1.1 Covered Activities

1.2 Effect of Stay

1.3 Remedies


2.1 Fraudulent Transfers

2.1.a Trustee may avoid transfer as actual fraudulent transfer only if ultimate decision-maker has fraudulent intent. Before entering into a two-step LBO transaction, the debtor formed a special board committee of independent directors, which hired professional advisers. Each step required separate financing. It sought solvency opinions for each step of the transaction. The opinions were based on management projections, but before the issuance of the first opinion, management had concluded the company would not make the projections, yet the opining firm was not advised of this new information. The transaction's first step closed using borrowed money, and major shareholders, who were represented on the board, sold their shares. Before the second step, management revised its projections again. The opining firm, based on management misrepresentations, ultimately issued a second solvency opinion. Although two other advisers did not agree with the opinion, they did not try to stop the transaction, which then closed. The company failed one year later. The liquidating trustee sued to avoid the transactions as actual fraudulent transfers. A corporation can act only through individuals; state law determines who has authority to act for the corporation—in this case, the board of directors— which delegated its authority to the special committee. Actual fraudulent intent can be established only through the intent of the individuals who have the authority to control the transfer. Here, the management projections may have misled the special committee and the advisers, but there was no allegation that the board itself intended to hinder, delay, or defraud creditors. Moreover, it is "unreasonable to assume actual fraudulent intent whenever the members of a board [stand] to profit from a transaction they recommended or approved." Therefore, the complaint fails to allege actual fraudulent intent adequately, and the court dismisses the complaint. In re Tribune Co. Fraudulent Conveyance Litigation, 10 F. 4th 147 (2d Cir. 2021).

2.2 Preferences

2.2.a Critical vendor order does not vitiate preference liability. Early in the chapter 11 case, the debtor in possession was authorized but not required to pay certain amounts to critical customers to be able to continue to receive necessary services from the customers. The liquidating trustee under the confirmed chapter 11 plan sued one customer to avoid and recover a preference. The customer order does not vitiate the trustee's preference claim. The debtor made the payments before the customer order and so, absent specific protection, could not have been protected by authorization to make future payments. Moreover, the order was permissive, not mandatory, and did not specifically identify the customer or require that its claims be paid. Therefore, the order does not protect the prepetition payments from preference attack. Insys Liquidation Trust v. McKesson Corp. (In re Insys Therapeutics, Inc.), ___ B.R. ___, 2021 Bankr. LEXIS 1923 (Bankr. D. Del. July 21, 2021).

2.3 Postpetition Transfers

2.4 Setoff

2.5 Statutory Liens

2.6 Strong-arm Power

2.6.a Trustee may not avoid unrecorded mortgage that does not transfer an interest in property. The bank failed to record the Puerto Rico mortgage. Under Puerto Rico law, recording a mortgage is a "constitutive act," and an unrecorded mortgage does not transfer any interest in the mortgaged property but gives the mortgagee only an unsecured claim. Under section 544(a)(3), a trustee may avoid "a transfer of property of the debtor ... that is voidable" by a bona fide purchaser. Because the failure to record the mortgage prevented the transfer of any interest in the property, there was no transfer for the trustee to avoid. The court does not address the consequence, which would appear to be that the real property becomes unencumbered property of the estate, the same as if the mortgage had been avoided. Miranda v. Banco Popular de Puerto Rico (In re Lopez Cancel), 7 F.4th 23 (1st Cir. 2021).

2.7 Recovery

2.7.a Good faith under sections 548(c) and 550(b)(1) is measured by an inquiry notice standard. The broker-dealer debtor ran a Ponzi scheme and was liquidated under the Securities Investor Protection Act. The SIPA trustee sued under section 550(a) to recover customer property from subsequent transferees of the debtor's account holders who withdrew funds within two years before the liquidation. A SIPA trustee has the same avoiding powers as a bankruptcy trustee. Section 550(a) authorizes the trustee to recover an avoided transfer from the initial transferee or from subsequent transferees, but section 550(b) prohibits a trustee from recovering from a subsequent transferee who took for value, in good faith, and without knowledge of the voidability of the transfer. "Good faith" is based on inquiry notice, that is, what the transferee should have known, even in a SIPA stockbroker case. However, the test is not purely objective or a negligence standard. "[W]hat the transferee should have known depends on what it actually knew, and not what it was charged with knowing on a theory of constructive notice." The test requires a three-step analysis: what did the transferee actually know; do those "facts put the transferee on inquiry notice of the fraudulent purpose behind a transaction—that is, whether the facts ... would have led a reasonable person in the transferee's position to conduct further inquiry into possible fraud," and if so, whether "diligent inquiry would have discovered the fraudulent purpose." Picard v. Citibank, N.A. (In re Bernard L. Madoff Inv. Secs. LLC), 12 F.4th 171 (2d Cir. 2021).


3.1.a Bankruptcy Rule 3002.1 does not authorize punitive sanctions. The mortgagee added  additional charges to the debtor's account statement without compliance with Bankruptcy Rule  2002.1, which requires a mortgagee to provide notice of any such charges to the trustee and the  debtor. The mortgagee ignored the trustee's requests to delete the charges, after which the  trustee brought a motion for contempt and sanctions. The mortgagee then removed the charges  and opposed the sanctions motion. Rule 3002.1 provides remedies for noncompliance. If the  creditor fails to give the required notice, the court may preclude the creditor from presenting  evidence in support of the charge and “award other appropriate relief, including reasonable  expenses and attorney's fees caused by the failure.” “Other appropriate relief” should be  construed consistent with the other terms in the same provision. Expenses and fees are  compensatory, suggesting that other relief is limited to non-punitive sanctions. PHH Mortgage  Corp. v. Sensenich (In re Gravel), 6 F.4th 503 (2d Cir. 2021).

3.1.b Bankruptcy Rules apply in a related-to action in the district court. A tort plaintiff sued a  defendant that it claimed was responsible with the debtor for the plaintiff's injuries. The state court  action was removed to federal district court on the ground that it was related to the debtor's  bankruptcy case and transferred to the district where the debtor's case was pending. Among  other reasons, because the case was a personal injury tort claim, the district court did not refer it  to the bankruptcy court. The defendant moved to dismiss on jurisdictional grounds. The court  granted the motion. The plaintiff moved for reconsideration 28 days later. The court denied reconsideration, and the plaintiff appealed. Bankruptcy Rule 1001 provides that the Rules “govern  procedure in cases under title 11.” Although the phrase is ambiguous as to whether it includes  related-to proceedings, practicalities require it to be read that way. Otherwise, a district court  handling both core and non-core proceedings in a single case would have to apply two different  sets of Rules. Bankruptcy Rule 9023 requires that a motion for reconsideration be filed within 14  days after the order or judgment. It applies here. Therefore, the filing 28 days after the order was  late. Under Rule 9023, a timely-filed motion tolls the time period for filing a notice of appeal.  Because the motion did not toll the time period for filing a notice of appeal, the notice of appeal  was late, and the court of appeals lacks jurisdiction to hear it. Roy v. Canadian Pac. Ry. Co. (In re  Lac-Mégantic Derailment Litig.), 999 F.3d 72 (1st Cir. 2021).

3.1.c Email service of a bar date notice is not adequate. The claims agent mailed the bar date  notice to the creditor's address shown on the schedules, which the parties stipulated was not the  creditor's last known address. It also emailed the notice to the creditor's email address, which the  creditor regularly used, including for communications relating to the case. The parties stipulated  that the creditor did not receive the mail notice, and the creditor claimed he did not see the email  notice. Due process requires at a minimum notice reasonably calculated to inform. While due  process is necessary, it might not be sufficient. Bankruptcy Rule 2002(a)(7) requires that notice of  a bar date be sent by mail. Because the parties stipulated that the address to which the notice  was sent was not the creditor's last known address, the notice did not comply with Rule  2002(a)(7). Bankruptcy Rule 9005 incorporates Fed. R. Civ. P. 61, which requires the court to  disregard errors and defects that do not affect substantial rights—the harmless error doctrine. To  show harmless error here in the absence of properly mailed notice, the debtor would have to  show the creditor had actual knowledge of the bar date. Because the debtor could not show that,  the court denies the bar date objection to the claim. In re Cyber Litigation Inc., ___ B.R. ___  (Bankr. D. Del. Oct. 21, 2021).

Download Recent Developments in Bankruptcy Law – October 2021 (PDF)

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.