "The net effect of the foregoing is to subordinate the payment of late unsecured nonpriority claims to the payment of nonpriority unsecured claims for which proofs were timely filed." "In re Hollingsworth," 331 B.R. 399 (8th Cir. BAP 2005).

According to a press release by the Administrative Office of the U.S. Courts, the total number of bankruptcy filings for the three-month period from June 30, 2005 to September 30, 2005 represented the greatest number of filings recorded for any quarter in the history of the bankruptcy law. During the 12-month period ending Sept. 30, 2005, 1,782,643 bankruptcies were filed, up from the 1,618,987 bankruptcy cases filed in fiscal year 2004.

In the Owens Corning case, the Third Circuit Court of Appeals reversed an Order of the Delaware District Court substantively consolidating Owens Corning, certain of its subsidiaries that had received a $2 billion unsecured loan, and other subsidiaries that had guaranteed repayment of the loan. In Re Owens Corning, No, 04-4080, 2005 WL 1939796 (3d. Cir. Aug. 15, 2005).

On August 12, 2005, the United Bankruptcy Court for the District of Delaware held in Cooper v. Tech Data, (In re Bridgeport Holdings, Inc.) that clear and unambiguous provisions in a disclosure statement and reorganization plan, which specify the category of causes of actions to be preserved and the effect of any recovery, are sufficient to preserve those causes of action for post-confirmation adjudication. Bankruptcy Code Section 1123(b)(3) does not require "specific and unequivocal" identification of all preference claimants.

The "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" (as the "Act") becomes effective Monday, October 17, 2005, and represents the biggest overhaul of bankruptcy law in more than 25 years. The major thrust of the Act is to limit an individual debtor's access to relief under chapter 7 of the bankruptcy code. Chapter 7 gives a debtor the right legally to discharge most debts after the debtor's non-exempt property is turned over to an appointed trustee for liquidation.

On September 20, 2005, the Eleventh Circuit Court of Appeals held in FINOVA Capital Corp. v. Larson Pharmacy Inc., et al. (In re Optical Technologies, Inc.), 2005 WL 2276420 (11th Cir. 2005), that an order confirming a plan of reorganization acts as a judgment given preclusive effect, and a bankruptcy court may not later void parts of its confirmation order based on "second thoughts" about its jurisdiction. The bankruptcy court "is bound to enforce the terms of the Plan as written" once confirmed. This case serves as a warning to all creditors that their rights and claims—even with respect to non-debtors—may be affected by a reorganization plan. Every party receiving a plan and disclosure statement should therefore carefully review these documents to determine whether their rights and claims may be affected and, if necessary, object to the plan or appeal the confirmation order before their rights are deemed waived.

Members of the House and Senate proposed three bills last week that seek to amend the new bankruptcy reform act in response to Hurricane Katrina.

In Dewsnup v. Timm, 502 U.S. 410 (1992), the US Supreme Court held that a debtor cannot avoid an undersecured lien under Bankruptcy Code Section 506(d), known as "stripping down" a lien. The Court did not consider, however, whether a debtor can avoid a wholly unsecured lien under Section 506(d), known as "stripping off" lien. The Delaware bankruptcy court recently considered the latter issue in In Re Pistritto, USBC Del., Case No. 03-10245 (April 19, 2005), and concluded that a Chapter 7 debtor cannot avoid a wholly unsecured consensual lien under Section 506(d).

On August 4, 2005, the Supreme Court of California held that pre-dispute waivers of the right to a jury trial are unenforceable under California law. "Grafton Partners L.P. v. Superior Court." The court based its ruling on California statutory construction and constitutional law principles. It held that the relevant statute, Section 631(d)(2) of the California Code of Civil Procedure, does not provide for pre-litigation jury trial waivers. It also held that the California Constitution does not permit the right to a jury trial to be waived absent an explicit statutory authorization.

In July 2005, the Fifth Circuit Court of Appeals held in Baker Hughes Oilfield Operations, Inc. v. Cage (In re Ramba, Inc.), 2005 WL 1581076 (5th Cir.), that a creditor's agreement to dismiss an involuntary bankruptcy petition in exchange for a debtor's payment of pre-existing debt—because it does not provide a "direct benefit" to the debtor—does not fall within the "contemporaneous exchange" exception to preference actions under 11 U.S.C. § 547(c)(1). The Fifth Circuit Court of Appeals decided this issue as a matter of first impression.

A secured lender that is a party to a written loan agreement—even one that expressly provides that it may not be amended or altered except in writing—may nonetheless be surprised to find itself bound by a loan officer's oral promises if the difference between the written loan agreement and the verbal promises is "drastic" and if the parties' conduct indicates that they considered the promises to have extinguished and replaced the lender's written loan agreement. See Fanucchi & Limi Farms v. United Agri Products, 2005 WL 1645694 (9th Cir. 2005).

In a unanimous decision, the United States Supreme Court recently reversed the Eighth Circuit Court of Appeals and held that debtors can exempt IRAs from the bankruptcy estate under section 522 (d)(10)(E) of the Bankruptcy Code. This decision now settles a division among the Courts of Appeal concerning the exemption of IRAs in bankruptcy cases.

The new amendments to the Bankruptcy Code change business as usual for key employees at companies entering bankruptcy. Prior to this year's amendments, companies in bankruptcy had wide discretion to offer retention bonuses in order to entice key employees to stay on board and guide the business through Chapter 11. Pursuant to the new amendments, the breadth of those incentives has been considerably reduced. So considerably reduced, in fact, that the effect may be that top executives start job hunting at the first sign of trouble and no longer stay with a company in bankruptcy.

With some exceptions, the new bankruptcy provisions do not become effective, and therefore applicable, until 180 days after enactment, or October 17, 2005. Since the new provisions are generally favorable to creditors at the expense of individual debtors, the general notion is that there may be a rush by potential individual debtors to file Chapter 7 petitions before October 17, 2005, so that they are not impacted by the new provisions. This could have a significant impact on lenders that make consumer loans or extend consumer credit -- e.g., home lenders, credit card lenders, household item financers -- because they may be inundated with Chapter 7 filings by their borrowers prior to October 17, 2005.

The general effective date for the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 is October 17, 2005. Cases commenced under title 11 on or after that date will be subject to the amendments made by this Act. However, a number of provisions are effective on a date other than October 17, 2005. The sections referenced below are sections of the Bankruptcy Abuse Prevention and Consumer Protection Act, not sections of the current Bankruptcy Code.

On Wednesday, April 20 2005, the President signed into law the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" (S. 256), which makes extensive changes to the Bankruptcy Code. Although the Act is widely known for its consumer provisions, it contains several sections that will affect business bankruptcies. Click here for the full text of the Bankruptcy Act and additional information.

On April 20 President Bush signed the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005." This act represents the biggest overhaul of bankruptcy law in more than 25 years. While the focus of the act, and much of the publicity surrounding its passage, has centered on its consumer provisions, numerous other changes have been made to the bankruptcy laws that govern chapter 11 business reorganizations.