Below is our initial take on recent bankruptcy-related developments:
In a court hearing on Monday, U.S. Bankruptcy Judge Christopher Lopez in Houston ruled that law firms Latham & Watkins and Jackson Walker did not perpetrate bankruptcy fraud by opening up a new bank account and P.O. box to secure venue in Texas for Sorrento Therapeutics, a California-headquartered biopharmaceutical company. Judge Lopez denied the motion for sanctions at a court hearing, stating that the firms representing the biopharmaceutical company, participated in questionable “legal maneuvering” but did not perpetrate bankruptcy fraud.
S&K Take: WBankruptcy fraud is an exceptionally high bar, with a substantial gulf between zealous advocacy and intentional misconduct. Thus, this decision is not much of a surprise. Judge Lopez also foreshadowed his decision on the UST’s motion to transfer venue (not so subtly) by plainly stating that timeliness is going to be a big issue. Obviously that weighs heavily in favor of denying venue transfer, which, admittedly, makes a lot of sense given the posture of the case. While this is likely in the rear view for Sorrento, I think this will put the old “retainer and a mailbox” jurisdictional play on the hot seat, at least for a little while. Prospective debtor’s counsel will probably be a bit more cautious going forward.
A bankruptcy watchdog for the U.S. Department of Justice asked a judge to dismiss the bankruptcy of Tehum Care, a subsidiary of prison healthcare provider Corizon. The U.S. Trustee stated that the company seemed unable to reach a feasible settlement of prisoners’ lawsuits accusing it of providing inadequate care at prisons nationwide.
S&K Take: There is a lot going on in the Tehum case. To get everyone back up to speed, there was a global settlement, which was mediated by the erstwhile Judge Jones. When the Jones/Freeman saga kicked into high gear, that settlement was revisited in a subsequent mediation presided over by Judge Sontchi. That second mediation resulted in another global deal, with slightly better terms than the first settlement. A tort claimant committee was formed around that time and ultimately concluded that the settlement was not to their liking. The TCC moved to dismiss the case (a Texas Two Step) and was joined by the UST and the Arizona Department of Corrections. The proposed settlement and the motion to dismiss are going forward in earnest in the next few days. This will be an interesting decision and another data point on the viability of the Two Step. An NC bankruptcy court recently kept the Bestwall case, declining to implement the Third Circuit’s “financial distress” requirement. This one certainly bears watching.
On Wednesday, Thrasio Holdings, an Amazon aggregator, filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the District of New Jersey and obtained commitments for $90 million in new financing from shareholders. The company said in a statement that it entered into a restructuring agreement with a portion of its lenders to reduce its debt by $495 million.
S&K Take: Another sizable filing in the Garden State, this time with another Amazon aggregator (Benitago filed in the SDNY last August and went effective earlier this month). Essentially aggregators were counting on the pandemic e-commerce boom to continue into perpetuity and amassed huge heaps of debt based on that assumption. The boom leveled off and aggregators were left with floating rates that skyrocketed, leaving them unable to service their debt. Thrasio had a little bit of a management issue as well, replacing the C suite well prior to bankruptcy. The debtors seek to emerge within 100 days.
The U.S. Securities and Exchange Commission (SEC) is taking an aim at a $166 million retainer payment to bankrupt blockchain firm Terraform Labs’ lawyers by declaring that Terraform should not be permitted to commission law firm Dentons or compensate costs for employees during its bankruptcy. According to the SEC, Terraform sent $166 million to Dentons since the beginning of 2023, and that the payments might have been meant to avoid paying a future judgement in the SEC’s lawsuit accusing the blockchain firm of defrauding its investors.
S&K Take: Now that is a war chest. Terraform has been a quirky case. The debtor filed to deal with SEC litigation. More recently, the SEC has initiated a battle with Dentons, which the debtor seeks to retain as special litigation counsel. The SEC notes that Dentons received a $166 million (yes, $166 million) retainer to defend the company and Do Kwon in the SEC litigation. Holy moley. The SEC alleges that Terraform may have used that retainer as a method of putting assets outside of the reach of creditors, and objected to the retention as well. This is teed up for an interesting skirmish. A creditors’ committee was just appointed with none other than the Celsius litigation trust as a member (Celsius holds significant claims against Terraform). So this could get real interesting real fast.
