PhaseRx Files Chapter 11: Commitee Formation Meeting Scheduled for December 20 at 11:00 a.m.

Mette K.

Bankruptcy Judges, Fish & Farmers

Fourteen temporary bankruptcy judgeships have been extended and four new ones have been authorized nationwide.  This is at least one piece of generally positive legislative news that bankruptcy practitioners should be able to agree on!

Temporary Judges Added to Delaware, Florida, and Michigan

The legislation, H.R. 2266, was included in the $36.5 billion disaster aid bill signed into law on October 26th. It incorporated a version of the Bankruptcy Judgeship Act of 2017 introduced by Rep. John Conyers (D) and Chairman Bob Goodlatte (R).

The bill, as enacted, reauthorizes 14 temporary bankruptcy judgeships in Delaware, Florida, Puerto Rico, Maryland, Michigan, Virginia, Nevada, and North, and authorizes the appointment of four additional temporary bankruptcy judges in Delaware, Florida, and Michigan.

While bankruptcy filings have declined nationwide in recent years, the effected districts have seen a 55% weighted increase in case filings since 2005. The federal Judicial Conference wrote to congressional leaders in April saying that federal bankruptcy courts in Delaware and eight other districts would face a ‘debilitating workload crisis” if lawmakers didn’t add judgeships and permitted the 14 temporary judgeships to lapse. (Original versions of the legislation had hoped not only to add four new, permanent judgeships but also to make the temporary judgeships permanent.)

Quarterly Fees to Increase to Fund the Judgeships

The measure increases the U.S. Trustee’s quarterly fees for large Chapter 11 bankruptcy cases to pay for the additional judgeships.  Specifically, if the balance in the U.S. Trustee System Fund is less than $200 million, then a debtor with total quarterly disbursements of $1 million or more must pay a quarterly fee equal to $250,000 or 1% of disbursements, whichever is less.

What About those Fish and Farm Tax Claims?!

The legislation also amends Bankruptcy Code § 1232 to add tax claims by the IRS resulting from the sale, transfer, exchange, or disposition of farming property in cases under Chapter 12 (e.g., family farmer or fisherman reorganizations). Such a claim that arises before a debtor’s discharge, regardless of whether the claim is pre-petition or post-petition, must be treated as a pre-petition claim, is not entitled to priority status, must be provided for under the bankruptcy plan, and is dischargeable.

Trivia Quiz… This $20 Cabela’s Gift Card Could Be Yours!

I’m offering a $20 Cabel’as gift card to the first person who can explain the connection between the fish and farming amendment and the rest of the bill!

Mette K.

Good News for Committees… Standard Carve Out Provisions Do Not Limit Fee Awards

Over and over again the same story plays out.  A case files.  A lender carves-out a small amount from its collateral to fund Committee professionals and an investigation of the lender’s position.  That amount is inadequate, and the Committee blows past the carve-out amount.

That’s just what happened in Molycorp, where the DIP financing agreement contained a typical $250,000 carve-out provision for the Committee’s investigation of claims.

 After an extensive discovery process resulting in asserted claims, mediation, and a global settlement, the court confirmed a consensual plan and the Committee’s counsel requested payment of $8.5 million in fees.

The lender objected, arguing that the $250,000 carve-out was an absolute cap on fee payments.  The Committee responded that while the carve-out may have limited its fees in an administratively insolvent case, it was irrelevant in a case with a confirmed chapter 11 plan.  The Delaware court agreed.

The court explained that “[t]he carve-out is . . . an agreement by the secured creditor to subordinate its liens and claims to certain allowed administrative expenses, permitting such professionals’ fees to come first in terms of payment from the estate’s assets. . . .  [W]hen there are insufficient unencumbered assets to pay professionals’ fees and no plan has been confirmed, professionals’ only recourse is the carve-out.”

Here, however, a plan was confirmed. In that context, Bankruptcy Code section 1129(a)(9)(A) requires that allowed administrative claims be paid in cash (or as otherwise agreed) on the plan’s effective date.  And nothing in the carve-out language suggested that the fee cap would prohibit the allowance of administrative fees upon plan confirmation.

“If the secured parties desire confirmation, the administration claims must be paid in full in cash at confirmation even it if means invading their collateral.”

A World of Caution….

 The court contrasted the carve-out at issue with one in a DIP financing order entered in another case that stated: “[n]otwithstanding anything to the contrary therein, and absent further Order of the Court, (i) in no event during the course of the Chapter 11 Cases will actual payments in respect of the aggregate fees and expenses of all professional persons retained pursuant to an Order of the Court by the Creditor’s Committee exceed $450,000 in the aggregate (the ‘Creditors’ Committee Expense Cap’) … (iii) any and all claims (A) incurred by the Creditor’s Committee in excess of the Creditor’s Committee Expense Cap or (B) incurred by any professional persons or any party on account of professional fees and expenses that exceed the applicable amounts set forth in the Budget shall not constitute an allowed administrative expense claim for purposes of section 1129(a)(9)(A) of the Bankruptcy Code.”  At the same time, the court offered “no opinion as to whether it would approve a DIP order containing [such] provisions” had it been presented ….

See In re Molycorp, Inc., 562 B.R. 67 (Bankr. D. Del. 2017).


Establishing Intent: Steve Bartman, Lyondell, and Actual Fraudulent Transfer Law


You are probably familiar with the Bankruptcy Code’s fraudulent transfer provisions, which allow a trustee to recover cash or assets that a debtor transferred away with actual intent to hinder, delay, or defraud its creditors. This can be a powerful tool in the hands of a trustee or creditors’ committee. See 11 U.S.C. Sec. 548(a)(1)(A).

But you may not have spent a lot of time thinking about how to prove intent when the debtor is a company. A company is a legal fiction; by itself, it can’t intend anything. And companies are typically made up of a lot of different people, including board members, officers, and employees. When it comes to fraudulent transfer litigation, who knew what, and who intended what, can be critical to creditor recoveries.

A recent decision by the New York district court provides a good example of how this works and how it can impact you.

In re Lyondell Chem. Co

Roughly one year before Lyondell Chemical Company (a Delaware corporation) collapsed into bankruptcy, its former shareholders had received $6.3 billion in distributions through a LBO. This included $100 million paid to its CEO through various stocks and options. The trustee alleged that Lyondell’s CEO had intended to defraud the company’s creditors by stripping it of assets to enrich himself and other shareholders, and that he accomplished this by knowingly presenting false financial projections to the company’s board of directors when the board considered approval of the LBO. The trustee asserted that the financials were inflated, unreasonable, and unachievable, and that consequently the LBO left the company inadequately capitalized and put creditors at great risk of a bankruptcy that could wipe out their claims.

The trustee’s lawsuit to avoid and recover these payments as actual fraudulent transfers hinged on whose intent would be imputed to the debtor. Would it be the scheming CEO? Or the duped board members?

Round One: The Bankruptcy Court Looks at the Board’s Intent

The bankruptcy court held that it was the intent of the board of directors that matters, and so it dismissed the trustee’s claim. Why? Under Delaware law, a corporation’s board of directors must approve a LBO. The court therefore felt that it was the intent of the company’s board, or a “critical mass” of the board members, which was essential to determining whether the company intended to defraud anyone.

Round Two: The District Court Imputes the CEO’s Intent to the Debtor

The New York district court disagreed and found that it was the CEO’s intent that mattered. Why? Because Delaware courts adhere to the “general rule of imputation.”

This means that Delaware corporations are held responsible for the acts and knowledge of their officers and directors acting within the scope of their authority… even when they act fraudulently.  (The rule may seem harsh, but it is designed to incentivize corporations to create strong information systems and controls).

Similarly, when an employee acts within the scope of employment or has a duty to disclose information to his employer, the law assumes that the employer was aware of that information… even if the employee failed to disclose it.

Based on these two legal principles, the district court found that the CEO’s knowledge and intent could be imputed to Lyondell even though the CEO did not control the board and it was the board, not the CEO, that approved the LBO and the resuling shareholder payments.

The court went on to find that there were enough facts to create a strong inference that the CEO acted with actual intent to hinder, delay, and defraud Lyondell’s creditors.  Because that intent could be imputed to the debtor, the court held that the trustee’s complaint would survive a motion to dismiss and that the litigation could continue.

Hey… What about Steve Bartman?

The district court also examined what “actual intent” means. The trustee had argued that debtors are presumed to intend the “natural consequences” of their actions, and that he would not need to prove the debtor actually wanted to, or believed it would, cause harm. The trustee lost this argument, and he could therefore have won the battle while ultimately loosing the war. The district court  held that the standard for finding “actual intent” to defraud is higher, and that the trustee would need to prove more. He would need to establish as an additional element, actual intent and an awareness of the consequences, not just an awareness of the facts from which the consequences would arise.

What does that mean, exactly? Let’s say you’re Steve Bartman. You’re sitting at Wrigley Field drinking a beer and watching the Cubs play. You reach to catch a foul ball. A natural consequence of reaching for that ball is that you could disrupt the game. But to establish that you actually intended to cause the Cubs to lose requires more. Chicagoans would have to prove that you weren’t just foolish, but you actually intended to cost the Cubs the National League pennant.

So the trustee was arguing that he would only need to show that, by inflating financials and paying out huge sums to himself and other shareholders, a natrual consequence would be the creditors would be hindered, delayed, or defrauded in their recoveries.  He may not have cared on whit about what happened to those creditors one way or another, as long as his actions, as a natural cosequence, hindered them.  The district court held that the trustee would need to prove more. He would need to prove that the CEO actually thought about the creditors and intended to harm them or was conscious that he was harming them.  (Legal geeks, you can curl up with the Yale Law Journal’s Intent to Defraud, published in 1915, to delve into these nuances.)

Weisfelner v. Hofmann (In re Lyondell Chem. Co.), 2016 WL 4030937 (S.D.N.Y. July 27, 2016) (motion for reconsideration denied).