Can (and should) directors, officers and third-party advisors of an insolvent corporation be held liable for approving transactions that ultimately fail and deepen the corporation’s insolvency? Over the past several years, federal courts have struggled with this basic question, with little (if any) guidance from the state courts.
In Howard Delivery Service, Inc. v. Zurich American Insurance Co., _ U.S. , S.Ct. _, (June 15, 2006)(Ginsburg, J.), a divided Supreme Court resolved a split among the circuits and ruled that an insurance carrier’s claims for unpaid workers’ compensation premiums owed by the debtor/employer were not entitled to priority as “contributions to an employee benefit plan” under 11 U.S.C. §507(a)(5) (formerly 11 U.S.C. §507(a)(4)).
In Marshall v. Marshall, _ U.S. _, 126 S.Ct. 1735 (May 1, 2006) (Ginsburg, J.), the Supreme Court ruled that the “probate exception” to federal jurisdiction did not bar debtor’s tort counterclaims against debtors’ stepson for interference with a gift or inheritance.
Among the loose ends left hanging by BAPCPA is how lenders should report bankruptcy status to credit reporting agencies.
Access to the federal courts is predicated upon the existence of either a federal question (i.e., a claim arising under the laws of the United States) or diversity jurisdiction. On Jan. 17, 2006, the Supreme Court, in Wachovia Bank, N.A. v. Schmidt, 126 S.Ct. 941, 74 USLW 4085 (2006) held that national banks must have the same access to federal courts through diversity jurisdiction as any state bank or other corporation.
In a 5/4 decision, the Supreme Court held Monday in Central Virginia Community College v. Katz, _ S.Ct. _, 2006 WL 151985 (Jan. 23, 2006), that a bankruptcy court had jurisdiction to hear a trustee’s adversary proceeding to avoid a debtor’s transfer to a state agency.
If we closed half of the hospitals in this country, would we say that there are less sick people, or that less people who are sick are being treated? The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) is creating a similar effect.
In In re Marrama, _ F.3d , 2005 WL 2840634 (1st Cir. Oct. 31, 2005), and In re Copper, F.3d _, 2005 WL 2648960 (6th Cir. Oct. 18, 2005), the First and Sixth Circuit Courts of Appeals, respectively, ruled that a debtor’s right to convert a case from chapter 7 to chapter 13 pursuant to 11 U.S.C. §706 where the case had not been previously converted is not absolute but is subject to an exception for motions filed in bad faith.
Since the Second Circuit decision In re Prudential Lines Inc., bankruptcy courts have routinely granted motions to restrict trading in a debtor’s stock (and sometimes its debt) to protect the debtor’s net operating losses (NOLs).
With the new bankruptcy laws enacted on Oct. 17, I have seen a greater emphasis by attorneys in chapter 13 “bailout” programs that various lenders offer.
Household Finance Corp. (HFC) held a junior mortgage on a chapter 7 debtor’s residence. The debtor at all relevant times was acting pro se. Acting on behalf of HFC was a Michigan lawyer who took certain actions that culminated in the debtor entering into a reaffirmation agreement with HFC in a bankruptcy case pending in the District of Massachusetts.
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