November 30, 2017

MONTH-IN-BRIEF: Bankruptcy & Finance

Penelope Christophorou, Taryn Darling

Commercial Law

Eighth Circuit on Construing Indemnification Clauses

By Steven O. Weise, Proskauer Rose LLP, and Teresa Wilton Harmon, Sidley Austin LLP

Feed Management Systems Inc. v. Comco Systems Inc., 823 F.3d 488 (8th Cir. 2016).  The Eighth Circuit held that it will “strictly construe indemnification agreements that shift liability for the indemnitee’s own negligence.” When an indemnification agreement does not shift liability for negligence, ordinary principles of contract interpretation apply.

Second Circuit on Limits of Court Jurisdiction over Corporations Registered to Conduct Business in the Court’s State

By Steven O. Weise, Proskauer Rose LLP, and Teresa Wilton Harmon, Sidley Austin LLP

Brown v. Lockheed Martin Marietta Corporation, 814 F.3d 619 (2d Cir. 2016).  The State of Connecticut does not have general personal jurisdiction over a corporation registered to do business in the state even though the corporation does significant business in the state. Registration is not consent to jurisdiction, and a corporation is not “at home” in the state where it is not formed under the law of that state or have its chief executive office in that state.

Second Circuit on Review by Courts of Arbitration Awards

By Steven O. Weise, Proskauer Rose LLP, and Teresa Wilton Harmon, Sidley Austin LLP

National Football League Management Council v. National Football League Players Ass’n (Brady), 820 F.3d 527 (2d Cir. 2016).  A court’s review of an arbitration award is “very limited.” The court is “not authorized to review the arbitrator’s decision on the merits despite allegations that the decision rests on factual errors or misinterprets the parties’ agreement.” The court may “inquire only as to whether the arbitrator acted within the scope of his authority as defined by the collective bargaining agreement. Because it is the arbitrator’s view of the facts and the meaning of the contract for which the parties bargained, courts are not permitted to substitute their own.” The court’s “task is simply to ensure that the arbitrator was ‘even arguably construing or applying the contract and acting within the scope of his authority’ and did not ‘ignore the plain language of the contract.’”

Fourth Circuit Upholds Lender-Imposed Transfer Restrictions in an LLC Operating Agreement

By Steven O. Weise, Proskauer Rose LLP, and Teresa Wilton Harmon, Sidley Austin LLP

 In re Kang, 2016 WL 6958438 (4th Cir. 2016).  Restrictions in a limited liability company’s operating agreement on the encumbrance of LLC property and the transfer of membership interests—which were added to protect the interests of a lender—were enforceable and rendered void a transfer of membership interests in violation of the restrictions.

Bankruptcy Law

Seventh Circuit on Lease Termination Being a Transfer for Preference Analysis

By Steven O. Weise, Proskauer Rose LLP, and Teresa Wilton Harmon, Sidley Austin LLP

In re Great Lakes Quick Lube LP, 816 F.3d 482 (7th Cir. 2016).  The Seventh Circuit found that a termination of a lease could be a “transfer” for preference purposes. The Bankruptcy Code has an expansive definition of the term “transfer,” which includes each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with (i) property; or (ii) an interest in property.” 11 U.S.C. § 101(54)(D). The court concluded that valid prepetition lease terminations can be subject to avoidance in a subsequent bankruptcy, stating “[the debtor] had an interest in property—namely the leaseholds—which it parted with by transferring that interest to [the landlord]. That was a transfer to one creditor of what might have been an asset to [the debtor’s] other creditors had the transfer not taken place; and if so it was a preferential transfer and therefore avoidable.”

Bankruptcy Ninth Circuit on Loan Default Rate Applicability in Bankruptcy

By Steven O. Weise, Proskauer Rose LLP, and Teresa Wilton Harmon, Sidley Austin LLP

In re New Investments, Inc., 840 F.3d 1137 (9th Cir. 2016). Although a Chapter 11 plan may cure a default on a secured obligation, and thereby de-accelerate the debt, because § 1123(d) provides that the amount necessary to cure must be determined according to the agreement and applicable non-bankruptcy law, the debtor remains obligated to pay interest at the default rate. The court did not specify whether the default rate applies for the remainder of the loan or only until cure is achieved.

Seventh Circuit on Whether Settlement Payments Made through a Financial Institution Are Safe-Harbored from Avoidance

By Steven O. Weise, Proskauer Rose LLP, and Teresa Wilton Harmon, Sidley Austin LLP

FTI Consulting, Inc. v. Merit Management Group, LP, 830 F.3d 690 (7th Cir. 2016), cert. granted, 137 S. Ct. 2092 (2017). The protection from avoidance for settlement payments by or to a financial institution does not protect a transfer that is conducted through a financial institution that is neither the debtor nor the transferee, but merely a conduit. Accordingly, a settlement payment the debtor made for the purchase of securities, which was handled by a bank as an escrow agent, was not protected and could be avoided as a fraudulent transfer to the seller of the securities.

First Circuit on Effect of Rejection of a Trademark License

By Steven O. Weise, Proskauer Rose LLP, and Teresa Wilton Harmon, Sidley Austin LLP

Mission Prod. Holdings, Inc. v. Tempnology LLC (In re Tempnology LLC), 559 B.R. 809 (B.A.P. 1st Cir. 2016). The court followed Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012), and held that a rejection of a trademark license is a “breach” of the license, but not an avoidance of the license. Thus, the fact that Bankruptcy Code § 365(n) (which protects a license from being stripped of rights to use licensed intellectual property) does not refer to trademarks does not matter.

Uniform Commercial Code

Eighth Circuit on Lack of Rights to Proceeds and Whether Trust Relationship Exists

By Steven O. Weise, Proskauer Rose LLP, and Teresa Wilton Harmon, Sidley Austin LLP

In re WEB2B Payment Solutions, Inc., 815 F.3d 400 (8th Cir. 2016).  A retailer that offered check-cashing and payday loan services, and that had hired the debtor to process checks received from its customers, was not entitled to the check proceeds that the debtor had on the petition date. The funds were not held in an express trust because the agreement contained neither a requirement to segregate the retailer’s funds nor an explicit declaration of trust. There was no resulting trust because the parties did not intend to create a trust. Imposition of a constructive trust was not warranted because the checks were properly negotiated to the debtor, and thus the retailer had no property rights in them.

Seventh Circuit on Security Interest Perfection in Rights under a Land Contract

By Steven O. Weise, Proskauer Rose LLP, and Teresa Wilton Harmon, Sidley Austin LLP

In re Blanchard, 819 F.3d 981, 89 U.C.C. Rep. Serv. 2d 512, 2016 WL 1459568 (7th Cir. 2016).  The Seventh Circuit resolved this question of a pledge of rights under a land contract by applying Wisconsin real estate law. The potential applicability of UCC security interest provisions did not override real estate law. A vendor’s interest in a land contract constitutes an “account” under UCC Article 9, and filing a financing statement might be an effective way to perfect a security interest on that interest.

Second Circuit on Language Specificity for Collateral Description

By Steven O. Weise, Proskauer Rose LLP, and Teresa Wilton Harmon, Sidley Austin LLP

In re Sterling United, Inc., 674 Fed. Appx. 19, 2016 WL 7436608 (2d Cir. 2016).  A financing statement described the collateral as “[a]ll assets of the Debtor including, but not limited to, any and all equipment … located at or relating to the operation of the premises at 100 River Rock Drive, Suite 304, Buffalo, New York.” The indication of the collateral was sufficient despite the fact that the stated location of the collateral was incorrect, because the language specifying the location modified the clause beginning “including, but not limited to,” not the opening phrase, “[a]ll assets of the Debtor.”

Penny Christophorou

Counsel; Cleary Gottlieb Steen & Hamilton LLP

Penelope L. Christophorou’s practice focuses on commercial financing, including secured transactions and bankruptcy law, derivative products, and structured finance. She represents leading financial institutions, corporate borrowers, private investment funds and sovereign clients on these matters.

Taryn Darling

Board Member, William H. Dwyer Inns of Court

Taryn began her career as a bankruptcy lawyer almost ten years ago. Her practice includes reorganization, insolvency, receivership, work-outs, and bankruptcy and all related litigation. Taryn has litigated at the trial level and appellate level on behalf of her clients in a number of adversary proceedings and in consumer protection litigation. Taryn’s clients include individuals, business owners, and closely held corporations and businesses. Her breadth of experience in the area of bankruptcy and insolvency enables her to take a preventive approach when clients come to her at the outset of a problem. Taryn develops creative solutions to mitigate the impact or consequences when it becomes clear that a bankruptcy or receivership is the best course of action.