Banking & Finance Law Report

Tag Archives: Bankruptcy

Expanding the Defense of Ordinary Course and Widening the Range of Acceptable Payments During the Historical Period

The Seventh Circuit Court of Appeals in Unsecured Creditors Committee of Sparrer Sausage Co., Inc. v. Jason’s Foods, Inc., 2016 WL 3213090 (7th Cir. June 10, 2016) expanded the scope of the ordinary course defense in a bankruptcy preference action.  This case provides an excellent road map for a creditors’ rights attorney defending a preference suit and suggests arguments for increasing the payments a creditor can retain even if those payments were made during the 90-day preference period.

Here are the facts in Jason’s Foods.  During the 90-day preference period, the debtor paid invoices it received from Jason’s Foods totaling about $587,000.00.  The Unsecured Creditors’ Committee filed suit asking the bankruptcy court to avoid all payments made within the 90-day preference period.  The bankruptcy court ruled that prior to the preference period, the debtor generally paid the invoices to Jason’s Foods within 16 to 28 days.  Accordingly, of the 23 invoices paid during the preference period, 12 were within the range and 11 were outside the range.  Thus, the bankruptcy court concluded that $306,110.23 of the payments were not made in the ordinary course.  The issue for the Seventh Circuit was whether the bankruptcy court set the …

STRUCTURED DISMISSAL OF CHAPTER 11 CASES AND THE INVOLUNTARILY SUBORDINATED CREDITOR: Official Comm. of Unsecured Creditors v. CIT Group/Bus. Credit Inc. (In re Jevic Holding Corp.), 787 F.3d 173 (3d Cir. 2015)

The United States Court of Appeals for the Third Circuit plays a uniquely important role in the development of the bankruptcy laws.  The liberal venue rule for bankruptcy cases set out in 28 U.S.C. § 1408 has led to the disproportionate filing of large and mega chapter 11 bankruptcy cases being filed in the District of Delaware.  The decisions of the Third Circuit are binding on the District Court and Bankruptcy Court for the District of Delaware.  Consequently, the decisions of the Third Circuit govern that disproportionate number of large and mega chapter 11 cases.  Furthermore, because the bankruptcy court decisions in these mega cases often involve greater dollar amounts, they are more likely to be appealed, which can result in the Third Circuit being one of the few circuit courts to address a given issue.

In Official Committee of Unsecured Creditors v. CIT Group/Business Credit Inc. (In re Jevic Holding Corp.), 787 F.3d 173 (3d Cir. 2015), the Third Circuit recently considered the propriety of a “structured dismissal” of a chapter 11 case that provided for a distribution of estate assets contrary to the distributional scheme set out in the Bankruptcy Code.  In Jevic, the debtor was …

Examining the Enforceability of Prepetition Waivers of the Automatic Stay

Recently, a bankruptcy court for the district of Puerto Rico held that a debtor’s waiver of the automatic stay contained in a pre-petition forbearance agreement was enforceable. In re Triple A & R Capital Inv., Inc., 519 B.R. 581 (Bankr. D.P.R. 2014). Unfortunately, the case adds little to the debate over the enforceability of pre-petition agreements impacting bankruptcy rights for one simple reason — the court’s holding was premised on the fact that the pre-petition forbearance agreement waiving the automatic stay was enforceable because the debtor, as part of a post-petition stipulation permitting the use of cash collateral, had ratified and agreed to be bound by the forbearance agreement.

Nonetheless, the court did briefly look at the treatment of pre-petition waivers of the automatic stay lacking post-petition ratification. Its examination provides a good opportunity to review the state of the law on this issue.

Before deciding the issue on its ratification grounds, the court noted that bankruptcy courts that have examined the enforceability of pre-petition waivers of the automatic stay:

[H]ave used different approaches with conflicting results. Three basic approaches have emerged: (1) uphold the stay waiver in broad unqualified terms on the basis of freedom of contract; (2) …

RECOUPMENT AND SETOFF ISSUES FOR HEALTH CARE LENDERS

Health care lenders and others evaluating or relying on the financial strength of a healthcare provider need to think about the potential recoupment and setoff of claims against Medicare/Medicaid receivables of the provider. 

RECOUPMENT

Recoupment, which is the netting of two related claims which is the function of a single, unitary transaction between the parties, occurs in the normal course of business and is not stayed by the automatic stay in a bankruptcy proceeding. For example, if Party A sells 100 widgets to Party B, and Party B discovers that four of the widgets were not delivered, Party B will deduct (recoup) the invoice amount of each unit in making payment to Party A.

In dealing with Medicare/Medicaid recoupment issues in bankruptcy, two general approaches have been taken by the Circuit Courts of Appeal with respect to the netting of overpayments against accounts due to the provider.

In the Third Circuit, which includes Delaware, the Court has applied an integrated transaction test, which means generally that any recoupment of Medicare/Medicaid payments is viewed as yearly payments and therefore the government can only recoup overpayments against payments due for a single year. Most of the Circuit Courts have adopted a “logical relationship test” …

Secured Lenders Have a Right to Credit Bid in Bankruptcy — At Least in the Seventh Circuit

Breaking with the Third Circuit and the Fifth Circuit, on June 28, 2011, the Seventh Circuit held that a debtor’s plan of reorganization that provides for the sale of the debtor’s assets free and clear of an existing security interest may only be confirmed over the objection of its secured creditor if the plan’s sale procedure permits the secured creditor to credit bid its secured debt for the assets being sold. River Road Hotel Partners, LLC v. Amalgamated Bank, — F.3d –, Nos. 10-3597 & 10-3598 (7th Cir. June 28, 2011).

The circuit split centers on the Bankruptcy Code’s provisions that only permit the confirmation of a plan of reorganization over the objection of a creditor class (a so called "cram down") where the plan’s treatment of such class is "fair and equitable." When the objecting class consists of secured creditors, the Bankruptcy Code requires that such fair and equitable treatment include provisions whereby either: (A) the secured creditor retains its liens in its collateral whether such collateral is retained by the debtor or transferred to another party and the secured creditor receives a specified level of cash payments under the plan, 11 U.S.C. § 1129(b)(2)(A)(i); (B) the secured …

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