June 2012: Bankruptcy & Restructuring Update

In re Lancelot Investors Fund, L.P.: A bankruptcy judge in Illinois recently determined that the Bankruptcy Code’s “safe harbor” provisions (11 U.S.C. § 546(e), (g)) apply to payments made to innocent investors who unwittingly put money into a “Ponzi” scheme.   In In re Lancelot Investors Fund, L.P., No. 08-B-28225, slip op. (Bankr. N.D. Ill. Mar. 1, 2012), the debtor was a hedge fund that purportedly used investors’ money to invest in the sale of electronics. In fact, as with typical Ponzi schemes, early investors were merely being repaid with the money received from later investors. In Lancelot, the question was whether ‘early’ investors who had been ‘repaid’ pre-petition had to return those funds to the trustee for the benefit of the overall estate (i.e., the other Ponzi victims).   The Bankruptcy Court held the ‘early’ investors could keep the funds received from their exercise of redemption rights, as long as such transfers otherwise met the facial requirements of the safe harbor provisions. The Court held that the safe harbor provisions applied because the plain meaning of the safe harbor provisions protected transfers that were themselves legitimate, even if they were the end result of a larger fraudulent scheme.

Statek Corporation v. Development Specialists, Inc., Plan Administrator for Coudert Brothers LLP: The Second Circuit recently shed light on how bankruptcy courts should apply choice-of-law rules to state law claims. In Statek Corporation v. Development Specialists, Inc., Plan Administrator for Coudert Brothers LLP (In re Coudert Brothers LLP), No. 10-2723-bk (2d Cir. February 28, 2012), a former client of Coudert Brothers filed a pre-bankruptcy malpractice suit in Connecticut state court.  The action was stayed when Coudert Brothers filed for bankruptcy in New York. The malpractice plaintiff then perfected its claim in bankruptcy, but the plan administrator moved to disallow it.  The bankruptcy court disallowed the claim, finding that New York law applied and that the claim was time-barred under the New York statute of limitations.  The district court affirmed, but the Second Circuit reversed, holding that a bankruptcy court should look to the choice of law rules of the state where the underlying prepetition complaint was filed, not the choice-of-law rules of the state in which the bankruptcy court sits.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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