United States: Commercial Bankruptcy: Selected 2015 Cases Of Interest To Banking And Finance


While bankruptcy filings have been down this past year, the number of decisions of interest for the banking and finance industries continues to remain steady. Hot topics decided continue to relate to bankruptcy court jurisdiction, safe harbors, make-whole premiums, customer status under SIPA and interest calculation. Many of the cases that were decided this year are being appealed to higher courts, ensuring that these topics will remain a focus of attention well into 2016.

We have summarized below some of the top rulings rendered this past year that impact banking and finance. It is not meant to be an exhaustive survey, just a summary of the top opinions you should be aware of as you start the New Year. After reviewing the case summaries, please feel free to reach out to us with any questions you may have. Contact details for members of the Troutman Sanders Bankruptcy Group are at the end of this publication.

Stern Issues – Bankruptcy Court Jurisdiction:

Wellness Int'l Network, Ltd. v. Sharif, 135 S. Ct. 1932 (U.S. 2015).

Reversing the United States Court of Appeals for the Seventh Circuit, the United States Supreme Court held that Article III does not prevent bankruptcy judges from entering a final judgment on Stern claims ("non-core" proceedings) if the parties to the proceeding knowingly and voluntarily consent. This implied consent hinges on whether "the litigant or counsel was made aware of the need for consent and the right to refuse it, and still voluntarily appeared to try the case." Wellness, 135 S.Ct. at 1948. The Court remanded the case to the Seventh Circuit to determine whether the objecting party's actions evinced a requisite knowing and voluntary consent to "forfeit" his Stern argument. This case is extremely important because it lightens the tight restrictions placed on bankruptcy courts by the Court's 2011 decision in Stern v. Marshall (131 S. Ct. 2594 (2011)), where the Court held that Congress violated Article III by authorizing bankruptcy judges to decide claims for which parties are constitutionally entitled to Article III adjudication. In Wellness, the Court held that entitlement to an Article III judge is a "personal right" that can be waived by a party, and that this waiver need not be express. This opinion returns some lost power to the bankruptcy courts.

Lehman SIPA Customer Status Cases:

In re Lehman Bros., 791 F.3d 277 (2d Cir. 2015).

The United States Court of Appeals for the Second Circuit affirmed the decision of the United States Bankruptcy Court for the Southern District of New York, holding that an investor that delivered securities to a broker-dealer as part of a repurchase agreement (repo) did not qualify for treatment as a "customer" under the Securities Investor Protection Act of 1970 ("SIPA").

Several parties had objected to the trustee's position that claims relating to their inability to repurchase securities from Lehman should be categorized as general creditor claims and not customer claims. Under SIPA, only "customers" are entitled to receive a pro rata share of "customer property" insurance protection from the Securities Investor Protection Company ("SIPC"). The Court held that the investor was not a customer under SIPA, because a customer must have "entrusted" assets to the broker-dealer, and the repos at issue did not involve entrustment of assets to Lehman. The Court stated that mere delivery is not entrustment, holding that entrustment "must bear the indicia of the fiduciary relationship between a broker and his public customer." 791 F.3d at 283. "This fiduciary relationship . . . arises out of the broker's obligation to handle the customer's assets for the customer's benefit." Id. Here, the securities were not entrusted to Lehman; instead, they were sold to Lehman. In fact, Lehman had the discretion to do "as it saw fit," even if its interests were adverse to the investor's.

*** CarVal UK Limited filed a petition for a writ of certiorari before the United States Supreme Court on September 25, 2015. The deadline to file responses to the petition is January 19, 2016. This is definitely something to lookout for next year.

In re Lehman Bros., 2015 Bankr. LEXIS 3981 (Bankr. S.D.N.Y. Nov. 23, 2015).

The United States Bankruptcy Court for the Southern District of New York, citing the Second Circuit's decision in In re Lehman Bros. (791 F.3d at 282, 283) (discussed supra), held "that to be a customer under SIPA, an investor must have 'entrusted' property to the broker-dealer. . . 'mere delivery'. . . 'is not entrustment.' Rather, entrustment involves a 'customer handing assets over to a broker-dealer so that the broker-dealer may do business on the customer's behalf." 2015 Bankr. LEXIS 3981, *27. In this case, FirstBank and Lehman Brothers Special Financing, Inc. ("LBSF") entered into a Swap Agreement. Lehman Brothers, Inc. ("LBI") was not party to this agreement. LBSF appointed LBI to hold FirstBank's posted collateral in a custodial account at JP Morgan Chase. FirstBank was not a party to any agreement between LBI and LBSF. The Court determined that LBI was doing business on behalf of LBSF, not FirstBank. Accordingly, the Court found that any relationship between LBI and FirstBank was not one of a broker-dealer/customer.

Moore Capital Mgmt., LP v. Giddens (In re Lehman Bros.), 533 B.R. 362 (S.D.N.Y. 2015).

The United States Bankruptcy Court for the Southern District of New York held that an investment company was not a "customer" because over-the-counter foreign exchange contracts in which the company and the broker were counter-parties were not traded or cleared on a contract market or board of trade subject to regulation by the Commodity Futures Trading Commission. The Court also held that because the company did not trade futures or purchase securities, it was not a customer under SIPA.

Closeout Pricing on Repurchase Agreements:

Sher v. RBC Capital Mkts., LLC, 539 B.R. 260 (D. Md. 2015).

The United States District Court for the District of Maryland, applying New York law, held that the buyer of residential mortgage-backed securities under a master repurchase agreement ("MRA") violated the MRA's liquidation provisions when it based the liquidation value on a bid from Goldman Sachs made three days after the seller's default under the MRA. Look out for potential expansion of this decision to close-out and termination valuation of securities lending agreements and ISDA Master Agreements.

Calculating Loss Under 1992 ISDA Master:

Lehman Bros. Holdings v. Intel Corp. (In re Lehman Bros. Holdings), 2015 Bankr. LEXIS 3991 (Bankr. S.D.N.Y. Sept. 16, 2015).

The United States Bankruptcy Court for the Southern District of New York held that the non-defaulting party under a 1992 ISDA Master Agreement has broad discretion in calculating the early termination payment, so long as it does so in good faith and the calculation is reasonable. Here, in a forward repurchase agreement where Intel gave Lehman $1 billion to buy Intel shares, and Lehman defaulted on its agreement to remit to Intel, the Court held that Intel calculated in good faith the early termination amount owed, and that its calculation was reasonable.

Preference Actions:

Krol v. Key Bank N.A. (In re MCK Millennium Ctr. Parking, LLC), 532 B.R. 716 (Bankr. N.D. Ill. 2015).

The United States Bankruptcy Court for the Northern District of Illinois dismissed a Chapter 7 trustee's avoidance claims seeking to claw back millions of dollars in pre-petition loan payments made to repay loan obligations owed to a trust. The Court held that the debtor's payments to a bank on account of a non-debtor affiliate's loan were protected by the safe harbor under section 546(e) of the Bankruptcy Code. Because the promissory note which was transferred to a real estate mortgage conduit trust and managed as a commercial mortgage-backed securitization, the payments on the underlying loan "related to" a securities contract. Accordingly, the Court held that it was covered by the Bankruptcy Code safe harbors, stating that a financial institution which seeks safe harbor under section 546(e) of the Bankruptcy Code need not acquire a beneficial interest in the transferred funds in order to trigger the safe harbor.

FTI Consulting, Inc. v. Merit Mgmt. Grp., LP, 2015 U.S. Dist. LEXIS 134494 (N.D. Ill. Oct. 2, 2015).

The United States District Court for the Northern District of Illinois, citing In re MCK Millennium Ctr. Parking, LLC (532 B.R. at 727), and analyzing both positions on this issue, held that the litigation trustee could not avoid certain "settlement payments" made "in connection with a securities contract." The Court discussed both the majority position (financial intermediary involved in a transaction implicates the safe harbor protection, even if it only acts as a conduit) and the minority position (financial institution must have a beneficial interest in a settlement payment), and sided with the majority.

Fraudulent Conveyance Actions:

MC Asset Recovery, LLC v. Commerzbank AG, et al, 4:06-cv-013-Y (N.D. Tex. Dec. 10, 2015).

The United States District Court for the Northern District of Texas granted summary judgment in favor of bank defendants in a constructive fraudulent conveyance action involving a parent guaranty issued in connection with an off-balance sheet financing for the acquisition of power generating equipment. A litigation LLC established under Mirant's plan of reorganization to represent the Mirant estate had sued to avoid the guaranty under New York law and recover loan repayments made to the banks. The Court ruled that the obligations that had been incurred to the equipment manufacturer prior to the financing constituted antecedent debt and thus fair consideration for the issuance of the guaranty. The Court rejected the estate's claim that the Court needed to assess whether the power equipment could be successfully deployed when determining the issue of fair consideration. The Court also found that there was no evidence that the banks entered into the transaction without good faith and rejected the estate's argument that reliance on a guaranty is indicative of a lack of good faith.

*** Troutman Sanders represented the bank defendants in this litigation.

Klein v. Cornelius, 786 F.3d 1310 (10th Cir. 2015).

The United States Court of Appeals for the Tenth Circuit, affirming the district court, held that the court had jurisdiction and the court-appointed receiver had standing to bring fraud claims under the UFTA. The Commodity Futures Trading Commission ("CFTC") alleged that Winsome Investment Trust ("Winsome") and its founder, Robert Andres, had perpetrated a Ponzi scheme. After the district court appointed Klein as receiver, Klein filed suit under the Uniform Fraudulent Transfer Act ("UFTA") against Cornelius to recover payments he had received from Winsome for legal services. The district court granted summary judgment in favor of Klein. On appeal, the Court held that the district court had jurisdiction to enforce rights over receivership property under the Commodity Exchange Act and 28 U.S.C. § 1367(a)'s grant of ancillary jurisdiction to district courts to hear "'all other claims that are so related to' the original claim as to 'form part of the same case or controversy.'" The court also held that Klein had standing because "a business entity abused by a Ponzi scheme," such as Winsome, "qualifies as a defrauded creditor." 786 F.3d at 1316-17.

Securities Investor Protection Corp. v Bernard Madoff Inv. Secs. LLC, 531 B.R. 439 (Bankr. S.D.N.Y. 2015).

The United States Bankruptcy Court for the Southern District of New York dismissed the liquidation trustee's avoidance claims because they were inadequately plead. The Trustee sought to avoid obligations owed by BLMIS to certain defendants under section 548 of the Bankruptcy Code and to avoid and recover certain transfers from subsequent transferees under sections 548 and 550 of the Code. The Court held that the Trustee's claims were not adequately plead because the Trustee's premise that the victims of a Ponzi scheme hold avoidable obligations merely because the obligations were incurred in the course of a Ponzi scheme "makes no sense," and the allegations failed to satisfy Rules 8(a) (constructive fraud) and 9(b) (actual fraud). 531 B.R. at 476. The Court also held that although the Trustee did not need to provide a "dollar-for-dollar accounting" of "the exact funds" at issue at the pleading stage, the facts alleged in his complaint were too "barebones." Id. at 473.

PSN Liquidating Trust v. Intelstat Corp. (In re PSN USA, Inc.), 615 F. App'x 925 (11th Cir. 2015).

The United States Court of Appeals for the Eleventh Circuit held that the debtor received "reasonably equivalent value" in exchange for its payment of its parent corporation's obligations under a satellite services contract. The Court found that the debtor received value because, in exchange for its payments, it was able to use the satellite services that were required to operate the debtor's television channel, even though the debtor was not obligated on the contracts. The debtor also received payments from the parent for its operation of the channel and, therefore, the debtor indirectly benefited from the parent by using the services it received under the contract. We will likely see more of this issue due to an increase in triangular payment relationships between parents, subsidiaries, and other affiliates.

Janvey v. The Golf Channel, Inc., 780 F.3d 641 & 792 F.3d 539 (5th Cir. 2015).

The United States Court of Appeals for the Fifth Circuit, reversing the district court, held that payment of millions of dollars to a cable network for advertising services provided to a Ponzi scheme was a fraudulent transfer because from the perspective of the Ponzi scheme's creditors, no value could be received for advertising services intended to promote a Ponzi scheme. The ruling created a risk for "innocent trade creditors" who could be subject to claw-back claims if they are in business with a party engaged in fraudulent conduct. Following the issuance of this ruling, on a motion for rehearing, the panel vacated its earlier decision and certified to the Texas Supreme Court the question of what showing of "value" is required by transferee under the Texas UFTA. Oral argument has been scheduled in front of the Texas Supreme Court on January 12, 2016 and we anticipate a further decision in this matter in 2016.

Final note on fraudulent conveyance cases: we are still awaiting a decision from the Second Circuit Court of Appeals in the Tribune and Whyte cases on the issue of whether the safe harbor provisions of the Bankruptcy Code preempt state law fraudulent conveyance actions.

Perfection of Security Interests:

Official Committee of Unsecured Creditors of Motors Liquidation Corp. v. JP Morgan Chase Bank, N.A. (In re Motors Liquidation Corp.), 777 F.3d 100 (2d Cir. 2015).

The United States Court of Appeals for the Second Circuit held that in order for a termination statement to become effective under Delaware law, it was enough that the secured party authorized the filing to be made. Although JPMorgan never intended to terminate the main term loan, it authorized the filing of a UCC-3 termination statement because it reviewed and agreed to the filing of the statement, and because it "knew that, upon the closing of the Synthetic Lease transaction, [the debtor's counsel] was going to file the termination statement that identified the Main Term Loan UCC-1 for termination."

Cramdown Interest and Make-Whole/Prepayment Premiums:

US Bank, Nat'l Ass'n v. Wilmington Savings Fund Society, FSB (In re MPM Silicones, LLC), 531 B.R. 321 (S.D.N.Y. 2015).

The United States District Court for the Southern District of New York affirmed the bankruptcy court's confirmation of a Chapter 11 plan that failed to provide a make-whole premium to secured creditors who were crammed down with replacement notes paying below-market interest rates. The Court held that the debtor's bankruptcy filing did not trigger its obligation to pay a make-whole premium because the governing documents did not provide "clear and unambiguous" language requiring such payments. The Court reasoned that it is well-established under New York law that a lender forfeits the right to a make-whole premium if it elects to accelerate the balance of a loan, and the only exception applies when the relevant instrument clearly and unambiguously calls for the payment of a make-whole premium even in the case of acceleration. The Court also held that the noteholders were not entitled to damages in the full amount of interest scheduled through the stated maturity date for a purported "no-call" provision because such provisions are not enforceable in bankruptcy given the automatic acceleration that occurs under the Bankruptcy Code.

As to the cramdown interest rate, the Court adopted the Till formula approach and rejected the efficient market approach. The Court, citing In re Valenti (105 F.3d 55 (2d Cir. 1997)), found that "the cramdown interest rate is meant 'to put the creditor in the same economic position that it would have been in had it received the value of its claim immediately. The purpose is not to put the creditor in the same position that it would have been in had it arranged a 'new' loan.'" The takeaway from the decision is this: the cramdown interest rate should not include any profit or cost element; market evidence is only relevant when considering the risk premium to use; and the risk premium should not be used by creditors to obtain market rate on replacement notes.

*** Both issues are on appeal to the Second Circuit Court of Appeals. This is something to look out for next year.

Computershare Trust Co., N.A. v. Energy Future Immediate Holding Co. LLC (In re Energy Future Holdings Corp.), 539 B.R. 723 (Bankr. Del. 2015).

The United States Bankruptcy Court for the District of Delaware held that automatic acceleration of a debt caused by a bankruptcy filing does not trigger a debtor's obligation to pay a make-whole premium where the agreement does not explicitly provide for payment of premiums notwithstanding acceleration or the payment of the make-whole any time prior to the original due date. This decision adopts the Southern District of New York's position in MPM, that a make-whole premium must be supported by "clear and unambiguous" language in the agreement. The court did not address whether such premiums are enforceable in bankruptcy, only addressing the interpretation of the specific contractual provisions before the Court.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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