Insolvency & Restructuring

In Teed v. Thomas & Betts Power Solutions, LLC, the 7th Circuit in an opinion written by Judge Posner held that, absent a good reason to withhold liability, a purchaser of assets was subject to successor liability for Fair Labor Standards Act (“FLSA”) claims and other federal labor and employment laws, even if the successor disclaimed liability when it acquired the assets.

This analysis updates a previous memo and incorporates advice we have received from the Federal Reserve Board (“FRB”) and the Federal Deposit Insurance Corporation (“FDIC”) regarding the preparation of living wills for bank holding companies and banks required to comply by July 1, 2103 or December 31, 2013.

Bankruptcy and insurance law frequently intersect and sometimes conflict. This article addresses the most important of these intersections, including the ability of a debtor to satisfy insured claims by the assignment of coverage proceeds in bankruptcy, the treatment of D&O insurance in bankruptcy, a debtor’s non-payment of a deductible or self insured retention (“SIR”) as a defense to coverage, “buy back” agreements and coverage-in-place settlements in bankruptcy, the ability of insurers and/or debtor-affiliates to obtain third-party releases, insurer insolvency and potential gaps in coverage, and paid-loss retrospective policies and a bankruptcy estate’s bad faith claims. As discussed throughout, this is an area of law that is quickly developing and where several issues remain unsettled.

Software licenses are copyright licenses. The license specifies the extent to which “copying” is permitted under the license. In this article, we address various bankruptcy issues related to computer software, computer software licenses and other intellectual property assets. First, we provide basic background applicable to licensor/licensee bankruptcies. Second, we discuss the Intellectual Property Bankruptcy Protection Act of 1988 (Bankruptcy Code Section 365(n), including identification of risk and potential strategies for minimizing those risks. Third, we consider issues relating to the assumption of technology licenses by debtor-licensees. Fourth, we provide an overview of benefits and risk of working with a financially troubled licensor. Fifth, we discuss the necessity of perfecting security interests. Lastly, we discuss the dischargeability of copyright infringement judgments (and other IP infringement judgments) in bankruptcy.

Numerous municipalities in California and elsewhere are struggling financially. Indeed, Harrisburg, Pennsylvania, and Central Falls, Rhode Island, have both recently filed for Chapter 9 protection. State governments may have neither the economic reserves nor the political will to bail out troubled cities and counties. These circumstances have raised the focus on Chapter 9 as a tool for reorganizing municipality debt obligations and have deepened the debate between states and their municipalities about the best strategies for addressing a fiscal crisis.

A recent ruling by the United States Court of Appeals for the Seventh Circuit affirmed the invalidity of a trust indenture between a tribal corporation and bond trustee that was not approved by the National Indian Gaming Commission ("NIGC"). However, the Seventh Circuit granted the trustee leave to amend its complaint to assert equitable claims, remanding the case for the district court to determine if other bond documents could support a waiver of the tribal corporation’s sovereign immunity, and whether the trustee has standing to sue for the return of funds to the bondholder.

Numerous municipalities in California and elsewhere are struggling financially. Indeed, Harrisburg, Pennsylvania and Central Falls, Rhode Island have both recently filed for Chapter 9 protection. State governments may have neither the economic reserves nor the political will to bail out troubled cities and counties. These circumstances have raised the focus on Chapter 9 as a tool for reorganizing municipality debt obligations and has deepened the debate between states and their municipalities about the best strategies for addressing a fiscal crisis.

Top-ranked IT and outsourcing lawyer Michael Murphy, nationally recognized outsourcing lawyer Joshua Konvisser and Pillsbury senior counsel Yusuf Safdari, along with Nishith Desai and Joseph Chan, explain U.S. bankruptcy law principles and issues most relevant to customers of insolvent outsourcing service providers. The authors provide a comparison of those principles with the insolvency frameworks in India and China in order to put customers in the best position to navigate the complexities of local insolvency laws. This article originally appeared in the PLC Cross-border Outsourcing Handbook 2011/12

"I am absolutely elated to see Congoleum's plan confirmed at last. It has been a long, difficult journey out of the complicated asbestos and insurance litigation we faced nearly nine years ago. I could not be happier about putting this chapter of our history behind us."
—Roger S. Marcus, Chairman of the Board

"Bankrupt Tronox Inc.'s reorganization plan has been deemed a winning restructuring formula by a New York judge."
—The Daily Deal

In the case of Rubin v. Eurofinance SA [2010] EWCA Civ 895, [2010] All ER (D) 358 (Jul), the English Court of Appeal, Civil Division, determined that a U.S. bankruptcy court’s monetary default judgment obtained against Eurofinance and its principals, British citizens, was enforceable. In doing so, the Court of Appeal favored a “universal” approach to international bankruptcy cases and recognized adversary proceedings as part and parcel of the main bankruptcy case under American bankruptcy rules. The decision did not require initiation of a separate proceeding to obtain an English court judgment as would usually be required under the rules of private international law. This decision potentially has wide-ranging implications that may streamline the process to enforce judgments in international bankruptcy cases.

The Opportunity
A Chinese real estate investment group was considering its first investment in the U.S. commercial real estate market. It identified a 5,000-unit apartment project in Texas and Maryland that satisfied its investment parameters, but the project was in the midst of the prior owners’ complex Chapter 11 proceeding—the borrowers’ equity had been wiped out, the assets were encumbered by multiple layers of CMBS debt, and the appointed Special Servicer was actively scrutinizing any proposed restructuring transaction.

On January 15, 2010, in In re Reliant Energy Channelview LP, the Third Circuit Court of Appeals affirmed the decision of the U.S. Bankruptcy Court for the District of Delaware denying payment of a $15 million break-up fee to the initial bidder of a power plant in conjunction with the debtor’s Section 363 bankruptcy asset sale. The Court based its ruling on the fact that it did not consider the fee necessary to preserve the value of the bankruptcy estate.

“After two years of uncertainty, the Queen Mary can once again become a world-class tourist destination.”

—Pillsbury partner quoted in Bankruptcy Law360, November 9, 2007

“Even holders of pre-bankruptcy Solutia’s common shares will make a recovery, despite repeated warnings by the company that those shares would be worthless. ... Those who had been set to get nothing could wind up owning a combined 18 percent of a growing corporation.”

—St. Louis Post-Dispatch, September 27, 2007

In Dumont v. Ford Motor Credit Company, the Ninth Circuit Court of Appeals confirms the Bankruptcy Code does not protect a debtor’s personal property collateral if the debtor fails to commit to redeem, reaffirm or assume the underlying loan—even if the debtor continues timely to make loan payments.

The Bankruptcy Court for the District of Delaware has issued a decision concluding that company-paid medical coverage offered as part of an employee severance package is a “retiree benefit” that cannot be unilaterally modified by the company in bankruptcy, except as provided under Section 1114 of the Bankruptcy Code. The court ruled that other payments under the package—salary continuation and car allowance payments—are not “retiree benefits” under Section 1114. The court based its decision on the medical coverage issue primarily on the company’s own description of the severance offer as “an early retirement package” and declined to apply the definition of “retiree benefits” under ERISA.¹

This article by Insolvency & Restructuring partner David Minnick and Litigation senior associate Ana Damonte originally appeared in the Real Estate Law Journal, published by West.

The Seventh Circuit U.S. Court of Appeals recently ruled that an environmental clean-up obligation under the Resource Conservation and Recovery Act ("RCRA") is not dischargeable in bankruptcy, even when the debtor no longer has any internal clean-up operations and would have to contract a third party to provide such services at significant cost.

On August 11, 2009, Judge Gropper of the United States Bankruptcy Court for the Southern District of New York denied motions to dismiss bankruptcy peti­tions of several special-purpose entity subsidiaries (SPEs) of General Growth Properties, Inc. (GGP) that were solvent, financially healthy companies structured to be remote from the bankruptcy risks of GGP and its other affiliates. The ruling has major implications for the future of structured financing and will require parties in structured finance transactions to reassess the risk that a special purpose bankruptcy-remote entity may be put into bankruptcy along with its parent and affiliates despite measures intended to prevent this.¹

Conventional wisdom was that bankruptcy was not a major consideration when outsourcing to “blue chip” sourcing suppliers. However, with recent market changes characterized by giant corporations effectively disappearing in a cloud of insolvency over a weekend—and with the proliferation of smaller, less well-capitalized suppliers—the rules of the game have changed.

Last week we alerted clients to the need for a rapid assessment of their exposure to Satyam in the wake of the much-publicized acknowledgement of fraud and mis-reporting of financial results by the company’s founder and former Chairman. In this second Client Alert, we further explore the actions that should be considered to protect Satyam outsourcing customers in a worst-case scenario.

Conventional wisdom was that bankruptcy and insolvency were not major considerations when receiving outsourcing services from reputable, credit-worthy suppliers. Recent market conditions—characterized by even giant corporations disappearing over a weekend in a cloud of insolvency, and an increasing scarcity of operating capital—have changed the rules of the game.

In a lawsuit filed in New York federal court on March 19, 2008, Merrill Lynch International (“MLI”), an affiliate of the investment banking firm Merrill Lynch & Co. Inc., alleges that bond insurer XL Capital Assurance Inc. (“XL”) wrongfully terminated a series of insured credit default swap agreements based on XL’s claim that MLI repudiated the agreements by assigning voting rights with respect to the insured reference securities to a third party. MLI commenced the lawsuit to obtain a declaratory judgment that the swap agreements remain binding and enforceable against XL and that MLI did not repudiate them. In effect, MLI seeks a ruling that XL’s purported terminations are invalid.

Richard Epling, partner in Pillsbury's Insolvency & Restructuring practice and member of the firm's Board, authored this article which originally appeared on Law.com, March 5, 2008.

Summary

Under Section 502(b)(6) of the Bankruptcy Code, Chapter 11 debtors have a very powerful statutory tool to limit a landlord’s recovery under a long term real property lease when the lease is rejected in bankruptcy. Generally, under Bankruptcy Code Section 502(b)(6), a landlord’s claim for damages resulting from the termination of a real property lease will be limited to the obligations due under the lease for the greater of (i) one year or (ii) fifteen percent, not to exceed three years, of the remaining term of the lease, plus amounts due under the lease on the earlier of the bankruptcy filing date or the date the property was surrendered. However, two recent judicial decisions, one by the Third Circuit Court of Appeals and the other by a California bankruptcy court, clarify that a lessee may be denied the ability to remain a Chapter 11 debtor when it is solvent and files for bankruptcy relief as a strategic maneuver solely to reject a lease and limit a landlord’s lease recovery. Knowledge of this evolving caselaw may impact your ability to protect your rights in certain situations.