Bankruptcy Law Update - December 2012

by Pullman & Comley, LLC

“Since the integrity of the bankruptcy process is implicated, and in the absence of any evidence that upsetting the Debtors’ selected venue would have dire consequences for the Debtors’ stakeholders, these cases should and must be transferred.”  In re Patriot Coal Corp., 2012 WL 5934334 (Bankr. S.D.N.Y. Nov. 27, 2012) (Chapman, J.) (transferring venue of chapter 11 cases of Patriot Coal and 98 affiliated debtors from New York to Missouri, the state in which Patriot's corporate headquarters was located, where venue was initially founded in New York based on the formation of two subsidiaries of Patriot Coal in New York just weeks before bankruptcy filing)

In this December 2012 Issue:

Second Circuit Decisions

Connecticut Bankruptcy Court Decisions

The Second Circuit tackles the criminal exception to the automatic stay, administrative rent claims under a terminated lease and the equitable mootness doctrine as applied to confirmed plans.  The Connecticut bankruptcy courts opine on the deferral of a dispute to arbitration, surcharging a secured creditor’s collateral under section 506(c) and the post-confirmation jurisdiction of the bankruptcy court.  

Second Circuit Decisions

Bankruptcy Does Not Suspend Defendant’s Restitution Obligation

U.S. v. Colasuonno, 2012 WL 4840715 (2d Cir. Oct. 12, 2012)
The exception to the automatic stay which allows “the continuation of a criminal action or proceeding against the debtor,” 11 U.S.C. §362(b)(1), was held to cover probation-revocation proceedings based on a debtor’s failure to pay restitution ordered as part of a criminal sentence.

Issuance of Warrant of Eviction Under N.Y. Law Does Not Effect “Unexpired” Status of Lease for Purposes of Administrative Rent Claim Under Bankruptcy Code Section 365(d)(3)”

Super Nova 330 LLC v. Gazes, 693 F. 3d 138 (2d Cir. Aug. 2, 2012)
A landlord sought to recover postpetition rent as an administrative expense under 11 U.S.C. §365(d)(3) for the period between the Chapter 7 filing date and the date  the landlord’s warrant of eviction, which was issued prior to the filing, was actually executed.  Section 365(d)(3) requires timely payment of postpetition rent under an “unexpired lease” of commercial real estate until it is assumed or rejected, so the issue was whether the lease remained “unexpired” after issuance of the warrant of eviction.

The court held that while the issuance of a warrant of eviction prior to the bankruptcy filing terminated the lease under New York law, the lease was nonetheless “unexpired” because under New York law the tenant retains the right to revive the lease by seeking to vacate the warrant for “good cause.”  However, because Bankruptcy Code §365(c)(3) precludes a trustee from assuming or assigning a lease terminated under state law, the case was remanded for a determination of the issue of whether the lease should be treated as presumptively rejected on the bankruptcy filing date, which would defeat any claim for postpetition rent.

Appeal of Confirmation Order was Dismissed as Equitably Moot

In re Charter Communications, Inc., 691 F. 3d 476 (2d Cir. Aug. 31, 2012) 
Junior creditors and a shareholder appealed the confirmation of Charter’s plan, which approved a settlement with its major shareholder, Paul Allen, enabling him to obtain $375 million in cash, a $1.6 billion rights offering, the purchase of his preferred shares in a subsidiary and a third-party release of liability, while the objecting creditors received only a percentage of their claims and the objecting shareholder received nothing. While significant, the consideration received by Allen was found to be necessary to induce him to forgo certain rights which, if exercised, would have prevented Charter, the debtor, from reinstating the loan agreement with its senior lender and retaining substantial net operating losses.  These benefits were found to be critical components to Charter’s successful restructuring, such that undoing them would cut out the heart of the reorganization.  Thus, it was held that the presumption of equitable mootness, which arose once the plan was substantially consummated, could not be overcome because granting relief on appeal would return the parties to negotiating anew, casting uncertainty over Charter’s operations and ability to reorganize.

Connecticut Bankruptcy Court Decisions

Adversary Proceeding to Value Debtor’s Interest in Bahamian Company Stayed in Favor of Arbitration

In re Natel, LLC, Case No. 06-50421, Adv. Pro. No. 07-5037 (Sept. 26, 2012) (Shiff, J.)
An arbitration provision broad enough to cover the debtor’s adversary proceeding to value its minority interest in ODC, a Bahamian company, was enforced by the bankruptcy court because, although valuation of the debtor’s property was found to be a core proceeding, arbitrating the matter would not seriously jeopardize the objectives of the Bankruptcy Code.  Under settled Second Circuit law, arbitration of even core bankruptcy proceedings should be compelled “unless doing so would seriously jeopardize the objectives of the [Bankruptcy] Code.”

Secured Creditor’s Collateral Could Not Be Surcharged for Administrative Expenses that Did Not Primarily and Directly Benefit Secured Creditor.

In re HC Walden Properties, L.L.C., Case No. 10-52106, Doc. No. 129 (Bankr. D. Conn. Aug. 9. 2012) (Shiff, J.)
Prior to consenting to lift the automatic stay for its secured creditor, Bank of America (BOA), the debtor expended BOA’s cash collateral in selling two condominium units, obtaining cash collateral orders which included adequate protection provisions for BOA and paying for homeowner association assessments, utilities and insurance payments on BOA’s collateral, a condominium complex.  The debtor sought to recover these expenditures from BOA under Bankruptcy Code §506(c), which permits a trustee or debtor in possession to recover the expenses of preserving or disposing of a secured creditor’s collateral to the extent of any benefit to the secured creditor.  The court held that none of these expenses were compensable under §506(c).  The expenses related to the sale of the condo units could not be charged to BOA because no evidence was presented that the sales had anything to do with BOA and because the units may have been better off being sold in foreclosure.  The expenses for obtaining cash collateral orders primarily benefitted the debtor, not BOA, and therefore were not recoverable under §506(c).  Similarly, the ancillary expenses of association assessments, utilities and insurance, although they may have indirectly benefitted BOA, were for the principal benefit of the debtor and therefore were also not compensable under §506(c).

Bankruptcy Court Explains Test for Determining Its Post-Confirmation Jurisdiction Over Adversary Proceeding

In re New England National, LLC,. Case No. 02-33699, Adv. Pro. No. 10-3033 (Bankr. D. Conn. Sept. 11, 2012) (Weil, J.)
In this opinion, the bankruptcy court provided guidelines for the parties to follow in briefing the issue of its post-confirmation jurisdiction over an action concerning a post-confirmation contract and dispute arising under that contract.  The test for jurisdiction in these circumstances, according to the court, was two-fold:  (1) whether the plan contained a provision for retention of jurisdiction which covered the dispute; and (2) whether the contested matter had a “close nexus” to the bankruptcy plan.  The bankruptcy court then enumerated seven factors to consider in determining whether a “close nexus” existed, such as whether the dispute arose before or after confirmation, whether state law applied, whether there were plan provisions for procedurally resolving such disputes, whether the claims required interpretation of the plan or court orders and whether there was evidence of forum shopping.

Please feel free to contact any of our attorneys in this practice area for additional information.

Elizabeth Austin                                                        Irve Goldman                        
203.330.2243                                                              203.330.2213

Jessica Grossarth                                                       H. William Shure                               
203.330.2285                                                              203.330.2232    

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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