United States: Recent Developments In Bankruptcy Law

1.

AUTOMATIC STAY

1.1

Covered Activities

1.1.a

Bankruptcy court properly enjoins actions against nondebtor entity after divisional merger. The debtor was the product of a divisional merger under Texas law, which replaced the former single corporate entity with a new nondebtor corporation and the debtor, which assumed substantial asbestos claims. The debtor indemnified the nondebtor for losses related to the asbestos claims that the debtor had assumed, and the nondebtor agreed to fund the debtor's bankruptcy costs and asbestos liabilities to the extent the debtor's assets were insufficient. A bankruptcy court has related-to jurisdiction over a proceeding if the proceeding has any conceivable effect on the estate. Because of the agreements between the debtor and the nondebtor, the nondebtor's potential liability in non-bankruptcy litigation by asbestos plaintiffs could have an effect on the debtor's bankruptcy estate, so the court had jurisdiction to enjoin the prosecution of those actions against the nondebtor. A court may grant a preliminary injunction only if, among other requirements, the plaintiff is likely to succeed on the merits of the underlying dispute. In a chapter 11 case, the focus is not the particular dispute but on whether the debtor's reorganization is likely to be successful. Here, based on the debtor's financial condition and the availability of section 524(g) to address the asbestos claims, the bankruptcy court properly determined that the debtor was likely able to confirm a plan. Therefore, the bankruptcy court properly enjoined the asbestos plaintiffs' actions against the nondebtor. Bestwall LLC v. Official Committee of Asbestos Claimants (In re Bestwall LLC), 71 F.4th 168 (4th Cir. 2023).

1.1.b

Automatic stay tolls time for filing cross-appeal. The debtor appealed an adverse monetary judgment and filed bankruptcy shortly thereafter. The plaintiff in the prebankruptcy action filed a cross appeal over a year later but within six days after it obtained relief from the stay in the debtor's bankruptcy case. Section 362(a)(1) stays the commencement or continuation of an action or proceeding against the debtor, and section 108(c) tolls any deadline that would otherwise expire during the stay until 30 days after the creditor receives notice of termination of the stay. Here, the cross-appeal was stayed, because it was a continuation of an action against the debtor, and the notice of cross-appeal was timely, because it was filed within 30 days after termination of the stay. Vitamins Online, Inc. v. Heartwise, Inc., ___ F. 4th ___, 2023 U.S. App. LEXIS 9493 (10th Cir. June 27, 2023).

1.2

Effect of Stay

1.3

Remedies

2.

AVOIDING POWERS

2.1

Fraudulent Transfers

2.1.a

Financial contracts safe harbor does not preempt state avoidance law in an assignment for the benefit of creditors. The debtor fraudulently borrowed from numerous lenders and used the funds to pay a swap counterparty for trading losses of an unrelated corporation. The debtor also guaranteed a portion of the unrelated corporation's obligations to the swap counterparty. The debtor made an assignment for the benefit of creditors under Florida law. The assignee sued the counterparty to avoid and recover the payments and avoid the guarantee as fraudulent transfers and obligations under Florida law. Section 546(e) of the Bankruptcy Code prohibits a trustee from avoiding a transfer made in connection with a swap agreement except under section 548(a)(1)(A) of the Bankruptcy Code. A federal law impliedly preempts a state law when compliance with both laws is impossible, the state law stands as an obstacle to the accomplishment of a Congressional objective, or Congress intended to foreclose state regulation in the area. Section 546(e) expressly applies only to a bankruptcy trustee, not an assignee. Bankruptcy Code preemption occurs only at the commencement of a bankruptcy case. Bankruptcy and assignments are separate, mutually exclusive proceedings, so different treatment in each is appropriate. Swap agreements are governed only by state law, so there is no suggestion that federal intervention is required in an assignment. Therefore, section 546(e) does not preempt state fraudulent transfer law. Von Kahle v. Cargill, Inc., ___ F. Supp. 4th ___, 2023 U.S. Dist. LEXIS 81120 (S.D.N.Y. May 9, 2023).

2.2

Preferences

2.3

Postpetition Transfers

2.4

Setoff

2.5

Statutory Liens

2.6

Strong-arm Power

2.6.a

Misnomer on security agreement does not vitiate security interest. The debtor borrowed from the lender in 1988. The lender filed a financial statement with the debtor's correct name in 1992 and filed continuation statements until the bankruptcy in 2018. The debtor corporation dissolved in 1994, but the debtor continued in business as a sole proprietorship under the same name. It incorporated again, under the same name, in 1999. The debtor signed a new financing statement in 2014 under an incomplete name, and the lender made a new loan in 2018 using the same incomplete name in the loan agreement. The trustee challenged perfection of the security interest. UCC section 9-308 requires, as a condition to perfection, that a security interest have attached. Section 9-203 requires, as a condition to attachment, that a security interest be enforceable against the debtor, which happens only if the debtor has authenticated a security agreement that contains a description of the collateral. Under applicable state law, the misnomer on the security agreement did not undermine its enforceability against the debtor, as a misnomer on a financing statement would on perfection. The 1992 financial statement was continued, and the 2014 statement subsumed it, thereby maintaining perfection on the collateral. Therefore, the lender's security interest was enforceable and perfected. Nike USA Inc. v. CNB Bank & Trust N.A. (In re First to the Finish Kim & Mike Viano Sports, Inc.), 649 B.R. 763 (Bankr. S.D. Ill. 2023).

2.7

Recovery